INDIANAPOLIS – A legislative pension oversight committee has urged the state pension system to reverse course on plans to privatize annuity savings accounts.
Monday’s unanimous vote is non-binding, and the Indiana Public Retirement System will consider it at its Friday meeting.
“The board will look closely at what was recommended,” said Jeff Hutson, spokesman for the INPRS. “I can’t predict what they will do.”
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, critics contend.
According to state pension staff, the current market rate would be in the range of 4 percent to 4.5 percent. This would result in a cut of tens of thousands of dollars to beneficiaries.
The recommendation passed Monday by the Pension Management Oversight Committee asks INPRS to keep the annuity in-house and periodically establish an interest rate that will not create an unfunded liability in the fund.
“We want INPRS to step away from their decision of privatizing the system,” said Rep. David Niezgodski, D-South Bend.
The Indiana Public Retirement System does not have to follow the recommendation. If it doesn’t, though, lawmakers could intervene in the 2014 session beginning in January.