TRS study: defined benefit plan is most cost effective

On April 19 and 20, 2012, the Board of Trustees of the Teacher Retirement System of Texas held its quarterly Board Meeting. The most critical portion of the meeting involved the Board receiving an update on the legislatively-required Pension Benefit Design Study (the TRS-Care Study was not a topic on this month’s agenda). Chairman David Kelly started off the discussion by reiterating his belief that the current defined benefit (DB) system was the most cost effective system that provided the most secure benefits. He added that he believed the facts contained in the study would ultimately bear out his belief, which upon conclusion of the presentation, appeared to be the case.

TRS was charged with studying the actuarial and fiscal impacts of potential changes to the TRS pension plan, including: (1) changes to final average salary, eligibility, and multiplier; and (2) moving to a hybrid plan or cash balance plan. It is important to note that current retirees will not be affected by any changes that could be made by the legislature.

As part of the study, TRS will also explore the following pension design issues: (1) balancing risk; (2) providing adequate replacement income; (3) offering value to members, the state, and other stakeholders; and (4) managing human capital.

Currently, to be eligible for retirement, a member must meet the Rule of 80, plus achieve a minimum age of 60. The current formula is five year final average salary (x) years of service credit (x) 2.3%.The following modifications to the current DB plan will be illustrated in the study: (1) moving from five to seven year final average salary (compared to other DB plans, five year is on the high end, so seven years is not common among other plans, but would engender savings); (2) reducing the multiplier from 2.3% to 2.0% (2.0% is in the mid-range for other plans where members have no social security benefits); and (3) move the retirement eligibility to a rule of 80, plus achieve a minimum age of 62 (61 was the average of 2011 TRS retirees).

It is important to note that the modifications outlined above do not provide as great a benefit as the current system and the modified benefit would be generally considered inadequate, which would greatly discourage the adoption of such a modification by the legislature.

The study also shows that if the plan is changed to a self-directed defined contribution (DC) plan or a pooled DC plan, returns would be less than the current DB system and administrative costs for these DC plans would be much greater than the DB system. In total, the study shows, compared to the current DB system, a DB/DC Hybrid Plan, a 100% Pass Through Cash Balance Plan, a DC Pooled Funds Plan, and a DC Self Directed Plan will all cost more and produce less. Further, the options mentioned above also displace the outcome risk from the employer to the employee. It was made painfully obvious that the current DB plan is the most cost-effective system that provides the greatest returns and benefits.

The Board was keenly aware that the concepts illustrated in the study need to be broken down into layman’s terms because many of the members of the legislature do not have an actuarial background.

TRS will continue to develop other aspects of the current study, including: (1) diminishing value of replacement income from lack of post-retirement increases; (2) impact of each structure on current UAAL and contribution requirements; and (3) sensitivity to investment returns, entry ages, and retirement ages. The next update will be available at the June 19 & 20, 2012 Board Meeting.

TRS also received a report on a recent Pension Administration Benchmarking study. TRS’ pension administrative cost was $31 per active and annuitant. This mark was $48 below the peer average. TRS is one of the lowest cost systems in the world, proving that the current system gives retirees of TRS the biggest bang for the buck.

Finally, next legislative session, TRS will seek to increase the state’s contribution rate to 6.4%. TRS will also seek a 1% statutory state matching contribution rate for TRS-Care.

TSTA will continue to fight to keep TRS’ current DB plan intact. At every available opportunity, we will continue to passionately advocate for our members on this extremely important issue. TSTA is in constant contact with TRS and elected officials on this important matter. We are out front countering those groups advocating to change the system to a DC system. We encourage you to join in the fight and make your voice heard. Contact you local state representative and senator and let them know how you feel, and let us know of any local groups advocating to change the system. Together we can make a difference.