Alternatives for Administering the Wisconsin Retirement System Current Policy versus Total Retirement Outsourcing Prepared for the Wisconsin Legislative Council Bethany Ackeret Hope Harvey Daniel Kleinmaier Noah 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 SWIB Management CostsSWIB Asset Management 11.3%

Reasons for State Privatization ( ) Source: Chi, Arnold, & Perkins, 2004

Policy Goals 1.Reduce Costs 2.Enhance Service 3.Have a Positive Economic Impact 4.Be Feasible

Reduce Costs GOALS Impact Category Current Policy: Piecemeal Outsourcing Total Retirement Outsourcing REDUCE COSTS Profit Motive CostsExcellentPoor CompetitionFairPoor Economies of ScaleFairGood Transition CostsExcellentPoor

Enhance Service GOALS Impact Category Current Policy: Piecemeal Outsourcing Total Retirement Outsourcing ENHANCE SERVICE Level of ServiceGoodPoor to Fair Level of Accountability and Control ExcellentPoor Risk MinimizationExcellentFair

Economic Impact GOALS Impact Category Current Policy: Piecemeal Outsourcing Total Retirement Outsourcing ECONOMIC IMPACT Employment EffectsGoodPoor Distributional Effects GoodFair

Feasibility GOALS Impact Category Current Policy: Piecemeal Outsourcing Total Retirement Outsourcing FEASIBILITY Political FeasibilityExcellentPoor Legal FeasibilityExcellentFair

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

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Policy Alternatives in terms of Policy Goals GOALS Impact Category Current Policy: Piecemeal Outsourcing Total Retirement Outsourcing REDUCE COSTS Profit Motive CostsExcellentPoor CompetitionFairPoor Economies of ScaleFairGood Transition CostsExcellentPoor ENHANCE SERVICE Level of ServiceGoodPoor to Fair Level of Accountability and Control ExcellentPoor Risk MinimizationExcellentFair ECONOMIC IMPACT Employment EffectsGoodPoor Distributional EffectsGoodFair FEASIBILITY Political FeasibilityExcellentPoor Legal FeasibilityExcellentFair