Alternatives for Administering the Wisconsin Retirement System Current Policy versus Total Retirement Outsourcing Prepared for the Wisconsin Legislative

Alternatives for Administering the Wisconsin Retirement System

Current Policy versus Total Retirement Outsourcing

Prepared for the Wisconsin Legislative Council

Bethany AckeretHope Harvey

Daniel KleinmaierNoah Natzke

Susanna Rasmussen

Agenda

• Project Summary• Overview of Wisconsin Retirement System• Privatization Definition• Policy Alternatives• Analysis of Alternatives• Recommendation

Agenda

Project Overview & Aims

• Question: Should the WRS be privatized? • Analysis of two options:

– Current WRS policy– Complete outsourcing of WRS to private firm

• Complement to the forthcoming report on a defined contribution option

Project Summary

Structure of the WRS

Wisconsin Retirement System

State of Wisconsin Investment

Board (SWIB)

Department of Employee Trust Funds

(ETF)

Provides day-to-day benefits administration for WRS

Manages invested retirement system assets

Framework for Decision-Making

• The WRS is a trust• State statutes dictate that ETF and SWIB

board members are fiduciaries of the trust• Must enact management decisions that

result in the lowest responsible cost• Decisions regarding privatizing functions are

dictated by this responsibility

ETF: Summary• Retirement, health, life, income continuation

and long-term disability benefits• Duties:

– Collects retirement funds; remits to SWIB– Calculates disbursement of payments– Provides information to participants and

employers

SWIB: Investment Strategy and Approach

• Board of Trustees establishes investment policy

• Day-to-day investment decisions must fall within the parameters of the policy

• Day-to-day decisions made by SWIB in-house professional investors or external private firm professional investors

Levels of Assets Invested by SWIB In-House Investors

• 2007: 21% invested by SWIB investors• 2009: 41% invested by SWIB investors• 2010: 47% invested by SWIB investors• Increase in internal investment

resulted in estimated net annual savings of $13 million in 2010

Source: State of Wisconsin Investment Board, 2011

CEM Benchmarking, Inc. Evaluation

• The WRS Core Fund five-year total return of 5.0 percent was above the peer median of 4.5 percent

• The WRS Core Fund had a lower cost than peers by 17 basis points on average (without adjusting for asset mix differences)Hopkins, 2011

Source: CEM Benchmarking, Inc., 2012

Privatization Definitions

• Scaling back of direct government action• The expansion of subsidies for private

insurance, savings, and charitable activities • Use of vouchers that provide opt-out

alternatives for the public service• Expansion of government contracting

Policy Alternatives

1. Piecemeal Outsourcing (current policy)2. Total Retirement Outsourcing:

Contracting with a single private sector firm to administer the WRS

Piecemeal Outsourcing• SWIB outsourced 52.7 percent of investment

in 2010 (currently approximately 45%)

• ETF outsources administration of IT services and actuarial services

Internal External

47.3%52.7%

Internal External

88.7%

SWIB Management Costs SWIB Asset Management

11.3%

Reasons for State Privatization (1998-2002)

0%

10%

20%

30%

40%

50%

60%

70%

Political LeadershipIncreased Innova-

tion

High Quality Service

Speedy Implemen-

tation

Flexibility

Expertise

Cost Savings

Reason for Privatization

Perc

enta

ge o

f Res

pond

ing

Stat

es

Source: Chi, Arnold, & Perkins, 2004

Policy Goals

1. Reduce Costs2. Enhance Service3. Have a Positive Economic Impact4. Be Feasible

Reduce Costs

GOALS Impact CategoryCurrent Policy:

Piecemeal Outsourcing

Total Retirement Outsourcing

REDUCE COSTS

Profit Motive Costs Excellent Poor

Competition Fair Poor

Economies of Scale Fair Good

Transition Costs Excellent Poor

Enhance Service




ENHANCE SERVICE

Level of Service Good Poor to Fair

Level of Accountability and

ControlExcellent Poor

Risk Minimization Excellent Fair

Economic Impact




ECONOMIC IMPACT

Employment Effects Good Poor

Distributional Effects Good Fair

Feasibility




FEASIBILITY

Political Feasibility Excellent Poor

Legal Feasibility Excellent Fair

Recommendation

• Our report demonstrates superiority of Current Policy

• Reduced costs, level of service, economic impact, and feasibility ranked lower for Total Retirement Outsourcing

• Current WRS lauded as low-cost, high-performance

For further information

Contact the La Follette School’s publications office at 608-263-7657 or [email protected]

Or see www.lafollette.wisc.edu/publications/workshops.html

Thank you!

Policy Alternatives in terms of

Policy Goals




REDUCE COSTS

Profit Motive Costs Excellent Poor

Competition Fair Poor

Economies of Scale Fair Good

Transition Costs Excellent Poor

ENHANCE SERVICE

Level of Service Good Poor to Fair

Level of Accountability and Control Excellent Poor

Risk Minimization Excellent Fair

ECONOMIC IMPACT

Employment Effects Good Poor

Distributional Effects Good Fair

FEASIBILITYPolitical Feasibility Excellent Poor

Legal Feasibility Excellent Fair

Documents

Alternatives for Administering the Wisconsin Retirement System Current Policy versus Total Retirement Outsourcing Prepared for the Wisconsin Legislative