Well-run retirement plans are an important reason why talented employees join the public sector workforce. In a 2018 Accenture survey of 2,800 public and private employees, 78 percent said pension benefits are critical to accepting employment and 73 percent stay with an employer because of the retirement benefits offered.
“Legislators and the general public often don’t adequately understand the overarching challenge that the public sector faces to attract the professionals we rely on to perform essential services, such as teaching our children, policing streets or protecting the public,” says Keith Brainard, research director at the National Association of State Retirement Administrators, a nonprofit group that represents state and territorial public retirement systems. “Retirement benefits are a vital part of filling those roles.”
Administrators at the largest state-run pension programs are no strangers to challenges — for decades they’ve serviced hundreds of thousands of members and overseen millions of dollars in benefits. But even these seasoned professionals say nothing compares to the challenges that have intensified over the last decade due largely to four key factors.
1. Growing Structural Complexity
Lawmakers have initiated a series of reforms designed to shore up the financial viability of retirement programs. As a result, today’s retirement systems often manage multiple types of retirement plans. Many pensioners are still covered by traditional defined-benefit plans, which use salary histories, tenure and other factors to determine the payout they’ll receive when they retire. With newer defined-contribution plans, however, employees contribute chosen amounts to their retirement accounts over time and may receive matching funds from employers. Because account totals change based on contribution levels and investment returns, the total amount of available funds at retirement is harder to predict.
Some pension organizations also offer hybrid plans that combine characteristics of these two options. In addition, there are differing benefits structures depending on when employees were hired, which departments they work for and which options they’ve chosen within their retirement plans. And pension rules never die; reforms always add complexity on top of the existing complexity.
“In the era of pension reform, structural changes and new plan designs have significantly increased complexity for administrators,” says Patricia Bishop, director of the Virginia Retirement System, which manages benefits for 706,000 state employees, state police and correctional officers, judicial branch retirees, teachers and employees of most of the commonwealth’s local governments and political subdivisions.
2. Changing Roles for Administrative Staffs
The shift toward defined-contribution plans — which require participants to take an active role in retirement planning since the amount and timing of their contributions directly determine how much money will be available when they retire — is fueling employee demand for financial education.
“Because these types of plans require employees to be more engaged in building a financially secure retirement, we’re helping our members learn about their benefits so they can make good decisions as it relates to their retirement,” says Kerrie Vanden Bosch, director of Michigan’s Office of Retirement Services, which counts more than 550,000 active members and retirees across five different systems. The systems have $80 billion in assets and pay out about $7.3 billion in pension and healthcare benefits annually.
In Michigan and elsewhere, administrators are finding ways to support defined-contribution plan participants. For instance, plans may automatically enroll eligible employees and include defaults that set contributions at a level where workers receive a full employer match.
In Michigan, employee contributions automatically increase by one percent a year up to 15 percent, unless enrollees opt out of the automatic increases.
“We try to work with the inertia of some members so they can be successful even if they’re not fully engaged with their retirement plan,” Vanden Bosch says.
But as retirement plan members seek greater insights, administrators may find themselves in a difficult position. Virginia’s Bishop emphasizes that there’s a difference between education about retirement planning and offering specific financial and investment advice for members.
“We’re pushing relevant information to help members understand the power of compound interest and why it matters to start saving early,” she says. “We’re showing them the opportunities that come from adjusting their retirement plan and contributions over time.”
To do that, the program creates quizzes to test and improve employees’ financial expertise. Participants can earn digital badges for improving their financial wellness. In addition, the Virginia Retirement System offers an online financial planner, tools that model benefits outcomes based on individual contributions and information about what steps participants can take to meet their retirement goals.
For example, participants in defined-contribution plans who aren’t taking the maximum amount out of their paychecks may see a pop-up screen when they log into their online portal. The message points them to information that discusses the value of a larger contribution.
“We’ve had great success with this initiative,” Bishop says. “About 31 percent of the participants who saw the splash screen increased their voluntary contributions.”
3. New Customer Engagement Demands
Participant expectations for interacting with pension programs are evolving rapidly, influenced by what citizens experience online with commercial retailers and other sophisticated online businesses.
“To meet these expectations, pension programs must improve their ability to support a range of digital interactions on the Web, with mobile apps and through social channels. But many plan administrators have been slow to invest in digital technologies, often because pension systems don’t compete for customers the way commercial businesses do,” says Owen Davies, global managing director of the pension practice for Accenture, a management consulting firm. “This attitude misses the fact that retirement systems are competing for the attention of their members.”
Some retirement plans are working to keep pace, however.
“We’re adding relevant features to our online capabilities,” Bishop says. “For example, members who end employment with a VRS-participating employer may apply online for a refund. Before hitting the final button to execute the request, members receive information about the impact on their future benefits and are given an opportunity to suspend the refund request at this point. This ensures members know the consequences of their action before executing the request and VRS has fully informed them. No one would have expected that level of information 10 years ago, but it’s absolutely expected now.”
But as retirement systems launch new engagement channels, they also must maintain existing contact methods. Some members will continue to communicate via phone calls and interactive voice response systems, while others choose websites and mobile apps. Making all these options available enhances customer engagement, but it also can increase personnel requirements, costs and overhead for securing member data.
In addition, as benefits become more complex, pension system administrators are realizing they need to adopt more sophisticated strategies to communicate with members.
“We have to increase our focus on targeted member communications to avoid confusion as people try to sort through all the new information,” says Vanden Bosch. “In the past we could distribute information designed for a general audience. But now we focus on customized information developed for members at critical times in their lives, so they don’t have to sort through a larger set of communications to figure out what does and doesn’t apply to them.”
4. Ineffective Legacy Technology
Because individual retirement programs have so many unique requirements, governments have relied on highly customized benefits administration software. Many of these applications are now getting old and are written in outdated programming languages that are difficult to maintain and support. These legacy technologies often support equally antiquated processes that require manual intervention by staff members.
“We see many of these administrative environments stuck with old IT systems and old processes,” says Bjørn Tore Holte, managing director at Accenture. “That is exacerbating problems in the pension area as the number of retired members is increasing. Without upgrades to technology, the only response is for administrators to hire more caseworkers, which just adds to overall costs.”
Learn how to overcome these challenges and implement pension reform in your jurisdiction by downloading the guide, “Transforming Benefits Administration: How modern technology and practices can boost plan efficiency and performance, while improving services for members and retirees” at www.governing.com/pension-administration.