Best Practices in Pension Administration.

• Author: Greifer, Nicholas

This article describes innovations put into practice by pension system administrators at the state and local levels. It describes best practices in pension investing, retirement benefit design, and outreach to retirement plan members.

Within the field of public finance, pension administrators face a unique set of pressures that are changing the way pensions are administered. First of all, economic pressures to hold the line on costly post-employment benefits continue. Cost "drivers" include an aging workforce and the demographic shift of baby boomers approaching retirement. Second, the information technology revolution that is changing other areas of public finance are having the same impact on pension administrators, giving them new tools to improve customer service and better manage their overall pension programs. Third, the design of pensions is changing at the margins. This reflects the addition of DROP plans, defined contribution (DC) plans or hybrid DC plans, and other changes. Taken as a whole, these changes have created new, innovative management techniques-best practices-for delivering state-of-the-art pension benefits.

Background

For this article, best practices are defined as a) management techniques, b) operating procedures, or c) applications of technologies that improve pension administration. Furthermore, these are practices that can be replicated in another jurisdiction and are not uniquely applicable to one government.

The author examined several areas of pension administration, including pension design, investing, and outreach and education of pension beneficiaries. Examples of best practices were culled from previous research appearing in Government Finance Officers Association publications, GFOA Awards for Excellence, and speakers at GFOA training sessions. In addition, the GFOA Committee on Retirement and Benefits Administration was surveyed in January 2000 for additional perspectives on best practices.

Retirement Benefit Design

Whether responding to change or leading change, pension plan administrators have modified the design of the traditional defined benefit package. Offering early retirement and defined contribution options are two ways that the traditional model has changed. The different design strategies reflect varying responses to fiscal constraints and changes in the labor market (such as a desire by relatively mobile workers for portable pensions).

Wyoming's Early Retirement Plan. State and local governments face pressure to rein in personnel costs. In recent years, governments of all sizes have used early retirement as a means to reduce cost, since early retirement programs can shrink the overall staffing levels of a government and replace high-cost workers with low-cost workers. However, poorly designed early retirement programs can negate these efficiencies.

The State of Wyoming, aware of the need for a properly constructed early retirement program, offered early retirement incentives in 1995 which built upon the strengths of a similar effort in 1987. The 1995 program imposed a number of management controls which aimed to "lock in" cost savings:

1) a mandatory benchmark that 10 percent of vacated positions stay vacant indefinitely;

2) any replacement worker's salary be less than the incumbent's;

3) stringent limits on types of workers that could qualify for early retirement, with workers needing at least 15 years of service and being at least age 52; and

4) prohibiting elected officials or appointees of elected officials from participating (on the grounds that those "slots" would otherwise be quickly be refilled).

In addition, the state tracked efficiency gains using a number of indicators. This included the following indicators: number of workers' eligible for early retirement; number of workers taking early retirement/vacancies created; duration of vacancies (e.g., 46 months after the program began); and comparisons of salaries of replacement workers. Because of these efforts, the state achieved savings of about $150,000 per retiree which was three times the rate of the 1987 initiative.

Alternative Approaches to Defined Contribution Conversions. Webster Groves, Missouri, and Washington State redesigned their defined benefit plans to meet the varying goals of labor and management. While having important differences (see Exhibit 1, excerpted from the December 1998 Government Finance Review), the two governments both relied on early "buy-in" of employees, intensive education, and lump-sum payments to older workers to make the transition work. Regarding the lump-sum payments, these were calculated for each worker, so that he! she would receive the equivalent to what the...