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December 6, 1996

RE: Report on Latest Meeting of the Uniform Pension Law Effort

Introduction

Purchase of service credit and liability standards for board members were key issues discussed at the November 22 and 23 drafting session of the proposed uniform governance of state and local government retirement plans. The proposal, which is being drafted by a committee of the National Conference of Commissioners on Uniform State Laws (NCCUSL), would require retirement systems to be independent from their state or local government and be subject to uniform reporting, disclosure, and fiduciary duties. If the proposal is approved by NCCUSL, it will be submitted to the state legislatures for their consideration.

NCTR participates as an observer to the committee, as do general counsels and actuaries of various retirement systems, teacher and retiree associations, and other groups. I attend these meetings on NCTR's behalf.

The proposal is now called the Management of Public Employee Retirement Systems Act (MPERSA) as agreed to at the meeting. Previously, it was known as the Management of Public Employee Pension Funds Act (MPEPFA). The proposal will be referred to as MPERSA in this memo.

NCTR members have reviewed the various drafts released by the Committee and identified a number of problems. This memo will summarize the highlights of the meeting, including the resolution of some of the problems. Please call me if you have any questions.

Purchase of Service Credit Provision

Problem. Even though the purpose of MPERSA is to create a uniform governance structure for state and local plans, the reporter of the committee had included a section defining how service credit could be purchased. The provision was viewed by a number of NCTR members as outside of MPERSA's scope because it dealt with benefits, not governance. Accordingly, the provision was seen as making the enactment of MPERSA more difficult. This difficulty was of particular concern to some NCTR members who would like greater independence from their state or local government. Such independence would help them better carry out their fiduciary duties to the participants in their systems. In short, they would like to facilitate, not complicate, the passage of MPERSA.

In addition to the strategic concern, other NCTR members opposed the purchase of service credit provision because it would have been stricter than the current law in some states, for example, limiting the purchase of credit to one-year increments. It included other controversial features, such as allowing the purchase of credit for both public and private sector employment.

Resolution of Issue. At NCTR's initiative, the committee members unanimously agreed to delete the purchase of service credit provision, thus returning MPERSA to its original purpose of providing for retirement system governance only. Because of concern among some committee members, the committee will ask NCCUSL to take up a separate drafting effort in the future on purchase of service credit, portability, and other benefit issues.

Standard of Liability for Board Members

Problem. As we've pointed out in previous drafts of MPERSA, members of retirement system boards, as well as others, would be personally liable for breaches of duty under MPERSA. This means that they would be strictly liable even for inadvertent acts. In a previous meeting, the drafting committee considered a narrower standard for board members that would have imposed strict liability for knowing and willful acts only. Those who favor this knowing and willful standard argue that public scrutiny and legislative oversight ensure the lawful conduct of board members. They also believe that individuals might be reluctant to serve on the board, for which no compensation is generally paid, if they know they will be strictly liable for even non negligent or unintentional acts or omissions.

Resolution. The Committee debated for two and one-half hours whether board members should be subject to the knowing and willful standard. In the end, they decided to retain the current language imposing strict liability regardless of the circumstances. They did make a change, however, that may in any event circumscribe board members' liability. In Section 6, which defines the general duties of board members, the Committee approved a change requiring board members to comply in good faith with the law governing the retirement system. Under this change, board members would not be held liable for good faith mistakes in law in administering benefits or managing assets. It would require them, however, to exercise due diligence in making a legal determination. If they acted in good faith in reaching the determination, there would not be a breach of duty and therefore no liability would attach. On the other hand, they would be strictly liable if they acted in bad faith. Moreover, any determination that did not involve an issue of law would continue to subject board members to strict liability if a breach of fiduciary duty occurred. Before the Committee's change, the good faith standard did not appear in MPERSA.

Notwithstanding the change, this section of MPERSA is very controversial within the Committee. It will likely re-surface during future meetings, so further changes are possible.

Other Problems Addressed

MPERSA would require the administrator of a retirement system to provide a participant or beneficiary with an annual statement. Previously, the language would have required the administrator to give a best estimate of the participant's or beneficiary's total benefits accrued. It was pointed out during the meeting that retirement system administrators might be held liable if a mistake occurred in the calculation of the total benefit accrued. The Committee agreed and the administrator would now be responsible for providing the participant's or beneficiary's annual contributions and years of service only, but not calculating the total benefit accrued.

This section still needs work because a participant in retirement status who knows the amount of his/her benefit, would not likely need an annual statement, particularly because he/she is receiving an IRS Form 1099-R from the retirement system. The same reasoning applies to a surviving beneficiary who is receiving a benefit. Ideally, the section would be streamlined so as to eliminate the annual statement for any participants and beneficiaries receiving 1099-R's, but retaining the requirement for other individuals.

Other Issues

Before this particular meeting, the scope of MPERSA excluded a certain type of COLA. Specifically, a "supplemental retirement income arrangement," i.e., a COLA, would have been exempted if the public employer was not obligated to make the payments pursuant to the basic retirement program and the payments were made out of general revenues, a separate trust fund, or a special appropriation. Other types of COLAs would have fallen under MPERSA's scope.

The Committee agreed that the language seemed to address a fairly uncommon type of COLA. The more common types of COLAs, e.g., CPI-adjusted or ad hocs paid out of the pension fund, would be covered by the Act. Accordingly, the Committee members struck the COLA language, thus making all types of COLAs subject to MPERSA.

As a final matter, discussion arose about whether MPERSA should require employee representatives on the boards of all state and local plans. The Committee determined that board composition was outside of the scope of the Act.

Future Consideration

The Committee will meet next March in Washington, D.C. A new version of MPERSA will likely be available before then and if so, I will circulate it to you for comment. Thanks very much for your previous feedback on this issue. It was very helpful.