A new comparison with four other large public pension funds found that CalPERS, while scoring average on service, had high pension administration costs — $213 per member a year, nearly twice the average of $108 per member.
In the year compared, fiscal 2012-13, a new CalPERS computer system and pension reform were taking unusual amounts of money and staff time. Scores are already improving as those jobs are completed, but CalPERS has a built-in disadvantage.
An official of Cost Effective Measurement (CEM) Benchmarking said CalPERS has the most “complexity” of 75 pension systems measured by the Canadian firm worldwide, including systems in Britain, Australia, Scandinavia and the Netherlands.
“You are the most complex system,” Tom Scheibelhut, CEM managing principal, told the CalPERS board last week while presenting the new comparison, “and that’s unfortunate because complexity impacts costs and it impacts services.”
Not directly adding to the complexity referred to by CEM, because it’s excluded from the pension survey, is a large part of the CalPERS operation: the administration of health care plans for active and retired state workers and many local governments.
The CEM service, whose slogan is “What gets measured gets managed,” has been used in the past by the California Public Employees Retirement System for investments. The new survey is the first annual pension administration report.
The California State Teachers Retirement System has used the CEM pension administration service for several years. The CalSTRS cost for fiscal 2012-13 was $198 per member.
As if to demonstrate a long-term commitment to having an outside firm monitor their performance, CalPERS and CalSTRS plan to host the annual CEM pension administration conference in Sacramento next May.
A comparison with 75 pension systems around the globe is said to be valuable for identifying “best practices” and “new ideas.” The CEM pension administration comparison for CalPERS was with similar large U.S. systems that use CEM monitoring.
According to CEM, CalPERS has 1.3 million active workers and pensioners, Teacher Retirement System of Texas 1.2 million, Florida Retirement System 1 million, New York State and Local Employees Retirement System 942,000, and CalSTRS 684,000.
“What’s really unique about CalPERS is that you have a lot more customization,” Scheibelhut told the board, while describing the system’s complexity and the rules covering operations.
For example, he said, CalPERS has five cost-of-living adjustment options, some capped at 2 and 3 percent and others uncapped. Payment options distinguish between “beneficiaries” and “survivors” and include “pop-ups” and “reversions.”
When a new employer joins CalPERS, Scheibelhut said, they can choose on average “91 different things.” He said a new employer joining one of the four other systems in the comparison can on average “choose four.” But it doesn’t stop there.
“From time to time an employer can come back and say, ‘Wait, my contributions are too high. I want to change the rules. I want to change the COLA.’ So they can change the rule set again and grandfather the old one,” Scheibelhut said. “In effect, you can have an infinite number of possible plans, and that is where your real complexity comes in.”
He said another “immensely” complex system, New York State and Local, has about 98 different plan rule sets, but they are “kind of frozen in stone.” CalPERS has 3,067 employers (half school districts and the rest local governments and the state).
So CalPERS starts with more complexity, Scheibelhut said, which can multiply if employers change their plans, giving new hires different benefits than previously hired employees who are “grandfathered” in the old plan.
As an example of how complexity increases cost, he said each of the many CalPERS rules has a number of lines of computer code that in effect say, “If this, then that.”
A lengthier code may take longer to write, be more error prone and must be checked for each employer to ensure accuracy. “You have more ‘ifs’ than anybody else out there,” Scheibelhut said.
In addition, he said, CalPERS has 44 actuaries, needed to do annual valuations of each employer’s funding and set contribution rates. Among the other four systems the next largest number of actuaries is 11, and some contract with outside actuarial firms.
The complex CalPERS system also requires, among other things, more legal staff, more internal auditors, more accounting staff, and the added complexity of dealing with retiree health care can’t be completely removed from the pension administration cost.
The service score for CalPERS, 63, was near the average, 66, for the five big systems. The CalSTRS service score, 73, was near the average, 78, for a different comparison group of 15 smaller systems.
“Service as we define it takes some members’ perspective, without regard to cost,” Scheibelhut said. “You don’t want to be 100 out of 100, because it would not be cost effective.”
He said members want services such as faster turnarounds on transactions, more channels where they can get information, counseling, a website, and “quality which we reflect indirectly through our satisfaction surveying measures.”
Among 20 different measures of member contacts, he said, are the number of calls that don’t get through because they “fall off the end of the phone tree” or the member gets bored and hangs up.
The survey found that 27 percent of the calls to CalPERS in fiscal 2012-13 did not get through, slightly less than the peer average of 28 percent. Since then the number is said to have dropped to 1 to 2 percent.
“So you have improved dramatically,” Scheibelhut said. Similarly, the average CalPERS call waiting time, 577 seconds, was above the average, 481 seconds, but since then is said to have dropped to about 90 seconds.
On member outreach, the survey found 10.3 percent of active CalPERS members attended one-on-one counseling sessions, compared to the peer average of 5.4 percent, and 6 percent attended a presentation, compared to the peer average of 2.9 percent.
“You have 12 things you can do on your website versus a peer average of eight,” Scheibelhut said.
In the future, CalPERS expects costs to drop, mainly because of the completion of the computer system, and service scores to improve, in part because of full operation of the new computer system and the CEM reports.
“We are looking forward to actively utilizing the information and not making it a report that sits on a shelf,” Donna Lum, CalPERS deputy executive officer, told the board.