Basic Guidelines for Selection of ORP vs. TRS

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Basic Guidelines for Selection of ORP vs. TRS

• Elena Gaidouk
• Michael Sergi
• Clint T. Skipper

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Why Our Problem Is Important?

• UH faculty have to choose between TRS and ORP.
• Enrollment in ORP in lieu of TRS is a
  one-time, irrevocable decision.
• Therefore some ORP-eligible employees may have
  difficulties in making this choice, which would
  ultimately affect their past-retirement income.

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Procedures Used

• In this project we outlined major points that
  should be considered while making this decision
  and provided basic guidelines for the selection.
• We also developed linear compensatory model using
  three major cues age of the employee, attitude
  towards risk, and job security (such as tenure).

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Findings

• TRS
• Provides benefits for service retirement,
  disability retirement, and death of a member or
  retiree
• Statutory retirement formula
• years of service x
• average of highest five annual salaries x 2.3

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Findings (cont.)

• ORP
• An individualized retirement plan in which each
  participant selects from a variety of investment
  products provided by several companies that are
  authorized by the employing institution.

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Major Difference

• The essential difference is that TRS is a defined
  benefit program, while ORP is a defined
  contribution program.

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What Does It Mean?

• Optional Retirement Program
• Benefits are determined by the contributions and
  investment earnings in a person's account.
• The employee bears the investment risk.
• The employer's responsibility is to make the
  scheduled contributions.
• Members have individual choices among
  investments.
• Benefits consist of the account balance, which
  can be annuitized for lifetime income.

• Teacher Retirement System
• Benefits are determined by a formula, and benefit
  levels are guaranteed.
• The employer bears the risk.
• Investment performance affects funding, and does
  not directly affect benefits.
• Members have no individual control of benefit
  levels.
• Benefit levels are guaranteed for a retiree's
  lifetime.

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Other Differences
ORP TRS
Vesting One year plus one day Five years
Portability Full None
Disability Does not provide benefits Provides benefits
Survivor Does not provide benefits Provides benefits
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Other Differences (cont.)

• Risk of Insolvency
• Currently, the TRS has an actuarial valuation of
  assets at 89,299 M with an accrued actuarial
  liability of 102,495 M. This is a 13,196 M
  deficit or assets equal to 87.1 of liabilities
• The percentage of assets to liabilities has been
  eroding since 2000

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TRS Financial Condition

• The state may need to increase its contribution
  to the program to meet the shortfall.

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ORP and Market Risk

• Enrollees in the ORP plan are exposed to market
  risk.
• Enrollees can be over exposed to risk at
  different stages of their career.
• Returns from proper investment mix can increase
  retirement benefit.
• How much risk must be taken to achieve the 8 TRS
  return?

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Other Differences (cont.)

• Cost of Living Adjustment
• Currently no recurring inflation adjustment to
  pension plan
• Ad-hoc adjustments to catch-up with inflation
• Legislation can pass benefit increase when fund
  is sufficiently sound for 31 years
• In other words, cannot when unfunded liabilities
  of plan exceed 31 years
• Every legislation since 1975 has made COLA
  adjustments
• 1993 Four installment plan to replenish fund
  purchasing power
• Round 1 in 1993- 5-15 increase, with older
  retirees getting high end
• Round 2 in 1995- 14 increase
• Round 3 in 1997- 7.5 increase
• Round 4 was supposed to occur in 2001, but
  instead changed multiplier
• Currently active pursuit to urge Texas
  Legislature to annualize a minimum pension COLA

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Other Differences (cont.)

• Cost of Living Adjustment contd
• To put into perspective- imagine employee who
  entered the TRS plan in 1992
• 1993- 5 increase (assuming minimum adjustment)
• 1995- 14 increase
• 1997- 7.5 increase
• Total of 26.5 increase, or roughly 2 per year
• 26.5 increase/14 years 1.90 per year
• Assuming TRS auditors 3 inflation estimate,
  this individuals pension should have been
  adjusted by 42
• 14 years times 3 42
• Proposal for 80th Legislation session to waive
  31 year rule and grant annualized pension
  cost-of-living adjustments
• Bottom line The Rule of 31 Law is eroding the
  purchasing power of TRS retirement benefits

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Who Should Choose ORP?

• Employees who terminate employment at a
  young/middle age
• Employees hired at young ages
• Employees with modest pay increases over a career
• Employees who achieve a higher rate of investment
  return, through personal investment selection
• Employees with short life expectancy

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Who Should Choose TRS?

• Employees who retire early
• Employees hired in mid-career
• Employees with substantial pay increases at the
  end of career
• Employees who try to avoid any risk associated
  with the investment decisions
• Married employees, because of survivor benefits
• Employees with long life expectancy

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More Complicated Cases

• Use Linear Compensatory Model
• O A R S

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Limitations

• We are not experts
• In our linear compensatory model we use only
  three cues, while there are other ones
• The weights assigned to cues in the model may be
  wrong
• Our model mostly addresses strong preferences
  cases
• Our model has not been tested

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Thank you!

• We wish you all