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Last updated: Tue. Sep. 24, 2013 - 08:48 am EDT

Vote on Indiana pension cuts delayed

Reduction to affect state’s retiring public workers

INDIANAPOLIS — A legislative pension oversight panel was on the verge Monday of approving a nonbinding recommendation to the state pension system to back off plans to privatize annuity savings accounts.

A member made a motion, it was seconded and there was ample discussion on the topic. Sentiment on the committee appeared to favor the recommendation.

Then just before calling for a vote, a Senate staffer whispered in the ear of Sen. Phil Boots’ – chairman of the Pension Management Oversight Commission – and he quickly announced he would hold the vote until the next meeting.

At issue is a contentious pension cut for soon-to-be retired teachers and public employees.

In Indiana, members of the Public Employees’ Retirement Fund and Teachers’ Retirement Fund have a hybrid system that consists of a defined benefit plan and an Annuity Savings Account component.

When someone retires, the person can take the money built up in the savings account and cash out for a lump sum or annuitize it with the Indiana Public Retirement System to receive monthly annuity payments calculated with an automatic 7.5 percent interest rate.

About 50 percent of retirees take the annuity option.

The topic arose during the last few days of the legislative session in April, but the provision was removed from the budget for public vetting.

In July, the Indiana Public Retirement System used its authority to unilaterally alter the system without consulting the Pension Management Oversight Commission.

The board making the change said it didn’t make sense to have a guaranteed interest rate on annuity payments that is higher than the rate of return for the fund’s assets.

But instead of modestly dropping the rate, the panel decided to privatize the annuity system with a third-party vendor using market-based rates. This reduces the risk for the state and public employers and places the risk on employees.

According to state pension staff, the current market rate would be in the range of 4.0 percent to 4.5 percent.

Gail Zeheralis, lobbyist for the Indiana State Teachers Association, said every 1 percent drop in rate yields an 8 percent drop in benefits. Over the 20-year life of such an annuity, the retiree could see a reduction of $40,000 in payments.

“We need a better balance,” she said. “This is a quality of life issue.”

She testified Monday that retirees are much more comfortable with the state guaranteeing the money rather than a private annuity vendor who could go out of business.

And others noted the fees and administrative overhead that would likely increase.

“It’s an unnecessary reduction of benefits to retirees who really receive very modest incomes,” said Nancy Guyott, president of the Indiana State AFL-CIO.

Several options were offered by those affected on making the fund more sustainable for the future without privatizing the program and drastically reducing the rate.

Tony Green, chief legal and compliance officer for the Indiana Public Retirement System, said other than having a third-party involved the structure of any new system is unknown at this point, including how the risk will be shared.

“Currently what we are doing is taking a step back,” he said. “We don’t know what the structure is.”

He said the consensus was to go to a market rate and the agency doesn’t have the expertise in-house to do that.

Green said the pension board has hired a consultant – Callan Associates – to advise on how to craft a request for proposal for private annuity vendors to bid on. A previous RFP in March received only two official responses. Two others were past the deadline. So the board decided to try again.

No further details were available on the contract with Callan.

Regardless what the Pension Management Oversight Commission or Indiana Public Retirement system does, lawmakers could have the ultimate say in the 2014 session beginning in January.

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