Protecting Retirement Security: The Future of Public Pensions

Tuesday, January 20, 2015
Lucas Jackson/Courtesy Reuters
Janet Cowell

Treasurer, State of North Carolina

Bradley D. Belt

Vice Chairman, Orchard Global Asset Management

Scott Stringer

Comptroller, City of New York

Glenn Hubbard

Dean and Russell L. Carson Professor of Finance and Economics, Graduate School of Business, and Professor of Economics, Faculty of Arts and Sciences, Columbia University

Orchard Global Asset Management's Bradley D. Belt, North Carolina State Treasurer Janet Cowell, and New York City Comptroller Scott Stringer join Columbia University's Glenn Hubbard to discuss the challenges of fulfilling pension obligations in the United States and how these liabilities will affect economic growth and stability. Though the panel suggests that federal leadership is lacking, they discuss ways that state and local pension systems are driving successful pension models, and the need for centralization and portability in benefit plans.

The Renewing America series examines how policies at home directly influence the economic and military strength of the United States and its ability to act in the world.

HUBBARD: Good morning everyone.

This is part of the Renewing America Series, on Risks and Priorities in Public Pension Plans. And we have an absolutely wonderful 360 degree view of the problem or situation on our panel with Brad Belt, who is the vice chair of Orchard Global Asset Management; a former CEO of the PBGC, Janet Cowell, who is the state treasurer of North Carolina, overseeing almost $80 billion in pension fund investments for almost 900,000 public employees and also chairs the state banking commission; and Scott Stringer, who's the comptroller of the city of New York and a great friend of Columbia University, thank you for that.

This topic is an extremely important one for, I would argue, some obvious and some non-obvious reasons. The obvious ones are familiar to everyone. Public pensions lie at the intersection of policy discussions about retirement security, capital markets, and the health of municipal finance.

The unfunded obligations of some, if not many plans, have been a concern to economists for some time. There is an estimated $2.7 trillion funding gap in the nation with an average funding rate of under 78 percent. The Economist magazine last year called Illinois "Greece." But there's a less obvious and really interesting reason to have this conversation today, that these plans have been an important center of discussion about ways to improve in a cost-effective way, retirement security of millions of Americans.

So Janet, I'd like to start with you if I might. When you and I were speaking earlier, you talked about an absence, if you will, of a federal vision and leadership. What can we learn from the variability across state and local plans in terms of what works and what doesn't? And in that regard, what's the future of the traditional defined benefit plan?

COWELL: Great. Well, thanks for having me today.

And yes, I don't think there's—I'm not expecting federal leadership on this issue anytime soon: either branch, legislative or executive. So, I do think there's a lot of interesting work at the states, and there is no one size fits all solution to this.

North Carolina is a 95 percent funded plan. It is—has been that way. We have funded every year since 1941 when the pension was established, so good track record of accountability. So, I think in certain states, you will find a long life for defined benefit. I will say I get tired sometimes of folks coming to North Carolina with the cookbook solutions, saying that we should blow up the defined benefit plan to fight the good funding and good track record in our state, and simply for maybe just purely philosophic or ideological reasons go to a different system.

I will say I think there should—there's probably a core system that would work across the country and in different variations, which is some sort of hybrid choice where people have a for-savings, centralized professional management of funds, and then they could choose a defined contribution or defined benefit.

I will—I will point to the UNC system, which has had that very plan since 1973 and it's worked very well.

So there are answers out there, and some good examples that could be adopted around the country.

HUBBARD: So you supervise both DC and DB plans. Now are those for different employees, or like the UNC example, they're people who choose between both and have both?

COWELL: Right now, we're—the university has a hybrid choice. We have a defined benefit and then we have a series of supplemental plans also run centralized through my office of about $8.5 billion. We have a quarter million people in those plans, and those are just to supplement what is a fairly modest benefit in North Carolina, the typical pension for a retiree is around $22,000. They get Social Security, but that's supplemental, gets them to a more liveable, healthy retirement.


Scott, you've certainly championed defined benefit plans in New York. How will we trade off the protection for employees that you've stressed with cost to taxpayers and honest accounting for these costs?

STRINGER: Well I—let me—let's start off and say to the Council on Foreign Relations, I think this is a terrific opportunity to have a important conversation about our pension system, defined benefit, and how we move forward. And I always am happy when I can share a platform with Janet Cowell, who has been very thoughtful about these issues on a national level.

But I—I think for those of you in this room who came of age during the city's fiscal crisis, New York is somewhat unique. Because we've learned in a sense from our past mistakes. If you think going back to 1975 when accounting was done, budgeting was done, literally on a napkin. After the budget was done, they filed away the paper napkins and thought that we could spend money without any accountability.

So after the fiscal crisis, transparency was put in place. We had a state monitor. We still do today to a certain extent. And we had to account to the rating agencies. So the city budgeting process and the pension system now are scrutinized in a way that is very rare among other states and other cities.

And so for me, the defined benefit plan is about making sure that we continue to put in place transparency efforts to continue to make sure that we get to a fully-funded position. In New York City, our pension system is funded on average to 72 percent. We've exceeded our actuarial target for the last ten years. That's the good news. We all know that that fluctuates. And I do think we've been able to put procedures in place now that I'm going to talk about today that I think will show that New York could be a model for the kind of national reform we're talking about.

HUBBARD: Let me draw you out on that. What—what are some of those procedures? And I know you've been a champion of transparency. What are ways in which the city has moved toward a more transparent reporting?

STRINGER: You know, the job of city comptroller is interesting. Because in addition to being a fiduciary for a $160 billion fund—it's the fourth largest in the United States, 12th largest in the world—I'm also the auditor-in-chief. And we actually look at city agencies. We root out waste and fraud. So before you look at what other people are doing, it's important to get your own house in order.

So when I became comptroller, we issued a six-point ethics plan. First thing we did was finally ban placement agents. We got rid of the middlemen, who did little work but got a lot of fees, and we finally pushed them out of the pension system. The second thing we did, believe it or not, is we hired a risk officer. A compliance officer is being hired. We brought in a national manager of our pension system, Scott Evans, who we were able to lure out of retirement and now he is our chief investment officer.

Part of what we're doing is getting our own house in order. More transparency. More of our employees now are doing more of their own disclosure. Because part of what we want to show our managers, as we hold them to a higher standard, we want them to know that we also believe in transparency. So we came in and did this on day one. We didn't wait a year or two. And I think that goes a long way to the work we're doing.

I'll tell you something else we're doing that I think is significant. We did not wait when it came time to implement GASB 67 and 68. We could have waited on GASB 68 for another year but we --


HUBBARD: On the off chance the audience isn't intimately familiar with the Government Accounting Standards Board, tell them what 67 and 68 are.

STRINGER: Well, this is essentially new transparency measures that follow the GAP accounting principles. This is very important for New York City, especially after the city fiscal crisis. And we implemented those changes, which basically ensures that we can look at our liabilities in real time. And we didn't wait. Because I thought it was important now, working with our trustees. And let me tell you, we worked with our fifty-eight trustees—union members—who are not afraid of transparency or scrutiny—and we put it out there. And I think that ensures that our bond underwriters, that people who look at our pension system, get a sense that we mean business and that we want the world to understand that as we move forward, it's with an eye towards everybody working together and having a real discussion on retirement security.

HUBBARD: Well, Brad, you've certainly had a lot of experience with both success and failures of traditional pension plans and the many hats you've worn --

BELT: I can take credit for the failures, not for the successes.

HUBBARD: OK. All right. Do you see the rise in importance of defined contribution plans continuing? Or do you see that defined benefit plans offer superior transaction costs or investment philosophies that make them a key part of the solution? And is there a middle ground in this debate? As Janet noted, this has sometimes been polarized that defined contribution is good, defined benefit bad, or vice versa. How do you see it?

BELT: Yeah, it's become a highly-politicized debate. And before I answer that, I also just want to thank Richard and staff of CFR for putting this program together. It's not often that public pension or pension-related issues are fodder for breakfast discussion.

And it's also—it's also a delight to share the dais with Scott and Janet. Janet has been a thought leader on these issues nationally. And Scott, I commend you and your staff for what you've done over time, really, in the area of transparency.

It was—he recently retired, which I think is a great loss. But your longtime chief actuary, Bob North, was really --


BELT:—one of the ones that pushed for kind of broad discussion of liabilities, providing more information to different stakeholders.

You're absolutely right that the debate has become far too politicized, Glenn. My own personal view is that defined benefit plans as we know them today are suboptimal. They—from the standpoint of both the provider and the employee, the user. From the provider's standpoint, they're managing a whole host of risks that they're not really best positioned to deal with; whether it's investment risk, longevity risk, operational risk. From the employee's standpoint, it's not a portable benefit. And I think that's one of the principal issues that creates some job locks sometimes.

But on the other hand, defined contribution plan are not a panacea, either. For any number of reasons, but not the least of which is they shift all the risk to the individual.

Now, the idea of defined benefit plans of pooling risk is a great thing. Cost efficiency is a good thing. But in defined contribution plans, the individual bears all of those. And I think the evidence is pretty compelling that individuals are not best positioned to manage investment risk. They're not in a position to manage their own longevity risk. So that's why we need to come to some type of hybrid structure that marries the best elements of both.

And there are some plans that are—you're seeing some models developing at the state level. Unfortunately, not at the national level. The only leadership you get at the national level is at the margins; improving defined contribution plans, auto-escalation, auto-enrollment, those kinds of things. But we really need to get to a point where we're coming up with a structure that will ensure greater retirement security for all Americans.

To Janet's point about the absence of leadership, when I was in the Bush Administration heading the PBGC, we'd sit down—and Glenn knows how the White House apparatus works with CEA and National Economic Council. But you had national retirement security policy being set by Department of Labor and EBSA, Social Security Administration, PBC, PBGC, Center for Medicare and Medicaid, and the IRS. No real coordination. And that's at the national level, let alone at what's happening at the state level. And that needs to change for the good of the country.

HUBBARD: Let me ask you a couple of follow-ups on that. You talked about portability. Give an example for the audience. So think about let's say a teacher in a typical defined benefit plan. Walk me through her career and portability issues.

BELT: Well, the—one thing to actually note is in the defined—in the defined benefits system, in the public sector, there's a—there's a lot more penetration. Probably 90 percent of public sector employees belong to a defined benefit plan. It's dramatically less than that in the private sector. And the number in the private sector has been going way down as pension plans in the private sector are increasingly frozen. That's not the case in the defined—in the public sector.

The issue is you've locked in—your benefits may not vest for a period of time. And then your ramp-up—your benefits are based typically on your final average salary over a long period of time. And if  there are early retirement subsidies, you're incented, certainly in the public sector, also somewhat in the private sector, to stay with one employer for a long period of time. Now, that may be a good thing. And it's—defined benefit plans have often been viewed as great human capital management tools, both for recruitment and retention and managing the exit of the workforce. But that creates its own problems. Sometimes it's more difficult to move—you know, to change the—the structure of your workforce if everybody's saying, 'I need to earn that last few years of benefit under the defined benefit plan'.

HUBBARD: Let me ask you one other thing. Because you mentioned some experiments that are going on. Can you talk about a particular state or example that you think is interesting?

BELT: Well, Janet's probably more attuned to what's happening at the state level. There are a number of states that I think are models for—and cities—for hybrid structures in terms of the benefit structure. But also, I think critically important is corporate governance. And there—you know, the issue at the end of the day, the biggest problem as I see it in the public sector—and Janet and Scott may have a different view on this, ultimately about the funded status of the pension plan and the ability of a municipality or state to meet its future obligations is, how well that plan is governed. What are the incentives to encourage regular contributions into the plan, to manage the assets and liabilities?

Most pension plans in the public sector—and I think, you know, people will trot out numbers, Glenn, about whether it's a $4 trillion problem or a $1 trillion problem. And it's probably somewhere in between—is most public sector systems are going to be able to meet their obligations. That's not true of all of them. And Illinois would be an example of that. But that's not true of all the municipalities on a go-forward basis.

But the qualification to that is to make sure you don't have assets moving in the wrong direction, that they're prudently managing the investment risk, that they're not increasing liabilities along the way, and they're consistently making contributions and not playing games through all the actuarial calculations that often occur. If all of those things happen, then it's a manageable problem.

HUBBARD: OK. I have a question for each of you. Because this topic of portability as has come up a lot. And it is the nub of differences between defined contribution fund benefit plans. What are ways that one could improve the portability of a traditional defined benefit plan, either on it own or as part of a mix? Scott? And we can work our way down.

STRINGER: Well, I think this is part of the national conversation that we have to have. And I agree with Janet that whether it's portability or what kind of system works for more Americans, I think we have to have in some respects a nonpartisan, honest discussion about that. This is probably so far the rational discourse on this issue. You have dyed-in-the-wool democrats with a Bush official all recognizing that we are concerned about liability. But we recognize the value of defined pension plan, we recognize that retirement security is critical to the wellbeing of this country, and that many people can't manage the 401(k), which is laden with fees and things like that.

So what I would say—and I'll just take one issue as it relates to portability or job—or job switching at different points in a career. There are people who aspire to working in government. It's really not a dirty word. Whether you're a firefighter or police officer or government official, there is a sense that you want to do this kind of work. And you recognize early on that you're not doing this work because you're going to make a lot of money. In fact, you're going to sacrifice a lot of earning power to serve the public.

At the end of the day, we sort of say to our officials, the people who protect us, you will make less money at the front end, but you at the back end will be able to take care of yourself and your family later on. The average pension that we pay out in New York City is less than $40,000 a year. It's important to know that. These are not big payouts. $40,000 to live in this city is a struggle, at best.

So I think we have to look at ways to make the workforce—to protect people in this issue. Portability is certainly critical to that. But I would argue that we first have to recognize that people go into this work, not because of financial reasons or even because of the pension path, but because they love what they do. And we need them to love what they do.

COWELL: Well, and I'll just give you a concrete example just of this portability issue. Because my mother was a public schoolteacher and my dad was a Methodist minister which, as those of you who know Methodists, we move a lot. And so Mom taught in Kentucky and Colorado and Tennessee and Utah. And when my dad recently passed away, I was going through Mom's finances. And despite the fact—she now had several defined benefit checks coming in. None of them large. But, you know, I was very grateful for that defined benefit plan that both my parents had through the Methodist church and the public school system and the sort of, you know, middle class income that it's giving my mother.

So there are challenges. But I would say it still works in the current system. This is where the federal piece is important. If you really want portability, you've got to have some federal participation in this. And to me, it would almost be like a Chinese menu options for states. You know, those states that have the governance structures or the discipline or the local governments, like Scott's, to support a defined benefit, you certainly can do that. You could maybe have more portability between the defined benefit.

But you could also have in your Chinese menu of options, you know, these defined contributions plans and an ability to transfer those funds easily across states and across plans if you had some sort of framework within—where you had some partnerships and understanding.

HUBBARD: So from the portability on the public side, do you see it as more as just earlier vesting, to use the example of perhaps your mother's experience? Or do you see it as a multiemployer kind of plan, perhaps with federal leadership? And what's the future here?

COWELL: Well, I certainly think centralization is the way to go. And North Carolina is another example of that. I run all the local plans. I run the state plan for teachers and state employees, which is why we're large despite the fact that we're, you know, not as—so I think centralization. You can't create the level of expertise to run these plans fifteen times in a given state. You just don't have the money or the—or the talent pools to do that.

So trying to get to more centralized structures, but then having agreements between those structures for more transferability.
STRINGER: Can I also just make—
HUBBARD: Of course.
STRINGER: That we—just to put a thought in people's head, that there's a lot of discussion about portability and how we can keep people in the public pension system, give them options. I know Janet's thought a lot about this.

But there's another phenomenon that I think people have to recognize if we want to continue to have talent within our public employee system. A lot of folks in the private sector are actually stuck in the private sector. We've got a lot of kids who run up huge college tabs and a lot of graduate school finances where they then get a job on Wall Street or law firms. And they're the ones who are actually stuck in the system, because they're paying off huge tuition fees. They want ultimately to shift from the private sector, where they're making money, but then they want to do good work. I talk to young people all the time, and they can't wait to finish off paying off their loans in twenty years or thirty years and then get into government or do something in the public interest. And I just think we have to spend a little more time thinking about these issues.

Part of the frustration with Washington is that no one is thinking about any of these issues. And that's why I think over the last few years we've seen state attorney generals, treasurers, and comptrollers with a real opportunity to create new ideas and thought that we can work on that will push Washington. Because it's not coming from the top down to us. We have to spur this discussion from the bottom up.
BELT: Glenn, I would just note that it's—it's one thing to look in the rear-view mirror. But looking ahead is, what's the structure, the benefit structure, that's going to be optimal for employers going forward, as well as employees going forward?
Most young people that I—I've hired a lot of young people entering the workforce. They have no expectation, frankly no desire out of the box to chart a career path with their first job; that they're going to stay—whether it's in the public sector or in the private sector. And the data's pretty compelling that on average most employees, most workers, change jobs every five to seven years throughout their life span. Now, some may stay in the public sector or in a particular job in the public sector throughout their lives. I'll—that's another debate as to whether that's a good thing or not.

But the fact is, most people don't attach a lot of value coming out of the box, out of school, to a traditional defined benefit plan. And if they are moving from one employer to another, they're—they may not be vesting benefits. They may be leaving money on the table. And the 401(k) option is the—actually, as suboptimal as it is, it's the only thing that's generating retirement savings for them.

So that's why it's so critically important that we do come up with a structure that is going to require some centralization. It's essentially a multiemployer construct. Whether that's architected or governed at the federal level or not or at some compact amongst the states I think is an open discussion.

That's a complex issue in and of itself, who actually is responsible for those liabilities, both management of the centralization, making investment decisions, as well as ultimately who's on the hook for those liabilities, are things that we need to talk about, we need to have a conversation about. Because right now, we're on a path, because of the erosion of the defined benefit system in the private sector, because of the public—the funding issues in the public sector, as well as all the risk-shifting that's occurring in the defined contribution or 401(k) sector, we're not on a good path right now. And I think the retirement security of future generations of Americans is going to be imperiled unless we all sit down and talk about these issues collectively.

HUBBARD: Let me ask all of you a somewhat technical question, but very important, about funding. So 95 percent funding or 72 percent funding or the national average is 78 percent funding. Depends of course on what you choose as a discount rate. So let me ask each of you, what is the way in which we should be discounting pension obligations?

HUBBARD: I can tell economics is a favorite subject of our audience. I can see it in their faces.
BELT: Well, I'll—I'll jump in on that one, since we—I was recently on the Society of Actuaries Blue Ribbon commission, where we looked very long and hard at that issue. And that's why I alluded to whether the public sector problem is a $1 trillion problem or a $4 trillion problem really depends on what you're using as your mortality table assumptions, your discount rate, your other smoothing mechanisms, actuarial levels—levers.

My own view is that at least for comparability purposes and for being able to understand what the cost of the obligation is on a riskless basis, that there should be disclosure of the liability, both in the private sector and public sector on a risk-free basis, on a Treasury rate discount basis.

Now, having said that, that's often conflated with driving or dictating the funding policy and the investments policy, which I don't agree with. I think each jurisdiction should be able to, you know, assume its own risks, as long as stakeholders have the relevant set of information available to them.

What I think is a concern is in the public sector right now, when Scott says he's whatever percent funded and Janet says she's 95 percent funded, I really don't know as a taxpayer or as a stakeholder in this system what that means. Because you can literally change your funded status from one day to the next if you changed your discount rate assumption. And indeed, if you say well, we're going to take a little bit more risk this year, that has the effect, under the public sector system, of making the size of the liability smaller.

HUBBARD: So your—so your bottom-line recommendation would be just transparency, let's report a seven percent or whatever rate the plan is using, but side by side the ten-year treasury? Just to be concrete—that's what you're recommending?
BELT: And that was a recommendation—
BELT:—of the—of the Blue Ribbon Commission. And it's one—again, so people understand that there is risk in the system.
BELT: If you wanted to fease this liability—and nobody's suggesting you do that—at this very costly rate, here's what it would entail. But it also allows comparability—
BELT:—across plans and across systems


COWELL: Yeah. And I agree. I think the comparability is important. So, I mean, we've been supportive of some of the initiatives to have the standardized discount rate. And, you know, we—we can --

HUBBARD: What do you disclose as a discount rate?

COWELL: Our—our target is seven and a quarter.


COWELL: And obviously, there's multiple accounting assumptions—that you could try to standardize all of them. There are—that gets a little harder --


COWELL:—because you do have very different portfolio constructions. But I certainly support this move towards a national standard, apples-to-apples comparison, to the extent possible.


STRINGER: We—we brought down our discount rate from 8 to 7 percent in recent years. I think it's two things. I think we have to look at consistency and transparency. So part of our disclosure documents show that the risk-free discount rate is actually 2 percent. So we want people to understand that we recognize what a true number is. The 7 percent that we now operate under, our actuarial target, we've actually hit that target for the last ten years. Doesn't mean we'll do it next year. But that is sort of our track record. And because we're longterm investors, we have to look at it on that basis.

One of the things I think that New York City and other states are doing well, the ones that are doing this, is that when I talk about consistency, we pay into our pension fund when there's a shortfall, no matter what. New Jersey doesn't do it. Detroit doesn't do it.

One of the things that's made, I think, our system strong is our consistency. People know at the end of the day, we are going to make up any shortfall. The city puts money into our pension system, no matter what. So we don't get into an underfunded situation that could trigger a default or something more critical. And I think states and localities who have pension investments have to be prepared to be consistent by continuing to make those payments in bad times as a way of keeping the system strong.
BELT: Although, you know, I—I think it's an interesting—it's almost a tautological issue. I often hear from my friends in—in the public sector that we've hit our return target over the last ten or twenty years. And I'm going—but—so you should be well overfunded, but—but they're not. Even on the discount—the rate of return discount rate assumption, still only 78 percent funded, that gets to the point that Janet was making; that there's actually a lot that's going on underneath just the rate of return on the asset side. That means either liabilities of (inaudible) benefits have been increased over time or contributions haven't been made consistently or there's been something going on with the amortization or smoothing periods or you have new mortality tables that have been implemented. It's just—people focus too much on the return on assets and not all the other component parts.
STRINGER: I agree with you.
STRINGER: I agree with you.

HUBBARD: ...only actuaries think living longer is a crisis. But I'll put that aside.


One thing the Council on Foreign Relations doesn't discount is views of members. So we're going to open up now for questions. So if you have a question, please raise your hand. Wait for the mic. Say your name and affiliation and question for the panel. The floor's open.

Alan, right there. Patricof.

QUESTION: (OFF-MIKE) ...question because I'm not knowledgeable about portability. You mentioned your mother going from—and you were asked, everyone was asked and no one actually explained it. What happened to your mother when she went from New Mexico to Utah to whatever --

COWELL: Yeah. Yeah.

QUESTION:—in terms of her pensions?

COWELL: Well, so, usually vesting periods are around five years to even --


COWELL:—vest. And so Kentucky, we didn't live there five years, so she had no Kentucky benefits. When we went to Colorado and Utah and Tennessee, we lived there five years so she actually did vest. Now, each state is also different in terms of is it—like in North Carolina when you hit twenty years, you've kind of hit the jackpot, you get an actually decent benefit. Before that, it's not that great.

So that's where I think, again, you could have a more standardized federal policy or guidance on more of a pro rata, and rewards for shorter-term employees, as opposed to this 'we're just going to encourage the twenty- or thirty-year employee and it differs state by state'.
HUBBARD: Yeah. Well, when people look at high pensions in the public sector, they're often looking at a long-tenured public sector worker. But Janet's right. For most people, if they were to leave early, they would get nothing like the numbers that you see.

Yes, ma'am. Right here.

QUESTION: Thank you. Hi, I'm Nili Gilbert of Matarin Capital Management, cofounder and portfolio manager.

I was wondering if you could share your views on how the governance of pension plans affects the success in outcomes. On the one hand, Treasurer Cowell, you're the sole trustee currently of the North Carolina plans, but I know thinking about that structure. At the other extreme, Comptroller Stringer, you've got, what, five boards and fifty-eight trustees. And then somewhere in the middle, I think PBGC has three trustees; right? The secretaries of commerce, treasury and --


QUESTION:—labor --

(UNKNOWN): Yeah.

QUESTION:—and then a strong advisory board. So we see such different governance structures in this—in this space.

To the extent that governance may affect the success of outcomes, how should we think about what's working and what could be adjusted?
STRINGER: Well, I actually think it's an excellent question. You know, in the case of the New York City pension fund, we do have five boards, fifty-eight trustees. You know, some look at that and say well, that's like herding cats; right? I mean, how do you—how do you quickly invest, how are you nimble, how do you—how do you deal with a very quick market, and how do you make sound investments? And part of our challenge is going back to the boards time and time again, basically doing the same thing over and over again.

One of the things that I'm wrestling with is how we begin reforming the pension system in New York City. One, does it require state legislation? We're looking into that. Two, it definitely requires the ability to work with our pension—with our pension trustees, folks who represent our unions, to come up with a system, one of consolidation and one of alignment so that we can meet the challenges of the 21st century.

New York City is unique in this. But, again, we're a $160 billion pension fund. We are going to be working towards that this year. Want to work with the mayor. Want to work with our labor allies. Because this is something that I think is fundamental to increase the ability for us to get that rate of return to—to make sure that we can do the work we have to do.

The second thing that we want to do as it relates to pension reform is we want to make sure that we hold our managers to the highest standards, as well. I started the conversation talking about the reform that we have undergone within our bureau of asset management. But we also want to make sure that if we're paying managers fees, we're also getting the best performance; that we have benchmarks, that we have opportunity, that we also hire diverse managers. And these are the issues that we're grappling with as we set the stage for looking at ways we can better align the New York City pension system.

COWELL: Just a second. I do think governance is critical. There's no one—just like in the design of these plans, no—no one solution. The huge benefit of the sole fiduciary is the accountability. So there is one neck to—to cut off. And the legislature—and I think part of the reason North Carolina has been so consistent in funding, just maybe—was because the treasurer, who is elected, has so much going on—you know, riding on whether or not they fund it.

I will say the challenge—and I have looked at the governance structure of—probably the ideal is—you know, it's the middle bowl of oatmeal. I'm, you, know maybe the small bowl. You're the large bowl. And then the middle is that expert panel of, you know, five or six people who all have professional expertise in investing. And that's—that's the holy grail. I will say that is very difficult to get to because of the conflicts of interest.

And I will say more recently with the Securities and Exchange Commission regulations that now put anyone who has fiduciary responsibilities in these public plans under SEC rules—you know, when people understand that, do governors or House speakers want to be subjected to those rules and give up all of those financial contributions? So I will say that is going to be a huge disincentive—in North Carolina, specifically—for them to go to a board structure, because there are so many other regulatory strings attached.
HUBBARD: Any thoughts or—
BELT: Well, the only one I—the only point I would make in addition to all of that is that you have an agency problem, more in the public sector than you do in the private sector, is that legislators set the contribution policy. And their incentives are all too often to use less of current tax revenues to put into the pension plan, particularly during periods of budgetary stress. Some of the—and I'm not sure you call it a governance structure. But I think the state that's been consistently the best funded, Wisconsin, the state of Wisconsin Investment Board, actually has things pretty much on autopilot in items of the contributions that have to go into the system. There's less latitude on the part of the legislators to underfund the contribution in any given year. It's one reason why it's very well-funded.

STRINGER: But let me also stress—

STRINGER:—that here in New York City is an example of us making that contribution. When you look at Chris Christie in New Jersey, their trouble is because they don't fund. They divert the money. Part of the challenge of New York City—and Janet alluded to it with the State legislature and with other elected officials that have to be involved in reforming our own system—we have to be very strategic in how we approach pension alignment.

During my campaign for comptroller, when I was debating Eliot Spitzer, I remember during one of our debates he slammed his fist down on the table and said, when I'm comptroller, we are going to have pension alignment and pension reform. And I—when it came to me, I didn't slam my fist down. I gently put my hand down and said, we have to work with fifty-eight trustees. We have to build consensus. We have to go to Albany. It is going to be a difficult journey.

But if we can get there in New York City, then I think we set the stage for a lot of the conversation that has to happen on a national level; that we can be nimble, that we can actually have a coherent conversation with all the different players to get to where we have to be to protect the retirement security, in my case, of 700,000 retirees.

HUBBARD: Other questions? John?

QUESTION: I'm John Biggs, a former chairman of TIAA-CREF. We were a pension system. And today I think it's about $600 billion. And about half of that is public funds and half of it is private.
HUBBARD: You have my money.

QUESTION: (inaudible) your money. I take it very seriously.


QUESTION: "It's my retirement money, take good care of it" was our slogan for many years.

We comply with ERISA, because we are a major player in the private sector. We're also a defined contribution plan primarily. There are some small DB plans in the system. I've often thought that if ERISA were applicable to the public sector, the problems would go away. The funding would be mandatory. There wouldn't be any messing around. There wouldn't be any actuaries playing games with the numbers. Which, in my opinion—I'm an actuary, as well—has been a real scandal to the actuarial profession. So the numbers aren't trusted by the—by the community because of that.

GASB—originally, I was involved with the appointment of the people in the GASB. We didn't get very good people to come in. I think it has much improved. It's much better now and the standards are stronger. There's a movement right now to—among a number of states—to consider mandatory simple plans with sort of an IRA model. And a big issue is whether ERISA will be applicable to those. And the state's position is we won't put in the plan if an ERISA is applicable to them.

ERISA has a lot of important employee protections, which are violated routinely in the public sector. I think it's probably unlikely that we're ever going to have ERISA applying to it. But the standards—and I think probably a major reason for the disappearance of the DB plan among companies who are required to comply with ERISA and PBGC and have PBGC protection, there's no PBGC protection for the state employees.

But could we move toward a more—I think a federal effort to apply ERISA? It was—they were constitutional issues, but they were not totally clear. They've been the same ones with Social Security. But with ERISA's standards, I think you would not have the kind of funding Mickey Mouse that we all see going on.

COWELL: Well, and—I like your suggestion. And I will tell you, I was in the schools in North Carolina and realized that we had school districts offering eighteen different defined contribution supplemental plans. There was no vetting. There was no oversight. And sometimes these people were picked because they were somebody's golfing buddy; right? And we're telling our teachers who are working for our kids that you're putting your money in this—and sometimes, it was a 5 percent upfront fee, 5 percent backend fee. I mean, they were outrageous fees.

The fact that we don't protect our employees better than that, what we did—well, this has a happy TIAA-CREF ending—is that we went to a centralized model and said you can offer those plans, but we're going to offer a centralized 403(b) for teachers with oversight. You know, bid out low fees, high quality. We ended up going with TIAA-CREF. So that was a well-placed question.
HUBBARRD: This was not a --


HUBBARD: Any other thoughts from the panel on ERISA?

BELT: Well, I would just note that, John, while I would agree that the ERISA funding rules are better than they are in the public sector, and certainly being—been improved further post-Pension Protection Act in 2006, I would not offer quite the ringing endorsement of ERISA that you did. I think there are a lot of issues still with ERISA.

And even as it covers private sector pension plans, the fact of the matter is PBGC's taken over several thousand very underfunded pension plans, not withstanding the application of those funding rules. In many cases, the company ended up being less than 50 percent funded. So the rules aren't quite as tight as they might be. Although, I suspect that many corporate sponsors would like them to be even more relaxed than they are.

HUBBARD: Other questions? Sir.

QUESTION: Thank you. Scott Swid from SLS Capital.

Given the value cycle that Comptroller Stringer mentioned, how public employees works for maybe below the compensation of the corporate sector but then gets rewarded with a DB pension that's good; given financial crisis, bankruptcy, some sort of out-of-court work out, where should that commitment sit and get treated? Should it have super protections like some legislatures have given it? What are your views on—on that in a work out?

COWELL: Well, I mean, the courts are, of course, working through these issues. What I've observed—I mean, for COLAs, you know, the guaranteed cost of living adjustment, that's maybe the first thing that goes. And then the rest is the negotiation. And dire situations, of trying to find the right balance between, you know, bondholders in Detroit and the pensioners. But, you know, I can't tell you what the exact formula is.

Of course, in municipal—and with the bankruptcies, a lot more flexibility than at the state level. I mean, in North Carolina we have a system where we preempt all of that, because we control all the local municipal finance. So if anybody's ever getting close to some sort of bankruptcy, we intervene and I actually run the checking account for that city. So, you know, trying to get to those kind of systems where you don't get to the point where you're actually having to work it out in a bankruptcy court.

STRINGER: And I agree with Janet. I mean, part of—part of our responsibility, our fiduciary responsibility, is not to get to this point. You know, ironically, we spend more time talking about pensions being sacrosanct as it relates to bankruptcies, when we really should be talking about making sure we don't get to this point.

And that is why the way New York City now does its budgeting after the fiscal crisis is we actually look at the budget plan four times a year. We do a budget analysis almost every quarter. We make adjustments in mid year. The mayor modifies the budget. The council looks at it. I analyze it. And we're constantly monitoring our pension fund, and we're also monitoring the way we do our budgeting. After we're done within our city process, we then have to go to the state and we make a case to the Financial Control Board, which is still in effect. And then we meet with the rating agencies. So the mayor and I are constantly looking at this budget so we don't get to that point.

And I think the model—although New York City, I'm not trying to make us better than anywhere else—there has to be more attention paid on the front end so that we don't have this incredible discussion on the back end. Sometimes I feel—and I want to be honest about this—that when a crisis does ensue, the first thing some look at is to take away the defined benefit pension that somebody, one, has contributed a lifetime to or a lot of—many years. Sometimes that pension's $25,000 a year. But we keep talking about that as the solution to getting out of the bankruptcy. And I just think we have to move this conversation very early into how we're going to govern the way we do budgeting in our cities and in our states.

HUBBARD: Anything, Brad?

BELT: The courts—as Janet noted, the courts will work through the applicability of the chapter nine in—in the bankruptcy context for municipalities going forward.

I think it circles back to where we started, though. If creditors to municipalities thought that they were senior, they may recognize that they're not necessarily senior, they're subordinate to the pension obligation in at least certain jurisdictions. That's why it's so important that there's greater transparency. You have more information about the size of that nut that you're subordinate to on a go-forward basis.

HUBBARD: Bob Hormats, I think you had a follow-up.

QUESTION: Yes. (OFF-MIKE) ...worked in government for four years and the State Department. So I'm familiar with some of the issues that were raised about government employees making relatively little and then making more or at least having a comfortable retirement.

I would like to go back to a point that was made early in the conversation about the role of the Federal government. And at this point, we obviously can't come to one decision as to an overall, all-encompassing plan. But what process—if you were to try to sort out with all these agencies that are involved and all the states and all the sub-entities in the states, how would the Federal government proceed in trying to develop an orderly process for adjusting this problem, for addressing these various aspects of the problem? 
Because orderly decision-making, as Glenn knows very well—and Brad and I have worked on many of these issues—orderly decision-making is not really a hallmark of the way Washington works on complicated issues. And I'd be very curious as to what recommendations the panel has on what the government, if it decided that this was a problem, needed to be adjusted on a more comprehensive basis with some consistency among various entities and our federal system—how would the government go about addressing this? How—what would be the process for getting to a rational, mutually-consistent—not perfect among all states, but at least mutually-consistent set of guidelines for moving forward?

COWELL: How about Brad --


BELT: Well, Bob, one thing that I've suggested in the past and written about is the need to establish at the federal level, for lack of a better term, a national retirement securities czar or office of requirement security policy within the executive branch. That nominally falls within the purview of the National Economic Council right now. But I think the issues are too important. And the—and the NEC is not I think constituted to really address those issues optimally. We've both dealt with those organizations.

So if you had an office of national security policy whose sole mandate was to coordinate at least at the national or federal level retirement security policy against all the different agencies and executive branch entities that touch upon requirement security policy, that would be a starting point.
STRINGER: Maybe this is simple. But one of the best meetings I've ever attended in my time in government was a meeting months ago at the White House. Our—our office is looking at ways to engage more managers of color. People of all different backgrounds should have the opportunity to manage money in our pension fund. Most of the investors, quite frankly, look like me, though they wear better suits. And we need to have a more impactful way to engage people in small funds with different diverse backgrounds. Studies show that when different people get to manage our pension funds, we do better.

So the fact that I was able to go to the White House and sit with Secretary Jarrett—Labor Secretary Valerie Jarrett to just have a discussion about how we do this with other people around the country was just so important. It's a meeting that took six years in the making. But it certainly energized the conversation. You know, whoever gets elected president, whoever controls Congress, sometimes just bringing people from different states and different people from different points in life we can have a profound impact.

I think Janet would agree—because she said this—it is very frustrating that on a city or state level we grapple with this with no expectation that we can have these meetings on retirement security. And that's so unfortunate. And that's why conversations like this are worth having among us. Because all of you are thought leaders. We've got to talk to our different allies and say let's break it up and let's come together. 
HUBBARD: Yeah. Bob, I would actually agree with what Brad said; that you need some sort of central official. In the old Reagan/George H.W. Bush Administration, there was an economic policy council chaired by the Secretary of the Treasury. And inside that was a working group on this. And having that kind of structure I think helps. Because this doesn't naturally emerge, as you know, (inaudible) process.


QUESTION: (OFF-MIKE). Hello. Yes. Thank you very much. Mahesh Kotecha. I recently—well, not so recently listened to Robert Merton who, you know, was asked what can management - you know, financial know-how - do for—for society? He was asked in light of the—the financial crisis and all of that.

His answer was, let's create a method to empower the pensioner to address the very complex issue, which is, I want a terminal retirement income that is targeted, that's based on my willingness to work and save. And how do I choose among all these pension schemes and investment alternatives that report on stuff that I really don't get an answer on as to what I care about?

I'd like to really ask what is being done to empower the pensioner to select among the myriad of complex plans that they have. And I don't hear much about that. I think the technicalities go to the program, the plans and the investment returns and the like and the actual assumptions. But really, from the point of view of the consumer, the pensioner, what are we doing to empower them to make choices that are really pertinent?

COWELL: Yeah. Well, I can tell you, because I run both the health plan and the pension plan in North Carolina, and those are very important questions. Because as you move to potential hybrid choice systems and get into more discretion on the part of the pensioner or the health plan consumer, the whole literacy and education and marketing is critical. And that's—I will—it is incredibly difficult. And I will say in the public sector—you know, Scott may agree here. It's very difficult to get the marketing expertise, the communication expertise, the dollars to keep up with that.

And I see people even making mistakes in their selections with the basic defined benefit plans. I mean, I'll have a janitor come in from some rural county who got bad advice from an HR representative and didn't, you know, select the right beneficiary. And you see the consequences of these, even on a very simple system.

So whatever solution we come to, I think you've got to design it where there are limited choices and some very good, you know, marketing selection language. None of that is simple. I think the retirement is easier, maybe, than the health plan, which I think we're seeing with the national health exchange and others. That's only one—that's one facet of the difficulty of these plans. But it's a very important conversation.
STRINGER: And I will tell you that as I move around the city, I'm constantly having people who are about to retire or who may, in fact, be in retirement come up to me with a million questions. And they're very concerned. They're concerned about their pensions. They have a lot of questions. We spend a lot of time in our community affairs unit actually fielding (inaudible) retiree or potential retirees. We just—the mayor's just now negotiated 72 percent of our labor contracts. And I cannot tell you how many people are trying to follow what those contracts mean when you go into retirement.

So we do have—as reelected officials, we really do have an obligation to do a very good job explaining to people what their options are, when should they retire, when should they take money out, what is the different aspects of this. Because, you know, a mistake can really have real impact, both in terms of health benefits or pension—pension opportunity.
BELT: I would just note, it's a little bit different on the private sector side. And I alluded to it with John, kind of the infirmities or at least oddities of ERISA on the private sector side, is that historically in a defined benefit plan you had the sponsor making every decision on behalf of the employee. And that was entirely consistent with their fiduciary responsibility under ERISA. Yet, on the defined contribution side, it was put out a menu of options but provide no advice and counsel because of concern about fiduciary liability. It's tough to square that circle. It makes no sense.

Now, post-PPA and some other legislation, you're providing some safe harbor, so you're starting to get a little bit more information. But at the end of the day, if the defined benefit plan sponsor of a company thinks that this structure, these fees, these managers are the best in the defined benefit context, then they should be able to offer that same option as a default option in defined contribution context so you could take advantage of that professional management, scale efficiencies, and everything else. But that hasn't been the way ERISA's been read over the—until now.
HUBBARD: Time for one last quick question. Sir, right there.

QUESTION: (OFF-MIKE) It's on. Ron Shelp, author and filmmaker.

If I could go back to something that Mr. Stringer said, but it's indirectly related. Let's say you're a young college student. You're out of school. You've got a job. It's in the private sector. But you're not on Wall Street, you never had those aspirations. But you do have an aspiration to have a middle class future, sort of like your parents had, maybe. But when you look at the salaries they make, even if they're good salaries, they're almost never with defined benefits plans.

My son is in that case. He's been told to have his IRA, it'll be matched. I personally don't see how over a long career, even if he changed jobs numerous times, you can possibly save enough money in an IRA, especially with inflation and other things coming on, to have a decent retirement. Any comments, please?
STRINGER: I think that—that is—that is part of the larger conversation about retirement security. And it's not just about union workers. But rather, we should perhaps open up a retirement security to more people to aspire to the middle class.

Look, back in the '60s and '70s, a middle class family would have one wage earner, you could be a typist, work in manufacturing, and you could pay the bills and raise your family and you knew you were going to have a small pension at the end of the day to take care of yourself in your old age.

Today, that's getting much more difficult to aspire to. Here's a challenge in our city. We talk a lot about raising the minimum wage. I believe we should. But we can't stop there. We have a high-tech economy that is booming in this city. We have got to prepare our kids for that opportunity, which means more science, more arts education. And, if we're going rival Silicon Valley—we've surpassed Boston—these are the next generation of middle class jobs - the coder jobs, the programmer jobs - that will allow our kids to do what their parents and grandparents have done, which is move up the ladder economically in this city.

And while I do think there has to be a layer of retirement security to that—and there has to be a broader conversation about that—one of the failings about the city right now is we are not laying the foundation to take advantage of these incredible job opportunities and companies that are now in this city and are telling me—telling me we do not have the ability to hire local kids in our public school system because they don't have the skills, they're not getting the training.

And the way we protect families in the future is by educating these kids today. These are the future fathers and mothers, and we've got to make sure they have an opportunity to do what we did and what our grandparents did. We may be limited in terms of what we accomplish at this moment in our lives. But we all think our kids have the potential to do anything they want. Especially for me, I'm fifty-four and I have a three-year-old and a two-year-old. I was up at 3:00 in the morning, by the way, before coming here. And I worry about what kind of economy is going to be left for them, retirement security included.

COWELL: I would say that politically, there's a lot more emphasis right now on current cash in hand and wages. I mean, I never thought that public employees in North Carolina would argue against funding a pension. But I found out when it came to 'do I get a raise today or do you fund my pension', they'll take the raise today. So that's a reason why I think this pension issue will not be dealt with in the immediate term. There's no huge incentive to do it. I do think it's a ticking time bomb for my generation who do not have the savings --


COWELL:—do not have a plan—our generation. Ours.


COWELL: Ours. So it's—it's ticking, but the crisis isn't there yet. And then in the meantime, you've got twenty-year-olds, you know, with high unemployment, low wage growth for middle class. And that's going be the more urgent, immediate issue.
BELT: And I would simply close on since this is Council on Foreign Relations, we talked about different models and structures. There's actually a lot to look at abroad in items of being better educated, whether it's some of the Scandinavian systems, the superannuation system in Australia, and others that we might learn from, and it doesn't have to be invented here. So the CFR on a go-forward basis can do some research and maybe get back to us about what some of these models might be in their applicability here in the U.S. to help solve those problems.

HUBBARD: May our guests never have a pension closeout. But we're going to have to close out. So thank you. And join me in thanking the panel.

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