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Pension Reform: Ensuring a Secure Future for Oklahoma's Retirement System

Representative Randy McDaniel discusses the history of pensions, the impact of the Great Recession, unfunded liability, investment strategies, and policy decisions to create a more secure retirement system for Oklahoma. He emphasizes the need for consistent and adequate funding to meet the workforce and economic challenges of the future.

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Pension Reform: Ensuring a Secure Future for Oklahoma's Retirement System

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  1. 2016 The State Retirement System and Solutions for a Secure Future Representative Randy McDaniel Chairman of the Business, Labor and Retirement Laws Committee

  2. Purpose Pension Reform is about honoring the past promises and being able to meet the workforce and economic challenges of the future. For the many Oklahomans whose pension benefits rely on the strength and durability of the retirement system, the substantial improvement provides more peace of mind and economic security.

  3. A Brief Pension History • Pensions have a long history, dating back 2000 years to the Roman Empire. • Gen. George Washington prevented an uprising due to unfulfilled promises shortly before the Treaty of Paris. • In 1908, Governor Haskell signed into law Oklahoma’s first pension benefit allowance for firefighters. • History Lesson: It is much easier to make pension promises than to fulfill them.

  4. 3 Key Pension Factors • Investment Performance • Policy Decisions • Adequate Funding

  5. Great Recession • Great Recession Impact • Major decline in U.S. Stock Market. The Dow Jones dropped from 12,495 in 2007 to a low of 6,594 by 2009. • The national unemployment rate increased from 5% in 2007 to 10% by 2009. • Interest rates dropped to record lows. • The pension system was already in bad shape. The investment losses experienced during this period exposed the magnitude of the problem.

  6. Unfunded Liability • In 2000, the unfunded liability was $6 billion • In 2004, the UAAL was over $10 billion • In 2010, the UAAL totaled $16.1 billion • Oklahoma ranked nationally near the bottom

  7. The Funded Ratio • In 2010, according to the PEW Center, our pension plans were 56% funded. NOTE: All numbers are actuarial determined percentages.

  8. Investment Strategy • While many investors retreated into low yielding securities, our system managers continued believing in the enduring strength of the free market system. • Pension assets were strategically allocated for long-term growth and high yields. The plan worked. Superior returns were achieved through FY2014. • Recently, many of Oklahoma’s pension systems have under performed the meager national peer average returns of 3% for FY2015 and .9% for FY2016. Source: PEW Charitable Trusts

  9. Investment Return Assumptions • Expected return assumptions have a sizable influence on the condition of pension plans and the annual resources required to maintain a healthy system. • The national average return assumption is 7.62%. • Oklahoma is in line with the national average and has a record of outperforming target rates of return. • Return assumptions need to reflect past performance, asset allocation models and economic forecast. Source: National Association of State Retirement Administrators

  10. Total Fund Assets *Pensions are the state’s largest investment funds

  11. Time For Action “Be strong and courageous. Do not be afraid; do not be discouraged, for the Lord God will be with you wherever you go.” – Joshua 1:9 “A good example is the best sermon.” – Benjamin Franklin “Together we can do great things.” – St. Teresa

  12. Policy Decisions • COLA Reform: Improved financial condition by $5.5 billion • New Plan Design (OPERS): $3.8 b in long-term savings • Retirement Age Increases: $2 billion in long-term savings • Vigilance and Other Reforms: Not scored, but significant

  13. Increased Annual Funding

  14. OTRS Funding *Note: Funding has increased nearly 70% from 2004 - 2015

  15. Funded Ratios *Weighted Average: 2010 – 56% 2015 – 76%

  16. Lower Unfunded Liability • The Pension systems have experienced a $7.3 billion reduction in the unfunded liability NOTE: All numbers are actuarial values

  17. Fiscal Condition

  18. Challenges and Solutions • Challenges • Low energy prices. • Oklahoma’s unemployment rate exceeds national average for the first time in 26 years. • Challenging demographics of U.S. workforce • Forecast for economic growth, government revenues and investment returns are not encouraging • Solutions • Ensure investment strategies that minimize risks and costs given the long-term nature of pensions and growth objective. • Stay vigilant regarding pension legislation • Implement reforms as needed that are fair and balanced • Protect consistent and adequate funding needed for improvement

  19. Conclusions & Questions Representative Randy McDaniel Chairman of the Business, Labor and Retirement Laws Committee 2300 N. Lincoln Blvd, Room 438 Oklahoma City, OK 73105 (405) 557-7409 randy.mcdaniel@okhouse.gov

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