Bill Orders Pension Board To Keep Annuity System In-house
January 27, 2014 — TheStatehouseFile.com
INDIANAPOLIS – The House is set to consider legislation that will prevent the state from privatizing one part of public employee and teacher retirement funds.
House Bill 1075 –authored by Rep. Woody Burton, R-Whiteland – tells the Indiana Public Retirement System that it can’t use a third party vendor to provide annuities to its members, who worked for state and local governments and schools.
The annuity is one of a two-part retirement system. The system includes a defined benefit plan, which is funded by government and schools for its employees, and a savings account that can be funded by employees or employers.
Upon retirement, the worker can take the savings account as a lump sum, roll it into a different retirement account, or convert it to an annuity to spread its benefits over the length of retirement.
Currently, retirees who opt to annuitize their savings can do so with a 7.5 percent interest rate, which is well above market rates and the amount the state is earning off the money that’s invested. The gap – which the nonpartisan Legislative Services Agency estimates is $2 million per month – creates an unfunded liability that the Indiana Public Retirement System board of trustees decided was no longer acceptable.
The INPRS board of trustees voted last year to fix the problem by hiring a third-party provider, which would transfer the risk of loss from the pension funds to the provider. That vendor would manage the funds and set the interest rates for the annuities.
However, legislators and public employees were upset that a portion of the retirement money would then go to a private firm, which would charge fees to make a profit.
Lawmakers encouraged the INPRS board last year to reconsider. They suggested that the board keep the annuity system in house but set more realistic rates of return. INPRS opted to stick with its original plan, which led Burton to file its bill.
HB 1075 prohibits INPRS from using a third-party vendor to handle annuities. But it also requires the board to establish a new rate of return no later than July 1of each year, basing it on the actual investment rate and the performance of the market.