Public pension plans modifying, not dropping, defined benefit

Modifying public-sector defined benefit pension plans is proving to be a better option for states than a wholesale shift to defined contribution plans, according to new research from the National Institute on Retirement Security released Wednesday.

“States find that modifying existing pensions provides a sustainable solution when they see the steep costs of a wholesale shift to individual DC accounts like 401(k) plans,” Diane Oakley, executive director of NIRS and the report's co-author said in a statement.

Since the Washington-based NIRS last looked at trends in public-sector pension plans in 2008, 45 states have modified their defined benefit programs. The most common modifications include increasing employee contributions, reducing benefits for new hires and trimming cost-of-living adjustments. “Rather than wholesale changes, they've opted to make incremental change, with an eye toward cost savings,” said Nari Rhee, report co-author and NIRS manager of research, during a conference call about the report.

“There is strong evidence that it is less costly to adjust benefits than to shift to DC plans. If you look at it from the transition costs point of view, you're almost always better off tweaking them,” Ms. Rhee said.

The report, “On the Right Track? Public Pension Reforms in the Wake of the Financial Crisis,” also looks at factors influencing decisions made by private-sector pension executives.

The cost of switching to defined contribution plans from defined benefit “is not as much of an issue in the private sector,” Ms. Oakley said on the call, because funding rules for companies are typically based on a seven-year amortization schedule, whereas public-sector sponsors have to calculate their pension costs over a longer time frame. Larger private-sector sponsors remain committed to keeping their defined benefit plans, Ms. Oakley said.