Efforts to shore up Oklahoma's pension system, which a couple years ago was among the most underfunded in the country, will continue this session with a proposal to give some new state employees the option of a defined contribution plan instead of the traditional plan.
Rep. Randy McDaniel, chairman of the House of Representatives Pension Oversight Committee, said Wednesday he will file a measure that would give that option to most state and county workers as well as some city employees whose pensions would be administered by the Oklahoma Public Employees Retirement System.
About 41,000 employees now pay into the retirement system to receive monthly pensions through a defined benefits plan based on a formula that takes into account their salary and duration of government work. Workers have the option to also take part in a defined contributions plan, similar to a 401 (k) plan. The system also has about 32,000 retired members.
Under McDaniel's proposal, new employees under the Oklahoma Public Employees Retirement System would have the option to take part in a defined contribution plan, which would provide employees with a payout when they retire based on the amount of money contributed and investment gains or losses.
New employees would have 90 days to make the decision on the pension option, said McDaniel, R-Edmond. Their decision would be irrevocable.
“They are not forced to participate,” he said. “We're going to give every employee a fair chance to look at both programs.”
Current state employees would remain with the defined benefit system.
McDaniel, who has about 20 years' experience in the financial services industry, said he didn't know how many employees would pick the defined contribution plan over the traditional state pension plan.
Tom Spencer, executive director of the Oklahoma Public Employees Retirement System, said he has talked with McDaniel about some concerns he has with the proposal.
“Anytime you have a situation where you're giving a choice to someone that's irrevocable for the rest of their state career, you have to make darn sure that you've communicated all the relevant information — the pros and cons — of each choice,” he said.
“Currently you don't have that choice. While that may not be good for some people, there's a lot of certainty to that and everybody's in the same system.”
Spencer said Florida tried a similar proposal about 10 years ago and few, about 5 percent, chose the defined contribution plan.
“I have no doubt that some people will pick DC (defined contribution), but a lot more would choose to stay in the pension plan especially if they plan a career in state government,” he said.
Spencer said his system would be able administratively to offer the defined contribution option because it already offers a voluntary one.
“We already have the infrastructure in place,” he said. “We have the ability to do that probably a lot quicker than some other agencies might.”
Under the present Oklahoma Public Employees Retirement System plan, state employees contribute 3.5 percent of their pay and the agency contributes 16.5 percent. Under the defined contribution system, the minimum employee contribution is 3 percent with contributions up to 10 percent matched by the state, McDaniel said. The match ranges from 3 percent to 6.5 percent.
If the measure passes, statewide elected officials and legislators elected after it took effect would have no choice, he said. Their pension would be a defined contribution plan.
McDaniel said he decided to try the option with the Oklahoma Public Employees Retirement System because it is among the better funded of the state's seven pension systems and it is the second-largest state pension system. Also, some members of the system have said they would have liked to have the choice.
“They want choices,” he said. “We want to give people mobility. We want to give them opportunities for economic prosperity and we believe in individual responsibility.”
Two years ago, the state's pension system had a $16.5 billion unfunded liability, making it among the worst in the country. New laws passed in 2011 reduced the unfunded liability by nearly one third or about $5 billion. Most of the savings came from a measure that requires the Legislature to fully fund cost-of-living adjustment increases for those on the state's pension system.
The changes helped improve the state's pension system to 33rd in the country, McDaniel said.
Sluggish market returns were key factors in increasing the liability by $1 billion last year, putting the unfunded liability at $11.5 billion.
The state's pension system had its funding ratio improve from 56 percent in 2010 to 67 percent in 2011, McDaniel said. Its funding ratio for 2012 was 65 percent; meaning that if all current and retired state employees cashed in their pensions at once, the pension plan generally could pay 65 cents on the dollar; the actual amount varies among each plan.
McDaniel said that for decades previous legislatures granted benefits to state retirees without funding them. The money to pay for them has mostly come out of the pension systems.
Also demographics are working against the defined benefit system, he said. The state has fewer new workers while the number of retirees is increasing.
“The trend is definitely moving in the private sector away from the defined benefit plan to defined contribution plan,” McDaniel said.