The Safety of Your Pension: A Perspective

1. The Safety of Your Pension:A Perspective Sandy Drew March 16, 2012

2. Agenda • Summary of WRS • Defined benefit (DB) vs. defined contribution (DC) pension plans • WRS -- Something to protect • Events in Wisconsin • How the system is working • Where to secure more information

3. Wisconsin Retirement System WRS = ETF + SWIB • Department of Employee Trust Funds (ETF) – Administers benefits for WRS participants • State of Wisconsin Investment Board (SWIB) – Manages and invests WRS assets

4. ETF’s Organization • Teachers Retirement Board • Wisconsin Retirement Board • Employee Trust Funds Board • Policymaking board • Appoints Secretary of ETF • Fiduciaries • Approves contribution rates recommended by actuary

5. SWIB’s Organization • Nine-member Board of Trustees • Six members appointed by Governor • One representative of teacher participants • One representative of non-teaching participants • Secretary of Department of Administration • Fiduciaries • Professional investment staff • Active management

6. SWIB and ETF • ETF – Secretary Robert Conlin • Questions regarding all retirement benefits and insurance benefits for state & UW employees • Any questions re your annuity • SWIB – • Executive Director Keith Bozarth until June • “ “ Michael Williamson • Any questions regarding investment returns or types of investments

7. Defined Benefit (DB) Pensions • Benefit based on years of service, salary & multiplier • Benefit paid for life of employee or spouse • Employers and sometimes employees make contributions to fund benefits • Professionally invested

8. Defined Contribution (DC) • No promised level of benefits – varies based on contributions and investment decisions • Employer contribution usually dependent on employee contribution • Employee responsible for investment decisions • Costs to invest DC plan about twice those of investing DB plan assets • Investment responsibility shifted from employer to employee • No assurance benefits sufficient to meet needs until death

9. Key Features of WRS • Consolidated – includes nearly all public employees, with exception of Milwaukee City & County • Defined benefit (DB) plan that provides benefits until death • Defined contribution (DC) plan as investment risks & rewards shared • Provides financial security with modest benefits • Fully funded

10. Shared Risks & Rewards • Employee-required and employer-required contributions • Contribution rates set by ETF Board • Participants share in investment gains and losses • Annuity benefits = contributions paid while active employee + investment earnings

11. Few WRS Facts • Over 570,000 participants • 12% of state’s population – nearly 20% with dependents • Two Funds • Core Trust Fund – All participants, diversified investments, gains & losses smoothed • Variable Trust Fund – Optional, all-stock fund, no smoothing of gains & losses

12. Few WRS Facts (cont.) • 167,649 annuitants as of 12/31/11 • $4.2 billion paid in annuities in 2011 • Monthly annuity averages about $2,000 per month • Nearly 90% of annuitants continue to call WI home • ETF & SWIB low cost to administer benefits & invest funds compared to peers

13. Sustainability of Public Funds • Can public pension funds pay promised benefits? • Some plans in difficult financial straits before 2008 • Collapse of financial markets in 2008 affected all funds • Some require significant funding increases • WRS weathered situation better than others – only modest contribution increases

14. Effect of Last Year on the WRS Legislature and Governor • Repealed law that allowed employers to pay employee-required contributions • Employees now pay ½ of all required contributions • Increased hours to be eligible for WRS coverage • Require 5-year vesting to be eligible

15. Other Legislative Actions • Study of the WRS to address • Effect of establishing a DC plan for new hires • Allow new hires to “opt out” of paying contributions to WRS • Create optional retirement plan (OPR) for UW System new hires • Limit ability of annuitants to be rehired by public employer

16. Study • To be completed by Department of Employee Trust Funds, Department of Administration and the Office of State Employment Relations • ETF spearheading the study • Study to go to Governor and legislative committee by June 30, 2012

17. Inherent Dangers • Permitting employees to opt out or not pay contributions will • Weaken the entire system • Create volatility in contribution rates • Reduce the pool of money to invest & subsequently affect investment strategies • Creating DC plan transfers risk to employees & further weakens current system

18. Retirement Security Major Concern for Workers* • Last 30 years shift to lower income jobs • Private sector workers covered by employer DB plan fell from 28% to 3% • 51% of working-age households at risk of falling short of pre-retirement living standard • Median retirement account balance value $45,000 in 2007 • 81% say all Americans need pension for independence, self-reliance *National Institute on Retirement Security report to Joint Retirement Boards March 2012

19. Policy Question Should we as a society . . . • Weaken or destroy a system that works? • Work to achieve financial security independence in later years for everyone?

20. Wisconsin Pensionomics* In 2009, expenditures from WI state and local pensions supported. . . • 50,317 jobs that paid $2.0 billion in wages & salaries • $6.2 billion in total economic output • $856.7 million in federal, state & local tax revenues *National Institute on Retirement Security report to Joint Retirement Boards March 2012

21. Wisconsin Pensionomics (cont.) • Each $1 paid in pension benefits supported $1.49 n total economic activity in Wisconsin • Each $1 “invested” by Wisconsin taxpayers in these plans supported $6.22 in total economic activity in the state *National Institute on Retirement Security report to Joint Retirement Boards March 2012

22. SWIB Investment Returns* * As of 12/31/11 per SWIB website

23. 2012 investment return from 27%-31% needed to avoid a negative adjustment* Core Trust Fund *ETF March 2012 Report to Joint Retirement Boards

24. Annual Annuities by Year of Inception After (7.0%) adjustment As of December 31, 2011 Approximately 71,521 annuitants and 47.5% of annuities were not subject to the full negative annuity adjustment in 2012

25. Now what??? • 4%-7% reduction not what anyone wants, but . . . • We will continue to draw a monthly pension that equals or exceeds our initial annuity. • Reductions show that the system works. It has withstood the worst financial markets since Great Depression. • But, vigilance is critical so system is not weakened!!!

26. What can you do? • Contact your legislator – hands off the WRS. • Keep abreast of what is happening • Differentiate facts from fiction • Quiz future candidates about their positions on benefits for public employees • Access ETF & SWIB websites for info

27. Sources for Information • Department of Employee Trust Funds http://etf.wisconsin.gov • State of WI Investment Board www.swib.state.wi.us • National Institute for Retirement Security www.nirsonline.org