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August 26, 2011 01:00 AM

Report touts DB as more cost-effective for Texas

Timothy Inklebarger
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    Taxpayers and public employees in Texas would get “a better bang for the buck” under a defined benefit plan than a defined contribution one, according to a report by Pension Trustee Advisors, commissioned by the Texas Association of Public Employee Retirement Systems.

    The report compared pension formulas and employee profiles at three Texas public funds to a hypothetical DC plan to determine how much a participant would need in a DC plan to match the public DB plans' benefits.

    The three plans are the $1.9 billion Houston Municipal Employees Pension System; the $2 billion San Antonio Fire & Police Pension Fund; and the $1.65 billion Austin City Employees' Retirement System.

    William B. Fornia, author of the report and president of Pension Trustee Advisors, a pension consultant, said in a telephone interview that the cost of delivering the same level of retirement income to public employees would be 39% to 44% higher under a DC plan.

    He said DB plans are more cost-effective because:

    • Participants who die early in a DB plan save money for the plan regardless of adjustments made for survivor benefits. “Under a DC plan if you live longer you can't go back to your neighbor and say, ‘Can I have some of your money?'” Mr. Fornia said;

    • Public DB plans are better at weathering the risks associated with approaching retirement. “Individuals can't capitalize on the higher long-term anticipated rate of return, but those in DB plans can because they have a longer time horizon,” Mr. Fornia said; and

    • Returns are better in DB plans because the assets are professionally managed and administrative costs are generally lower.

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