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Retirement Planning > Retirement Investing > Annuity Investing

Indiana officials spar over annuity privatization plan

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A battle appears to be brewing in Indiana over a plan to privatize future annuity payments to retired public workers and teachers.

In July, the Indiana Public Retirement System (INPRS) board of trustees voted to seek an outside third-party insurer to administer its Annuity Savings Account (ASA) program for future payments. It also green-lighted a switch to a market rate for annuities, beginning Oct. 1, 2014.

Currently, retirees receive a defined benefit (DB) pension, as well as an option to direct contributions into an ASA, which can result in investments gains and/or losses. State law requires that 3 percent of wages be contributed to the annuity account, according to a spokesperson for INPRS.

When they retire, members can choose to withdraw as a lump sum, roll over or convert the ASA account balance into a monthly income stream. The ASA program is in addition to the DB benefit. Half of retirees decline to participate in the annuitization option, according to INPRS.

However, the Pension Management Oversight Commission (PMOC) the Indiana State Legislature has recommended that the pension board keep the annuity program in-house and not contract with a third-party provider. In October, INPRS asked that its staff work with PMOC for clarification on that recommendation.

PMOC further advised that the board “should periodically establish an interest rate that will not create an unfunded liability in their managed funds.” Those recommendations were made in a November 2013 report issued by the commission. In the report, the commission noted that representatives from several unions spoke in opposition to the INPRS plan.

As it stands now, INPRS calculates the ASA annuitizations at an assumed interest rate of 7.5 percent. In a letter dated Dec. 13, 2013, from the INPRS board of trustees to the Indiana General Assembly, INPRS stated that rate is “well above prevailing private market rates,” and has created $143 million in unfunded liabilities. “A continuation of this practice adds another $343 million of additional unfunded liabilities,” stated the letter, which was signed by Ken Cochran, chairman of the INPRS board of trustees.

The letter goes on to say that keeping the annuity program in-house, even if the interest rate were changed, could still lead to the possibility of unfunded liabilities. In addition, the board of trustees noted that Indiana law gives INPRS the ability to enter into an agreement with an insurance company to provide annuities to retired members. “The insurance company option maintains the same level of benefit to the member, while also immunizing the funds from additional unfunded liabilities,” the board wrote, adding that Indiana law also protects retirees from “the extremely unlikely event of an insurance company default.”

State legislators convene in the state house Jan. 6. According to report on, one state senator who sits on the Pension Management Oversight Committee expects legislation to be introduced that would shut down INPRS’s plan to hand over the annuity program to a private provider.

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