The Indiana Public Retirement System, Indianapolis, reissued an RFP for a lifetime annuity provider for its $5.6 billion annuity savings account program despite a bill that passed the state House that would force the retirement system to continue to manage the program in-house.
The board of the retirement system, which oversees $28.6 billion, wants to shift management of the account to a third-party manager that would use a market-based rate of return. (Currently the ASA is managed internally with an assumed 7.5% fixed rate of return. If the market-based return were applied now, it would be 4% to 4.5%.)
System officials have said maintaining internal management with the higher rate of return would increase the retirement system's liabilities. The 7.5% rate was kept for the ASA after INPRS in June 2012 lowered the assumed rate for the two pension plans it oversees — Indiana Public Employees Retirement Fund and Teachers Retirement Fund — to 6.75%.
While the Indiana system’s board may issue a request for proposals without legislative approval, the current RFP would have to be withdrawn, said state Sen. Philip Boots, who chairs the Senate Pensions and Labor Committee.
A bill passed unanimously by the Indiana House on Jan. 30 would require the retirement system's board to keep management of the annuity program in-house for the next five years, but would let it set the interest rate annually during that time. However, that rate could not be lower than the rate of return for the overall retirement system in the previous fiscal year, according to the Indiana General Assembly's website. The system's overall rate of return in the 12 months ended June 30 was 6%. The bill now goes to the state Senate which next meets on Feb. 3.
In October, the Indiana Legislature's Pension Management Oversight Commission recommended the retirement system keep management of the annuity program in-house, but without increasing the liabilities. The Indiana system’s board in a letter it approved in December said that wasn’t possible.
Indiana officials don’t take positions on legislation so “once a decision is made (by the Legislature), we’ll be happy to implement it,” said Jeffrey Hutson, INPRS spokesman.
Mr. Boots said legislators are being pressured by retirees over the switch to an external provider because of what it might mean for their retirement accounts. “The fear is not so much the rate of return, but the privatization of it,” said Mr. Boots. The possibility that the managing the annuities could collapse “is a concern” to participants, as are the fees those firms would charge. “PRS believes the size of the annuity funds would mean they (the external provider) would charge lower fees.”
Mr. Hutson said retirement system officials “fully understand” retirees’ concerns. “We obviously have to make certain that the provider we select is solid, and also continue to make certain they remain solid in the future,” he said.
Mr. Boots said “we’re stuck in the middle” between the Indiana system’s privatization plan and some legislators’ desire to maintain internal management of the annuity program, but a compromise is possible. “That seems to be the way that we’re headed,” he said.
Meanwhile, the annuity provider RFP is on the retirement system’s website. Proposals are due at 3 p.m. EST Feb. 27, and a selection is expected the week of April 7, according to the RFP.
An RFP originally had been issued last year but was rescinded. Since then, the retirement system hired investment consultant Callan Associates to help with the RFP and to create an operational model for the annuity program.