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
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Project Summary
Overview of Wisconsin Retirement System
Privatization Definition
Policy Alternatives
Analysis of Alternatives
Recommendation
Project
Overview
& Aims
Project
Summary
• 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
Structure of the WRS
Wisconsin Retirement System
State of
Wisconsin
Investment
Board (SWIB)
Department
of Employee
Trust Funds
(ETF)
Manages invested retirement
system assets
Provides day-to-day benefits
administration for WRS
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
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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%)
SWIB Management Costs
SWIB Asset Management
11.3%
47.3%
52.7%
88.7%
Internal
External
Internal
External
• ETF outsources administration of IT services
and actuarial services
Reasons for State Privatization (1998-2002)
Percentage of Responding States
70%
Cost Savings
60%
Expertise
50%
40%
Flexibility
30%
20%
10%
0%
Speedy
ImplemenHigh Quality tation
Service
Political Increased
Leadership Innovation
Reason for Privatization
Source: Chi, Arnold, & Perkins, 2004
Policy Goals
1.
2.
3.
4.
Reduce Costs
Enhance Service
Have a Positive Economic Impact
Be Feasible
Reduce Costs
GOALS
Impact Category
Current Policy:
Piecemeal
Outsourcing
Total
Retirement
Outsourcing
Profit Motive Costs
Excellent
Poor
Competition
Fair
Poor
Economies of Scale
Fair
Good
Transition Costs
Excellent
Poor
REDUCE COSTS
Enhance Service
GOALS
ENHANCE
SERVICE
Impact Category
Current Policy:
Piecemeal
Outsourcing
Total
Retirement
Outsourcing
Level of Service
Good
Poor to Fair
Level of
Accountability and
Control
Excellent
Poor
Risk Minimization
Excellent
Fair
Economic Impact
GOALS
ECONOMIC
IMPACT
Impact Category
Current Policy:
Piecemeal
Outsourcing
Total
Retirement
Outsourcing
Employment Effects
Good
Poor
Distributional
Effects
Good
Fair
Feasibility
GOALS
Impact Category
Current Policy:
Piecemeal
Outsourcing
Total
Retirement
Outsourcing
Political Feasibility
Excellent
Poor
Legal Feasibility
Excellent
Fair
FEASIBILITY
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, highperformance
For further information
Contact the La Follette School’s publications office at
608-263-7657 or publications@lafollette.wisc.edu
Or see
www.lafollette.wisc.edu/publications/workshops.html
Thank you!
Policy
Alternatives
in terms of
Policy Goals
GOALS
Impact Category
Current Policy:
Piecemeal
Outsourcing
Total
Retirement
Outsourcing
Profit Motive Costs
Excellent
Poor
Competition
Fair
Poor
Economies of Scale
Fair
Good
Transition Costs
Excellent
Poor
Level of Service
Good
Poor to Fair
Level of Accountability
and Control
Excellent
Poor
Risk Minimization
Excellent
Fair
Employment Effects
Good
Poor
Distributional Effects
Good
Fair
Political Feasibility
Excellent
Poor
Legal Feasibility
Excellent
Fair
REDUCE COSTS
ENHANCE
SERVICE
ECONOMIC
IMPACT
FEASIBILITY