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Indiana Public Retirement System board seeks clarification on pension cuts

Interest rate adjustment could slash retiree benefits

– The Indiana Public Retirement System board Friday punted on a legislative recommendation involving a future pension cut.

Instead of taking action, the board unanimously voted to seek clarification from leaders on the Pension Management Oversight Commission about a recent recommendation. The board will address the issue again in December.

“We’re somewhat unclear on the intent,” member Michael Pinkham of Fort Wayne said.

The legislative panel this week passed a nonbinding recommendation on 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 take the annuity option 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 general 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 starting next year.

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 at 6.75 percent.

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. This would result in a cut of tens of thousands of dollars to beneficiaries.

The legislative panel recommendation was for the Indiana Public Retirement System to keep the annuity in-house and periodically establish an interest rate that will not create an unfunded liability in the fund.

Steve Russo, executive director of the Indiana Public Retirement System, said the two parts of the recommendation conflict. He said the only way to truly eliminate any possibility of an unfunded liability is to outsource the program to a third party that assumes all the risk.

Indiana Public Retirement System board member Brian Abbott of Huntington said he took the wording to mean drop the guaranteed interest rate to below the fund’s rate of return. He concedes the rate should have been adjusted years earlier.

While the staff investigates the legislative intent, the process to hire an outside insurer to take over the annuities continues.

But Russo said the board would not sign a contract until after the 2014 legislative session.

He also told the board that many public employees have expressed concern about losing money if the third-party insurer defaults.

Russo said the state has a program, funded by insurance companies, that protects Hoosier annuities from default up to $250,000 a person.