State pensions may be merged; expected to affect many locally
April 3, 2009

By Sarah Severson | April 2009

Illinois Treasurer Alexi Giannoulias has proposed combining the investments of the five State-funded pension systems into one single system in an effort to cut administrative costs and fight potential fraud and abuse.

Under the proposed system, the single fund would be managed by a new Illinois Public Employees’ Retirement System (ILPERS). The treasurer estimates this change would save taxpayers up to $82 million annually and has the potential to reduce unfunded liability by $16 billion by 2045. The State’s current liability for underfunded pensions stands at a record $54 billion, which Giannoulias said ranks
as a major reason to merge the five pension systems.

The plan also introduces ethics and transparency requirements to help ensure appropriate performance by board members overseeing the proposed retirement system. Those requirements would prohibit board members, their spouses, and ILPERS employees from benefiting financially from the investment system and would ban vendors with contracts exceeding $50,000 from making political contributions.

“Currently, State pension assets are invested on three separate boards, creating multiple opportunities for corruption,” said Sara Wojcicki, spokesperson for the treasurer’s office.

Giannoulias’s proposed change also would make it easier for government watchdogs to help ensure pension assets are managed and invested properly because they would monitor the actions of just one board instead of five.

Making the change would cost the State between $23 and $28 million to transition to one system, but it would cut salary costs, currently between $3 and $3.5 million, to about $1 to $1.5 million,
according to Wojcicki.

Ken Kent, a consulting actuary with the securities and commodities company Cheiron and past vice president of pensions for the American Academy of Actuaries, said consolidating state systems is more complicated than simply cutting costs.

“The experience depends on the nature of the group—the employment behavior of a general employee versus a teacher can be different in terms of turnover, retirement structure, and benefit structure,” Kent said. “Separate systems can focus more on their particular group.”

Consolidating the board structure also would mean board members, who represent the public, no longer would carry as much weight with the direction of the board decisions, Kent said.

Officials also must consider how today’s different systems are funded. “If you’re merging a well funded plan with a poorly funded plan, how do you reconcile that difference?” Kent asked. “Members of the well funded plan may find it challenging to see their assets comingled with a less funded plan.”

On the other hand, he said, combining the systems would lower administrative fees and eliminate redundant investment expenses.

Currently, three investment boards oversee investments for five pension systems: the General Assembly Retirement System, the Judges Retirement System, the State Employees Retirement System, the Teachers’ Retirement System, and the State Universities Retirement System.

Carl Luft, associate professor of finance at DePaul University, said if the funds are managed separately, there would be some overlap and duplication. He emphasized the need to identify different
needs among populations in the various systems.

“Are most people close to retirement age, or are they very young and have a long time until retirement?” he asked. “That will have an effect on how the fund is managed. If you have two funds that are not very similar in terms of the population, it’s likely one manager wouldn’t satisfy both objectives.”

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