DiNapoli defends DB schemes

New York State Comptroller, Thomas DiNapoli, has defended public defined benefit schemes, saying that they are not a drag on state government finances, are sustainable and form a vital part of the US economy.

DiNapoli (pictured), who is the sole trustee of the $146 billion New York State Common Retirement Fund (CRF), also told attendees at the recent Council of Institutional Investors (CII) fall meeting that his fund, which has come under fire for its governance structure, has made key reforms to make it more transparent and accountable.

Under DiNapoli’s tenure the fund has taken several steps to reform governance and transparency, including banning the use of placement agents and lobbyists.

He has also prohibited so-called “pay-to-play” campaign contributions and improved the detail in and increased frequency of reporting at America’s third-biggest public pension fund.

DiNapoli, who as comptroller oversees all audits of state government agencies, told conference attendees that the governance structure of the fund, where the sole trustee is elected by voters, actually protects the fund from political interference.

The fund has been the subject of bitter political battles in the past, with current New York Governor Andrew Cuomo recently introducing a sweeping reform agenda in a bid to reduce the burden on taxpayers of financing the fund’s liabilities.

The reforms, however, have fallen short of fulfilling Cuomo’s election promise to reform the governance of the fund by introducing a trustee board.

New York is one of just a handful of states in the US – others are Michigan, North Carolina and Connecticut – where the state pension plan is under the control of a sole state government official.

CRF’s governance structure has come under increasing scrutiny after DiNapoli’s predecessor and fellow Democrat politician Alan Hevesi was sentenced to between one and four years’ jail in April.

In October last year Hevesi pleaded guilty to one felony count of taking $1 million in gifts from a California money manager to whom he, as sole trustee of the fund, had steered more than $250 million in investments.

A separate governmental investigation also claimed the scalps of six others involved in the fund, including David Loglisci, the former chief investment officer.

DiNapoli told conference delegates that CRF had weathered nine decades of market ructions, and with more than $146 billion in assets was in its strongest position since the global financial crisis.

While acknowledging that pension costs were rising, DiNapoli cited Boston’s Centre for Retirement Research figures which show that state government contributions to public pension funds in the US account for on average a 3.8 per cent slice of the states’ annual expenditure.

CRF’s own calculations reveal that the fund accounted for 2.4 per cent of New York State’s operating expenditure, DiNapoli told delegates.

DiNapoli also refuted claims that the fund was a drag on public finances, saying that over the past 20 years investment returns had accounted for 83 cents of every dollar paid to New York public pension recipients, compared to a national average of 68 cents.

He also rejected a common criticism that public employees were retiring on bloated pensions compared to their private sector counterparts.

“In fiscal year 2010-11 the New York Common Retirement Fund paid out $8.5 billion in benefits to 385,000 retirees and beneficiaries,” DiNapoli said.

“Less than one-half of one per cent of those retirees receive a pension exceeding $100,000. The average annual New York State pension, excluding police and fire, is a little over $19,000.”

DiNapoli also hit out at the trend toward defined contribution funds in US, saying it was a “bad idea” that had proven to be “woefully inadequate” for those who depended on DC plans for their retirement.

“If we continue to move away from defined benefit pensions to 401(k)s, I think we can predict the outcome,” he said.

“Twenty years from now we risk having an entire generation of retirees who don’t have enough money to get by, an aged underclass that increasingly depends on government food, clothing and housing.”

Defined contribution or, in the US, 401(k) funds, had never been intended to replace pensions, and were savings vehicles, DeNapoli argued.

He said defined benefit funds also had considerable cost advantages, citing studies that showed defined benefit funds had up to 40 per cent lower costs than individual 401(k)-style funds.

Defined benefit funds also had the advantage over 401(k) funds of being able to adjust their investment strategy to market conditions, rather than having risk levels dictated by the individual’s proximity to retirement.

DiNapoli said defined benefit funds also could manage their liabilities by calculating the average mortality rate of members rather than having to make the assumption that an individual is likely to live well into their 90s, as a 401(k) plan had to.

With many state economies reliant on consumer spending, DiNapoli also said defined benefit schemes offer a sustainable income for retirees, which was spent in the local economy.

CRF figures show that 77 per cent of their retirees and beneficiaries continue to live in New York.

In addition, workers who were confident that they would receive a pension and financial security in their retirement would maintain their levels of spending.

DiNapoli called for a national commission to talk about ways to maintain and bolster defined contribution funds and to look at creative ways to tackle the problem of millions of employees who had inadequate retirement savings.

Potential questions for a commission to consider could include whether consortiums of smaller pension plans should be encouraged, with the goal of achieving the economies of larger-scale pension funds.

DiNapoli also said a potential commission could consider if federal laws should be amended to open public pension funds to private-sector employees and employers.

“The growing problem of retirement security is too important an issue to be kicked down the road, we need to discuss and debate these and other critical questions and come up with solutions that will shore up retirement security across this country,” he said.