Illinois Pensions Reviewed

Will there be Illinois Pension Reform?

The answer to whether there will be Illinois pension reform in the next year is a resounding, maybe. One thing that is clear is that any reform efforts will be motivated by concerns regarding "Tier 2" pensions.


Intersection of Pension Investments & Social Policy

Illinois Sustainable Investing Act FAQs

The Illinois Sustainable Investing Act is a legislative act that mandates public agencies in Illinois to integrate sustainability factors into their investment decision-making processes. This includes investment analysis, portfolio construction, due diligence, and investment ownership.

Sustainability factors refer to elements that might have a material and relevant financial impact on the safety or performance of an investment. These factors are complementary to financial factors and financial accounting.

Yes, sustainability factors may include corporate governance and leadership factors, environmental impacts like greenhouse gas emissions, social capital factors affecting relationships with key external parties, human capital factors recognizing workforce value, and business model and innovation factors.

Public agencies are required to prudently integrate sustainability factors into their investment decision-making, analysis, portfolio construction, due diligence, and investment ownership. The goal is to maximize anticipated financial returns, minimize projected risk, and effectively execute their fiduciary duty.

Yes, the Act allows the State Treasurer to manage the domestic and international proxy voting activity for shares held directly by the System and execute required ballots on behalf of the System, subject to certain conditions and the Board's consent.

Starting from September 1, 2023, and annually thereafter, the Board must publish guidelines for voting proxy ballots and a detailed report on its website. This report should describe how the Board considers sustainability factors, among other details.

Beginning January 1, 2024, investment managers must disclose, prior to the award of a contract, a description of the process through which they integrate the sustainability factors into their investment activities.



ESG Basics FAQs

ESG considerations refer to the integration of environmental, social, and governance factors into the investment decision-making process for state pension funds. These factors can influence the long-term sustainability and risk profile of investments. By considering ESG factors, state pension funds aim to ensure that their investments are not only financially sound but also aligned with broader societal values and sustainable practices.

ESG considerations are important for state pension funds for several reasons:

State pension funds can integrate ESG considerations in various ways:

Yes, there are several challenges:

State pension funds can measure the impact of their ESG investments through:

ESG Comprehensive FAQs

ESG considerations play a crucial role in state pension fund investments. Pension fund managers and elected officials in several U.S. states have taken positions on whether it's appropriate for public pension managers to consider ESG factors in their investment decisions. The fundamental economic question is whether inhibiting ESG investing for political rather than economic reasons hinders efficient market-driven capital flows and allocations. A majority of studies suggest that excluding ESG investment strategies can potentially hinder the financial performance of pension funds. [Source: ALI Social Impact Review]

ESG investing laws and attitudes vary significantly between states, often influenced by political affiliations. Some states have taken steps to limit or discourage ESG investing, while others actively promote it. For instance, Florida has proposed legislation that would prohibit its State Board of Administration from considering ESG factors, focusing solely on maximizing returns. In contrast, other states have taken measures to counter such anti-ESG laws with pension climate measures. [Source: Bloomberg Law]

While some pension funds have integrated ESG considerations due to their role as intergenerational stewards of capital, others have not due to various structural, regulatory, and legal hurdles. However, the logic and history of pension plans provide clear advantages that outweigh the challenges of integrating ESG. [Source: Pension Research Council]

The consideration of ESG factors in investment decisions by pension plans has evolved over the years. Initially, the focus was primarily on governance issues. By the late 1970s and early 1980s, concerns for social and environmental topics evolved into what became known as socially responsible investing (SRI). By the 1990s, public pensions joined other investors in addressing issues like apartheid in South Africa, child labor, and environmental calamities. The term ESG, as distinguished from SRI, became prominent in 2004 following a United Nations report. [Source: ALI Social Impact Review]

Several global initiatives focus on ESG considerations. For instance, the 'Race to Net Zero' initiative by the UN has prompted many pension funds to declare their intent to have net-zero portfolios by 2050 or sooner. Another significant initiative is the Glasgow Financial Alliance for Net Zero (GFANZ), which aims to accelerate the transition to net-zero emissions. Additionally, there are initiatives focusing on diversity, equity, and inclusion (DEI) in the investment sector. [Source: Pension Research Council]

2023 National Comparisons & Localized Issues

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Is Illinois alone in its pension challenges? No

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Is the Illinois pension challenge limited to state pension funds? No

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Will there be pension reforms in 2023 fall legislative session? Maybe?

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Illinois Pension Consolidation Recent History

Illinois Pension Consolidation FAQs

Illinois state pension consolidation refers to the merging of multiple local police and firefighter pension funds into two statewide funds: one for police and another for firefighters. This move aims to streamline administration, reduce costs, and potentially increase investment returns by pooling assets.

The consolidation was considered to address the fragmented nature of Illinois' pension system, which consisted of hundreds of individual pension funds, each with its own set of assets, liabilities, and administrative costs. By consolidating these funds, the state aims to achieve economies of scale, improve investment returns, and ensure the long-term sustainability of the pension system.

The consolidation is primarily administrative and does not alter the pension benefits of individual members. The rights and benefits of pension plan members remain protected and unchanged. The main goal is to enhance the investment capabilities and reduce administrative costs.

The consolidated pension funds are overseen by two new statewide boards: one for police pensions and another for firefighter pensions. These boards are responsible for the management, investment, and administration of the consolidated funds.

The expected benefits of pension consolidation include increased investment returns due to pooled assets, reduced administrative costs, improved transparency and accountability, and enhanced financial stability for the pension system.

2019 Illinois Pension Consolidation Legislation Overview

"After eight months of data collection, analysis, and many meetings, the Task Force recommends the State take the following actions:

STEP 1: Consolidate suburban & downstate police & fire pension plan assets...

STEP 2: Review consolidation of suburban/downstate police & fire pension plan benefit administration; review of other state and local plans to determine advantages of consolidation...

The issues surrounding pension funding in Illinois have been decades in the making. Underinvestment, overly optimistic projections, and the required trade-offs with other critical public services all place great pressure on the financial health of retirement systems. The State and local governments are now faced with limited options to remedy these issues."

Other Pension Studies & Reports

Illinois Pension Study by University of Illinois-Chicago Cover Page

"Underfunded pensions occur when promised pension benefits are not backed with an adequate amount of assets (Inman, 1986). This situation can occur for a variety of reasons. For example, pensions may be underfunded because investment returns fall short of expectations, or actuarial assumptions about factors such as participant mortality rates may differ from reality (Coggburn and Kearney, 2010). Alternatively, elected officials may choose to deliberately underfund pension plans to save money in the short-term (Thorn and Randazzo 2015; Smith, 1981). Deliberate underfunding can be dangerous to governments and their residents as it is essentially “borrowing against the future” but can go unnoticed (Mitchell & Smith, 1994: 278)."

"The Pew Charitable Trusts conducted a comprehensive 50-state review of state constitutions, statutes, and case law to determine the level of legal protection for not only public employee pensions—a monetary annuity paid throughout the lives of retired employees and often to a surviving spouse as well—but also retirement health care plans. Pew’s research examined the annuity and health care benefits separately because the law in most states treats the two differently. The research also focused on the legal rights of current employees and retirees because retirement benefits can be modified for new employees prior to their date of hire."

By Greg Hinz for Crain's Chicago Business - September 6, 2019

"I had a lengthy visit the other day with a man in search of redemption. That would be John Filan, who was Mr. Blagojevich's chief financial officer and sold him on the POB. The big borrowing actually worked, it's a success and the numbers are there to prove it, says Mr. Filan, presenting a stack of papers and charts and data-based scenarios."

Illinois Pension Laws & Constitutional Litigation

"The Supreme Court’s opinion in In re Pension Litigation, is extraordinary in its depth and analysis, and goes well beyond the briefs filed by any party, exploring the trial court record, and public document. It was a 7-0 opinion, and it was decisive. It is highly unlikely that the Supreme Court will reverse itself at any time in the near future if ever." (footnoted omitted)