With defined benefit plans on the ropes, the new executive director of NCPERS is out to change some current perceptions about those plans and boost membership of the public fund organization.
Hank H. Kim, the National Conference on Public Employee Retirement Systems' new executive director and counsel, worked for three years as director of government affairs before his promotion in July.
NCPERS, formed in 1941, is the largest national non-profit public pension organization. Its core mission is to provide advocacy, trustee education and research for pension trustees, administrators and public officials. Mr. Kim said NCPERS' membership is around 500 defined benefit pension plans, and he hopes to bring that number to 800 in the next 10 years. He has focused on keeping defined benefit issues in the media and in Congress, and is committed to giving trustees the tools they need to best understand pension issues they are likely to face in the next few years.
He has been a lobbyist for the International Association of Fire Fighters, working on firefighter benefits, appropriations, homeland security and health care issues, and has worked at a hospital trade association and on health-care issues for former Sen. Bill Bradley, D-N.J.
What are the major issues pension funds face? There's the misconception regarding (defined benefit plans), the thinking that defined contribution plans will solve all the (underfunding) problems in the short term, when in fact it (DC) costs you more in administrative costs.
The problems with defined contribution plans are the initial administration fees, which are always higher. Also, employees don't save as much. We're putting a lot of effort into educating our membership and employees enrolled in DB plans.
Anecdotally, there's the case of Florida, which implemented a new defined contribution plan in 2000 and spent about $87 million. At the time, the stock market was strong and you could essentially throw a dart and get double-digit returns, so politicians had confidence in defined contribution plans and also felt they could reduce administrative costs, but fewer than 5% of eligible employees switched over. That (defined contribution) experiment was a failure.
Another issue is that people don't understand that health care and defined benefit assets are completely separate issues, and they — either inadvertently or deliberately — confuse the issues and therefore inflate the underfunded status of the pension plan.
Defined benefit plans are prefunded and qualified, and health care is basically a legislative budget line. It comes out on a pay-as-you-go basis each year, and the legislature or the county board of supervisors looks at the health care inflation rate and budgets what's appropriate for the upcoming year. They are funded separately, but some people, due to a lack of understanding or deliberately, mix up the two and don't look at them as distinct from one another.
Often those figures are lumped together and the underfunding number is (falsely) inflated to drive home a point that the current DB system is unsustainable or mismanaged, that there's a need to convert to a defined contribution system.
What bothers you about the industry; what keeps you up at night? Nothing specific, we focus exclusively on the public sector, and our industry is fine. Eighty-six percent of the public sector has pension funds.
What keeps me up are the global issues that we all worry about: terrorism, war and how it may impact Wall Street and our members and their investments.
But there are 2,659 pension plans in the public sector, and even among Fortune 500 companies, 350 still provide pension benefits. Employers still recognize that defined benefit plans can be a great tool to recruit and retain qualified employees.
What's missing in media coverage of public pension plans? We hear a lot about PBGC plan freezes, but what's missing are the good stories about pension plans, and there are some good stories to tell. In total, public pension funds have $2.8 trillion in assets, and our retirees are likely to spend money and help the economy. They are more likely to make investments in non-traditional areas like venture capital, biotech, other individual investments, which spurs the economy.
What would you like public pension plans to look like in the future? There's still a vacuum, a lack of understanding about some aspects of pension plans. We think NCPERS can occupy the vacuum.
We recently helped pass legislation as part of a pilot program for public safety employees that allows them to use up to $3,000 of their benefits on a pre-tax basis for health insurance.
It was a great idea that first came up in 2004 but died in Congress. The perception is that public sector employees are getting rich, but they're in fact paying health-care costs. Most public safety jobs have mandatory retirement ages, sometimes before retirees become eligible for Medicare, so they are receiving, say, $850 in benefits and have to pay $1,150 in health-care insurance costs.
For the 110th Congress, we want to follow the example of that pilot program and extend it to all public plans.
That legislation is one part of our three-part core mission. Research is another. What we want to do over the next couple of years is conduct more research that demonstrates the benefits DB pension plans provide to states and jurisdictions. Some of our data has shown that public sector defined benefit plans disperse roughly $130 billion worth of benefits annually, but because of the way they're structured, beneficiaries are more likely to spend their pension benefits, as opposed to DC plan beneficiaries, who are more uncertain about their future. So DB plan beneficiaries in turn generate $200 billion of economic stimulus, according to our data. I'd like to see more research and delve into the specific economic and tax-based benefits associated with defined benefit plans.
The third is education. We have a textbook out, "Public Pensions and You," which is geared for very new public sector trustees, and there is an online training component available. We also have a number of educational conferences in 2007, where attendees can learn about new and best trends, and we will continue to expand on our educational initiatives.
What place do you think DC plans have? We want to promote a secure, stable retirement with the guaranteed income from a DB plan. But we also tell employees that they have to have other elements in place; they need to plan ahead and have some personal savings like a 457 or a 403(b). DC plans certainly have a role, but they're designed to be supplements to the traditional pension plan, to augment those benefits.
We're not anti-DC, but we are concerned that they not be used as substitutes for (defined benefit) pension plans.
Do you see examples of pension obligation bonds that are misused? I've seen several examples of POBs that are done in an appropriate way and that have been done well. But it's of great concern to us when officials use pension assets to fill budget shortfalls.
It happened in New Jersey, when Gov. (Christine Todd) Whitman raided the state pension fund to fund her tax breaks and then used market gains to finance government obligations.
Some politicians need excuses, so they paint a picture of a really bloated benefit system that's riding on the backs of the taxpayers. Illinois (is) another one (that) hasn't made full contributions to the plan in more than 35 years.