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.