In comparison to the investment side of public pensions, the public administration literature has paid short shrift to the benefits side of pension management. This is a curious phenomenon since pension systems exist
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in the first place to serve pension plan participants. And, it goes without saying that pension systems face considerable challenges in benefits administration. For example, the Association of Public Pension Fund Auditors (APPFA) released a report in 2003 identifying 25 broad categories of operational risk for public pension systems (APPFA, 2003). These broadly defined risk categories include such things as legislation/legal action/court decisions, staffing (e.g., attracting, training, and retaining employees), enrollment of members, collection and maintenance of member data, and communications with members, to name only a few. Given these risks and the importance of the benefits side of pension system management to over- all pension effectiveness, this section considers several important managerial issues associated with pension benefit administration.
16.3.2.1 Payout Formulas
Most often, formulas for determining DB plans are determined by legislative bodies. These formulas determine how much employees will receive in retirement benefits. While there are some variations (see Blostin, 2003), the most common approach to determining DB levels is with a formula taking into account: (1) an employee’s final average salary (FAS), which is typically the average of an employee’s salary over the last three years of employment;
(2) years of service; and (3) a retirement multiplier, which is a percentage of salary figure that varies by plan. FAS and years of service are self- explanatory, but the retirement multiplier deserves elaboration. The retire- ment multiplier ‘‘indicates a percentage of FAS that is earned for each year of service’’ (State of Wisconsin Retirement Research Committee, 2000, 13).
The retirement multiplier generally ranges in the area of two to three per- cent, depending upon plan. The multiplier can be: graduated to reward longer years of service; higher for public safety workers (e.g., police and fire) who have riskier jobs and shorter careers; and/or higher in jurisdictions whose employees are not covered under Social Security (Brainard, 2003).
Seemingly small differences in the multiplier can result in substantial differ- ences in retirement benefits. This can be seen in the following example.
Assume that a pension plan’s formula includes: (1) FAS over the final three years of employment; (2) length of service; and (3) a two percent retirement multiplier for general/non-uniformed employees and a two and one-half retirement multiplier for police officers. A general employee who earned $32,000, $35,000, and $38,000 over their last three years of employment (for an average of $35,000) and who worked for 25 years would be entitled to an annual retirement benefit of $17,500 (FAS of $35,000 .02 retirement multiplier 25 years of serviceẳ$17,500). Assuming that the police officer’s FAS and years of service are the same, they would be
entitled to a retirement benefit of $21,875 (FAS of $35,000.025 retirement multiplier 25 years of serviceẳ$21,875). As this demonstrates, the retirement multiplier is an important component of DB formulas.
While legislative bodies may be responsible for determining benefit formulae, it is the responsibility of pension systems to accurately calculate benefits levels for plan participants. Incorrect calculations may mean that retirees are not receiving the benefits they are entitled to, that is they may be receiving too much or too little in retirement income. In order to mitigate these risks, pension systems need to institute controls such as providing retirees with summary data used in calculating their benefits, developing charts and checklists to assist pension system staff in determining benefits, and routinely testing automated benefits calculations for accuracy (APPFA, 2003). As this suggests, ensuring the accuracy of benefits calculations is a fundamental activity for public employee retirement systems.
16.3.2.2 Customer Service
Another primary benefits-administration consideration for public pension systems is customer service. While pension systems have a number of stakeholders (e.g., legislative bodies, taxpayers, financial advisors, etc.), their key stakeholders are the current employees and retirees that make up their respective plan memberships. According to the APPFA (2003, 16), pensions systems face three customer-service risks:
Risk that various forms/methods of communication with members, retirees, and beneficiaries are not coordinated and consistent Risk that system communication, processes, and policies are not
customer oriented
Risk that appeals occur because of inadequate communication among members, employers, the pension system, and third party administrators
To mitigate these risks, pension systems can take a number of steps.
For example, the APPFA (2003) recommends pension systems hire an information/communications coordinator, hire a manager of quality assurance or establish a quality assurance team, and develop ongoing quality assurance processes. Systems might also evaluate best practices in pension customer service through such venues as the GFOA’s Awards for Excellence program which recognizes excellence and innovations in financial management, including pension administration.
Delivering customer service to pension plan participants occurs in a number of media. For example, most pension systems offer one-on-one
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counseling for plan participants. Similarly, the use of call centers, where plan participants speak with system staff, is a ubiquitous customer-service feature.
In addition to personal telecommunications, systems are also developing automated phone systems and integrated voice recognition (IVR) systems, that allow plan participants round-the-clock interactive access to benefits information. As this suggests, pension systems are taking advantage of technological advances to offer improved customer service. Greifer (2000), for example, describes how the New York State Teachers’ Retirement System expanded its access to plan participants through the use of video teleconferencing. Such teleconferencing allows for two-way communication between system staff and participants and allows the system to reach participants in remote locations (saving time and money in the process).
Pension systems also are developing web-based tools to offer not only pension plan information, but also to allow participants to execute certain transactions via the Internet. The Teacher Retirement System of Texas, for example, has developed a website that allows members to register for bene- fits presentations on-line, calculate certain benefits estimates (e.g., service credit purchase calculator), and view streaming video of benefits-related information. In all of these cases the goal is for pension systems to offer con- sistent, reliable, and readily available information on their pension benefits.
The scope and scale of benefits administration service provided by pension systems is impressive. For example, the California Public Employees’ Retirement System (CALPERS, 2003) reported in its 2003 Operations Summarythat (among other things) its staff:
Completed more than 80,000 retirement estimates
Processed 20,117 new service retirements and paid out nearly
$7 billion in retirement, death, and survivors benefits
Delivered first benefit checks to 97 percent of new retirees within 30 days of their retirement
Processed 24,774 requests for refunds and processed them all within 30 days
Completed 3,872 disability retirement determinations
Processed 45,529 requests for direct deposit of retirement checks Provided counseling services to 51,670 visitors in their eight regional
offices
Held 652 retirement sessions at employer sites
Conducted nearly 1,600 financial planning seminars and retirement planning workshops
Given the importance of customer service, many pension systems have adopted customer service performance standards. For example, a system
might establish a goal of ensuring that new retirees receive their first retirement check within 30 days. Or, a pension system call center might establish a performance standard of answering all calls within 60 seconds.
Regardless of the specific standards, the point is that many pension systems have recognized plan participants as customers and, as such, have attempted to provide them with the best service possible.
16.3.2.3 Communications
Governments are beginning to recognize the importance of effectively communicating the value of their benefits to prospective employees, current employees, and retirees. For prospective and current employees, such communication may be particularly important from a human resources strategy standpoint since, compared to private sector employees, public employees receive a larger portion of their compensation in the form of pension benefits (Johnson, 1997). Therefore, governments that effectively communicate the relative generosity of their pension plans have a poten- tially potent tool for employee recruitment and retention.
Recognizing the importance of an effective communications strategy, Cost Effectiveness Measurement, Inc., has produced a document chronicling best practices in public pension plan communications (Cost Effectiveness Measurement, 2002). The report suggests a number of specific best practices
— complete with illustrations — arranged under three broad headings:
completeness (e.g., provide benefits publications to members when they join the system; ‘‘sell’’ the value of the benefits);design(e.g., make materials inviting; use context-sensitive artwork and pictures; use appropriate paper stock and print quality); andclarity(e.g., offering clear understanding of what members will receive when they retire or leave the system before retirement;
how members qualify for benefits). There are a number of tools pension systems use to communicate with their plan participants, including posters, payroll stuffers, informational letters, plan brochures and booklets, news- letters, videos, and web-based publications (Eitelberg, 1997).
While there are a number of tools pension systems use for communi- cation, there are certain elements that are necessary for an overall effective communications strategy. According to the GFOA (Eitelberg, 1997, 45), an effective communications strategy requires careful planning and clear goals and objectives, including:
Creating better understanding of the plan’s purpose, how it operates and any participant responsibilities
Promoting awareness among participants of the plan and issues confronting the plan
Providing participant access to personalized information
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Education employees about retirement income needs and where plan benefits fit in with overall retirement income resources
Maintaining contact with all stakeholders, including taxpayers, as well as legislators, employees, retirees, and beneficiaries
As this list of goals suggests, a sound communications strategy is an important aspect of benefits administration. To this point, the focus of this discussion on communications has been geared toward plan parti- cipants. But, as suggested in the last goal statement above, pension systems have a number of stakeholders with whom effective communications must be maintained. Consider, for example, legislative bodies. As mentioned in the section on benefits calculations, legislative bodies are normally respon- sible for determining DB formulas. Moreover, these bodies are responsible for ensuring pension plans are adequately funded. Unfortunately, there can be a disconnect between these two responsibilities, as political decisions to enhance benefits (precipitated, perhaps, by short-term fiscal prosperity) can be made without considering the long-term consequences for pension systems. Such enhancements might be an increase in the retirement multiplier or an early retirement program. In such cases, pension systems need to make decision makers fully aware of the long-term financial effects of those enhancements on the health of pension funds.
Effective communication with stakeholders also is important when pension investments suffer bad years, as was the case in 2001 and 2002.
Specifically, pension system administrators have an important role to play in alleviating the fears and concerns of lawmakers, taxpayers, and bond rating companies in addition to plan participants. One way pension systems can do this is by reiterating the long-term health of pension plans.
Naturally, poor investment performance — which for larger plans can result in multi-billion dollars dips in plan assets — can be the source of much attention. Such attention can lead to calls for changing asset allocations, investments, and/or external investment advisors. To thwart these short-term reactions, pension trustees and managers must reiterate their investment policy and focus attention on long-term performance. One way pension systems help maintain long-term focus is to smooth (or average) their investment returns over long periods of time (e.g., 5, 10, or even 15 years). Far from being unethical or gimmicky, this common actuarial practice properly focuses attention on the long-term health of the plan’s investment returns. Consider the case of CALPERS. CALPERS sent shock waves in 2001 when it announced a $9 billion loss in its investments. Even with those losses, however, CALPERS was able to report in its2003 Operations Statement a strong 10-year average return of 8.2 percent, and a 15-year rate of return of 9.6 percent, which exceeded the system’s actuarial assumptions (CALPERS, 2003).
As all of this suggests, an important aspect of benefits administration is communications. Whether selling the value of benefits to potential government employees or educating legislative bodies on the long-term consequences of pension benefit changes, pension administrators have an obligation to ensure better awareness, understanding, and appreciation for pension benefits among a diverse group of stakeholders.
16.3.2.4 Educating Employees
Finally, separate treatment should be given to the educative role pen- sion systems play in benefits administration. While education might be properly subsumed under either the customer service or communications categories, the fact that pension systems have a fiduciary duty to ensure their participants receive benefits education (Eitelberg, 1997) justifies brief separate treatment for employee education. In a nutshell, public pension plan sponsors should implement programs designed to educate employees about the importance of retirement savings and the various retirement savings vehicles available to them. This is important for DB plans but even more so for pension systems who sponsor only DC plans. Having employees assume risk for their own retirement security, as is the case with DC plans, does not eliminate a pension plan sponsor from fiduciary duties: employees need to understand asset allocation, diversification, tolerance for risk, what constitutes an acceptable rate of return on investments, and how their employer-sponsored retirement plans fit into their overall retirement income package. Unfortunately, public sector employers have lagged their private sector counterparts in offering financial planning education to employees (Daley, 1998; Sostek, 2004).
When coupled with the aforementioned investment conservatism of public employees (Frank, Condon, Dunlop, and Rothman, 2000), the importance of retirement education becomes all the more apparent.
According to the GFOA, ‘‘the key to educating participants about invest- ment strategies, plan benefits and retirement planning is to demonstrate the advantages and the pitfalls of inaction’’ (Eitelberg, 1997, 46). For plan sponsors, this education activity should begin, initially, with a thorough overview of their plan’s respective features for new employees and plan participants. Moreover, plan sponsors should provide all participants:
asset allocation tools (software, literature, counseling); information on the trade-offs between the probability of high returns and risks of loss;
information on risk exposure and historical market returns of various investment choices; periodic statements on the investment performance of participants’ accounts; reminders about the need to monitor and rebalance their asset allocations according to their own unique investment
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strategies; and information on the importance of diversifying their invest- ments (GFOA, 1999). Implementing these educative measures requires a concerted effort, utilizing multiple forums, on the part of pensions systems, as suggested in the above section on communications. Doing so helps to ensure that plan sponsors fulfill their fiduciary duties and that employees are properly positioning themselves for retirement security.