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Missouri Local Government Employees Retirement System

Getting It Right! The positive impact of your LAGERS defined benefit plan, on the Taxpayer, Employee, Employer, and Retiree.

Providing Retirement, Disability, and Survivor Benefits to Missouri’s Local Government Employees.


Table of Contents... Missouri LAGERS Quick Facts.....................................................................................................3

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Missouri LAGERS Members.........................................................................................................4

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The Value of Defined Benefit Public Pensions: The Employer..........................................................5

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The Value of Defined Benefit Public Pensions: The Retiree.............................................................6 Finances At a Glance.....................................................................................................................7 The Value of Defined Benefit Public Pensions: The Employee..........................................................8 The Value of Defined Benefit Public Pensions: The Taxpayer...........................................................9

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National Institute on Retirement Security Pensionomics 2012: State of Missouri...............10 Missouri LAGERS vs. Defined Contribution Plans.....................................................................12 A Word from LAGERS Chairperson............................................................................................13


Missouri LAGERS Quick Facts • Non-Profit Public Pension System created by Legislative Action of the Missouri General Assembly in 1967 • Provides retirement, disability, and survivor benefits for local government employees within the state of Missouri • lagers is a Defined Benefit Plan that pays a protected retirement benefit based on the member’s salary and years of service • 622 Different subdivisions from every region in Missouri (as of June 30, 2012) • Includes cities, counties, health departments, libraries and special districts • As of June 30, 2012, lagers had 32,925 active employees and 16,483 retirees • lagers provides modest, but dependable retirement benefits • The average retiree receives $10,263 per year in benefits • lagers is an efficient, proven system that works well for everyone • Taxpayers, Employers, Employees & Retirees • The majority of lagers Pension benefits are spent in the local communities creating reportable revenue throughout the State of Missouri

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Missouri LAGERS - Getting It Right! 701 W. Main St. Jefferson City, MO 1-800-447-4334 www.molagers.org


Missouri LAGERS Members LAGERS continues steady membership growth annually, while maintaining a fiscally sound system. LAGERS expects the same continued stability in providing a protected, defined retirement benefit for all of its members.

Active Missouri LAGERS Member Employees (As of June 30, 2012)

General 25,111

Police Officers 5,774

Firefighters 2,040

Total 32,925 Missouri LAGERS Member Employers

LAGERS Member Employees: Where They Work (As of February 29, 2012)

Cities

285

Counties

60

Health Agencies

62

Special Districts

46

Water Districts

39

Road Districts

25

Fire Districts

32

Emergency Services

34

Libraries

39 as of June 30, 2012

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Missouri LAGERS - Getting It Right! www.molagers.org 1-800-447-4334 701 W. Main St. Jefferson City, MO


The Value of Defined Benefit Public Pensions:

The Employer

Providing a defined benefit plan is the most efficient way to offer employees a dignified exit from the workforce. Employers that provide defined benefit plans also see the value in employee retention and lower costs. Defined Benefit Plans Encourage Employee Retention: A defined benefit plan, like LAGERS, is based on salary and length of service, not an account balance. The payoff for the employee is that the longer he or she works for an employer the more he or she will earn in retirement for that service.

Pooling Longevity Risk:

By pooling longevity risk, defined benefit plans, like LAGERS, only need to accumulate enough funds for the average life expectancy of a group of employees. With a defined contribution plan, however, the individual must save for their maximum life expectancy to avoid running out of money in retirement. What this means is that a defined benefit plan can accumulate less funds to achieve the same defined contribution benefit. Maintaining a Balanced Portfolio: Defined benefit plans are ageless, so they can maintain a balanced investment portfolio over long periods of time. The individual with a defined contribution plan must adjust their investments as they age to a more conservative asset allocation and settle for lesser returns in their later years.

A study done by the National Institute on Retirement Security indicates that 72% of employees say retirement benefits is a retention factor. Defined Benefit Pensions also reduce quit rates by 20%. Public pensions, like LAGERS, aid in recruitment and retention of specialized workers to perform important public services like police and fire protection. By retaining employees, defined benefit public pensions save the employer the cost of posting a job opening, hiring a new employee, and training the new employee. As a result, costing the taxpayers less. Defined Benefit Plans Nearly Half the Cost of Defined Contribution Plans: Defined Benefit Plans, like LAGERS, are proven to be more efficient than 401-type defined contribution plans, because they stretch taxpayer, employer, and employee dollars further in achieving any level of retirement income. In fact, the cost to deliver the same retirement income to a group of employees is 46% lower in a defined benefit plan than in defined contribution individual account plan. Defined benefit plans are able to achieve this efficiency because they utilize longevity risk pooling, maintain a balanced portfolio, and earning superior investment returns.

Achieving Higher Investment Returns Defined benefit plans typically achieve higher investment returns than defined contribution plans because of professional portfolio management and reduced fees. Public pension plans are able to negotiate lower fees because of the size of the portfolio. Higher returns and lower fees turn into lower employer contributions, which mean a savings to taxpayers as well. Excess Investment Returns = Lower Rates LAGERS is a non-profit retirement system. Investment returns in excess of the expected rate are credited back to our member employers. This helps stabilize and even reduce employer rates. Because LAGERS is a stable, continual, long term retirement system, short term fluctuations in investment return do not undermine or jeopardize the safety and security of employee earned benefits.

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Missouri LAGERS - Getting It Right! 701 W. Main St. Jefferson City, MO 1-800-447-4334 www.molagers.org


The Value of Defined Benefit Public Pensions:

The Retiree

The LAGERS Defined Benefit system provides a clear path to a secure retirement future. What is received at retirement is clearly defined and is based upon effort, not economic forces beyond control. The more service dedicated to their local government employer, the more the benefit increases. There is a direct connection between the amount of work and the earned benefit. More work equals more retirement benefit earned...as it should be.

DB Plans Help Reduce Elder Hardships

Income from a defined benefit pension plays a vital role in reducing the risk of poverty among older Americans. Poverty rates among older households lacking pension income are about six times greater than those with such income. According to a 2009 study by the National Institute on Retirement Security (NIRS):

Provide Protection to Earned Benefits Retirees have the security of knowing once they retire, economic changes beyond their control cannot destroy the benefit they have worked their career to earn. LAGERS and other sound Defined Benefit systems have become the stable building blocks not only within individual families, but firmly throughout local communities, the state and the entire nation. This secure, dependable financial foundation is more important now than ever. Defined Benefit plans are proven vital building blocks within our local communities and across the nation.

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Missouri LAGERS - Getting It Right! www.molagers.org 1-800-447-4334 701 W. Main St. Jefferson City, MO


Finances At a Glance Funded Ratio

83.5%

This number represents the financial soundness of the LAGERS system. The funded ratio is determined by dividing the systems assets by its liabilities. In other words, how much LAGERS has versus how much LAGERS owes. The amount LAGERS “owes” to pay retirement benefits to our members is very similar to a home mortgage. The pre-funded ratio would tell us that the LAGERS “mortgage” is 83.5% funded. In total, public plans in Missouri and the U.S. are well funded. The graph (right) shows the average funded ratios for public plans.

Annual Benefits Paid As of June 30, 2012

$197 Million

Investment Return 1 Year 3 Years 10 Years 15 Years

Retiree Data (As of February 29, 2012) Retirees

16,483

Average Annual Benefit

$ 10,263

Average Service Credit

10 Years

Average Annual Benefit for Retiree with 25-30 years of service

Asset Allocation

Investment decisions are made by the LAGERS Board of Trustees in harmony with LAGERS dedicated investment staff

3.6% 13.9% 7.2% 7.1%

Interest Credits to Employer Accounts 2012 9.1% 2011 10.2% 2010 5.4%

$ 22,476

(As of June 30, 2012)

(As of June 30, 2012)

Annual investment gains or losses are smoothed over a five year period and credited to member employer assets. Investment gains put downward pressure on employer contribution rates. Losses have the opposite effect. The smoothing process helps to keep employer contribution rates level in all economic environments. Changes in 2013 Employer Contribution Rates

Increases Decreases Unchanged

439 507 61

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Missouri LAGERS - Getting It Right! 701 W. Main St. Jefferson City, MO 1-800-447-4334 www.molagers.org


The Value of Defined Benefit Public Pensions:

The Employee

In order to remain middle class, employees must build a nest egg and rely on Social Security to fill the income gaps in retirement. The LAGERS defined benefit system provides a protected base from which employees may Employees covered under defined benefit plans, like build their retirement security. LAGERS, have the peace of mind knowing they are earning a benefit that they will never Defined Benefit Plans are outlive and that will directly reflect Professionally Managed: their working career. There is nothing fancy about the LAGERS defined benefit: The more an employee A recent survey conducted by works, the more he or she earns Financial Finesse, a financial towards a retirement benefit. education firm, found that 53% of workers lack a basic knowledge of stocks, bonds, and mutual funds. Defined Benefit Plans Reward Longevity: Public pension plans typically earn Defined benefit pensions, like higher returns than individual LAGERS, reward employees for investment accounts because assets longer working careers because their are managed by professionals, and retirement benefit is based on their investment decisions are not subject salary and years of service, rather to fluctuations of the market. The than an account balance. Studies have shown that defined investment plan of LAGERS is a long-term investment benefit plans reduce quit rates by 20%. strategy and it is managed by a dedicated, well-trained investment staff. LAGERS Provides Protection in Volatile Markets: During the tumultuous economic climate of 2008, millions of Americans lost thousands in their defined contribution accounts. According to US News & World Report, workers age 45-54 with 20-29 years of service lost on average 26% of their defined contribution account balance in 2008. Since 2008, LAGERS has added 60+ new member employers. We believe this is, for the most part, attributable to the desire for security in uncertain times. Defined benefit plans, like LAGERS, protect employees from the inevitable swings in the markets because benefits are based on a formula. Employees Must Plan to Save for Retirement: While the income from a defined benefit plan may provide a substantial monthly retirement benefit, it should not be the employees soul source of income for retirement. The current average annual LAGERS benefit is $10,263, a modest but reliable allowance. The national average pension payment is approximately $15,000 per year.

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Missouri LAGERS - Getting It Right! www.molagers.org 1-800-447-4334 701 W. Main St. Jefferson City, MO


The Value of Defined Benefit Public Pensions:

The Taxpayer

LAGERS paid out over $197 million in retirement benefits in the last year, 95% of which stayed in Missouri’s economy. Each dollar paid out by defined benefit pensions supported $1.49 of total economic activity in Missouri.

There is a common misconception that taxpayers bear all the costs of funding defined benefit public pensions. The truth is, taxpayers receive substantial economic benefits from defined benefit public pensions.

Expenditures stemming from state and local pension plans supported

Over 60% of LAGERS funding comes from its investment return.

Contrary to poplar belief, the majority of public pension funding does not fall on the taxpayer (employers in the case of LAGERS). Approximately 60% of LAGERS system is funded by the investment gain of the system’s assets. A little less and 40% of LAGERS funding comes from the Employer (taxpayers).

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38,518 Jobs that paid $1.6 billion in wages $4.9 billion in total economic output. $640.1 million in federal, state, and local tax revenue ...in the State of Missouri

Taxpayer Dollars = Economic Output for MO A study by the National Institute of Retirement Security found that for every Missouri taxpayer dollar paid into a defined benefit public pension, a substantial amount of economic activity is produced by the system’s retirees. Each dollar contributed by Missouri’s taxpayers to state and local pension plans, like LAGERS, supported $5.43 of total economic output within the state. Total output is defined as the value of all goods and services produced in the economy. This particular study measured the value of the total output supported by retiree’s spending income from a state or local public pension plan.

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Missouri LAGERS - Getting It Right! 701 W. Main St. Jefferson City, MO 1-800-447-4334 www.molagers.org


National Institute on Retirement Security

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Missouri LAGERS - Getting It Right! www.molagers.org 1-800-447-4334 701 W. Main St. Jefferson City, MO


Pensionomics 2012: State of Missouri

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Missouri LAGERS - Getting It Right! 701 W. Main St. Jefferson City, MO 1-800-447-4334 www.molagers.org


Missouri LAGERS vs. Defined Contribution Plans Defined Contribution Plans

Missouri LAGERS

Who is responsible for investment decisions?

Employee if plan has participant directed accounts

LAGERS Board of Trustees

Who bears the investment risk?

Employee

Employer

What is promised to the employee?

Possibly an annual employer contribution; employer maintenance of plan

A definitely determinable monthly benefit from retirement until death

How are benefits determined?

An accumulated account balance

A formula based on the member’s salary and length of service

Are actuarial calculations necessary?

No

Yes - in order to determine the employer contribution rate

Are loans allowed?

Yes (except for SIMPLE plans)

No

Are hardship withdraws allowed?

Yes

No

What is the normal distribution from the plan?

Lump Sum

Monthly retirement benefit

Are disability and survivor benefits available?

No

Yes

Who is responsible for administrative costs or fees for the plan?

Employee

Employer

Who is responsible for investment decisions? The investment return of the system provides approximately 60% of LAGERS’ funding. The rest of the funding comes from employer and employee contributions. LAGERS Board of Trustees is responsible for ensuring the system’s portfolio is invested to produce the best results for LAGERS members. Who bears the investment risk? If employee contributions are required by the employer, LAGERS member employees are always guaranteed to receive back everything they contribute plus interest. Since such a large portion of LAGERS funding comes from investment return, this does have an impact on employer contribution rates. When LAGERS portfolio produces a return above what is assumed, the excess is credited back to employers. When the portfolio does not produce an excess return, upward pressure is applied to employer contribution rates to make up for the lack of funding.

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What protections do employers have from skyrocketing contribution rates? LAGERS does provide protections to employers from extreme rate increases because of poor market conditions. First, LAGERS statutes limit the annual increase in an employer rate to 1% unless the employer chooses to make a benefit enhancement. Also, annual investment gains and losses credited to employers are smoothed over a five year period to help protect against volatility in the rates. What about plan fees and administrative costs? Fees that are charged to defined contribution plan participants ultimately decrease the participant’s retirement benefit because they are often paid directly from plan assets. LAGERS is a non-profit entity and does not charge fees to employee members. Therefore, there is no decrease in retirement benefits because of fees. The administrative costs to run the system are paid from the investment returns of the LAGERS portfolio.

Missouri LAGERS - Getting It Right! www.molagers.org 1-800-447-4334 701 W. Main St. Jefferson City, MO


A Word from LAGERS Chairperson As Chairperson of the Board of Trustees of the Missouri Local Government Employees Retirement System, I am pleased to present this report. I hope you have found this information helpful. I truly believe LAGERS is getting it right for members, employers, retirees, and taxpayers. The investment markets for the one-year ending June 2012 were challenging once again, with a return of 3.6%. The ten-year return through June 2012 was 7.2%, in spite of the deep economic recession of 2008 and 2009. This return places Annual Investment Results (July 1, 2011 - June 30, 2012)

LAGERS in the top quartile of public

Arby Todd, Chairperson Member Trustee City of Lee’s Summit

pension plans and soundly beats the LAGERS Custom Benchmark. It is very important to note that the ten-year return is almost identical to the assumed investment rate of return of 7.25%. The Board continues to diversify the portfolio into alternative asset classes providing stability to the LAGERS portfolio. LAGERS continues to present a strong 83.5% pre-funded ratio. Twelve new employers elected LAGERS participation seeking the security and professional administration provided through the system. LAGERS provides that secure monthly benefit permitting members to plan for a successful retirement. The seriousness with which the LAGERS Board takes on their oversight role is admirable and is one of the primary reasons LAGERS is one of the most sound public pension plans in the country. Finally, I appreciate the opportunity of serving on the LAGERS Board and as your Chairperson. Thank you for your continued interest and support. Be assured that LAGERS will maintain the financial integrity of the system in these volatile financial times.

Schedule of Funding Progress

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Missouri LAGERS - Getting It Right! 701 W. Main St. Jefferson City, MO 1-800-447-4334 www.molagers.org


Notes:


Getting It Right!

Missouri Local Government Employees Retirement System 701 W. Main St. P.O. Box 1665 Jefferson City, MO 65102 (800)447-4334 www.molagers.org info@molagers.org


Getting It Right