Reading the headlines about Detroit raises fear in many public sector employees about their own pensions plans. However examples exist of well-run public plans that are managed and funded responsibly to deliver the most cost-effective retirement security to public employees.

A new study by the National Institute on Retirement Security entitled: Lessons from Well-Funded Public Pensions: An Analysis of Six Plans that Weathered the Financial Storm shows that Delaware, Idaho, Illinois, New York, North Carolina and Texas are all faring well under volatile and difficult circumstances.

Some of the traits these plans exhibit and are looked to as potential reasons for their sound footing include:

  • Employer pension contributions that pay the full amount of the annual required contribution (ARC), and that maintain stability in the contribution rate over time, that is, at least equal the normal cost;
  • Employee contributions to help share in the cost of the plan;
  • Benefit improvements such as multiplier increases that are actuarially valued before adoption, and properly funded upon adoption;
  • Cost of living adjustments (COLAs) that are granted responsibly, for example through an ad hoc COLA that is amortized quickly, or an automatic COLA that is capped at a modest level;
  • Anti-spiking measures that ensure actuarial integrity and transparency in pension benefit determination;
  • Economic actuarial assumptions, including both the discount rate and inflation rate that can reasonably be expected to be achieved over the long term.

Among the findings, says the report, retirement systems that adjust benefits responsibly, are transparently and objectively evaluated, and deal diligently with abuses remain – fiscally solvent.
The report goes on to say that pension plans left unfunded will likely be dealing with very difficult consequences down the road. Says the study: “The most fundamental principle in ensuring a plan achieves a 100% funding ratio is ensuring that the plan sponsors pay the entire amount of the annual required contribution (ARC) each year, because anything short of a full ARC payment will have a negative impact on the plan’s funding ratio in the long run.”

States and cities such as New Jersey, Rhode Island, Illinois, and Chicago, are currently experiencing pension shortfalls primarily due to the failure to responsibly continue funding the system.

Defined benefit pension plans have an advantage over retirement plans such as individual 401(k) accounts. DB plans are professionally managed and incur lower administrative fees, resulting in large savings for states and municipalities. As the NIRS report says, “DB plans possess ‘built-in’ savings, which make them highly efficient retirement income vehicles, capable of delivering retirement benefits at a low cost to the employer and employee.”

With places like Detroit as a backdrop, the report notes it is essential to correct in the public’s mind what is often misunderstood about the financial stability of public pension plans. When managed responsibly with funding at its core, public pension plans deliver a sustainable and affordable measure of financial security for public employees and state/local governments.

Joel Kranc is Director of Kranc Communications, focusing on business communications, content delivery and marketing strategies. He has written and worked in the retirement and institutional investment space for 17 years covering North American markets, large institutional pensions and the adviser community. 

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