Public pension fund boards and state legislators are showing increased interest in cash balance and other hybrid plans as the unfunded liabilities of traditional defined benefit plans continue to grow.
More than 15 cities, counties and states have cash balance and other types of hybrid plans, the majority approved or implemented in the last two years, according to Pensions & Investments data and reports from the National Conference of State Legislatures. Meanwhile, pension board and state officials in Texas, California and Mississippi have made proposals or commissioned studies on adding a hybrid plan option.
The Kansas Legislature on May 17 passed a bill creating a cash balance tier for new employees hired after Jan. 1, 2015, within the $13 billion Kansas Public Employees Retirement System, Topeka. Gov. Sam Brownback is expected to sign the bill.
Louisiana could be next, as the Legislature there continues to debate a bill to create a cash balance plan for new state employees in the $13.7 billion Teachers' Retirement System, $9.3 billion State Employees' Retirement System and $1.4 billion School Employees' Retirement System to help lower the state's $18.5 billion in unfunded liabilities.
Kansas elected to take the cash balance route as both a cheaper alternative and more efficient way of reducing unfunded liabilities, said state Sen. Laura Kelly, who was a member of a committee that reconciled the state House and Senate bills.
Only four public funds in P&I's database of the largest 1,000 retirement plans reported having hybrid plans.
The $19.5 billion Texas Municipal Retirement System, Austin, and the $17.5 billion Texas County & District Retirement System, Austin, are the largest cash balance plans. The $152.9 billion California State Teachers' Retirement System, West Sacramento, has $7.3 billion in cash balance plan assets.
In Nebraska, the $702 million State Employees' Retirement System and $221 million County Employees' Retirement System — part of the $9.6 billion Nebraska Public Employees Retirement Systems — moved to cash balance plans from a defined contribution plan in 2003 as a more cost-efficient way to provide benefits more equal with employees in defined benefit plans under the Nebraska PERS umbrella, said David Slishinsky, Denver-based principal and consulting actuary for Buck Consultants LLC. Mr. Slishinsky is an actuary for Nebraska PERS, based in Lincoln.
Kansas fund executives contacted Nebraska plan officials when designing its cash balance plan, said Phyllis Chambers, director of NPERS. Ms. Chambers said the cash balance plan is less expensive than a traditional DB plan and is more advantageous for employees than DC plans, which costs participants more through investment fees.
“The least expensive (option) is probably going to be the cash balance,” she said.
But if one goal is to reduce liabilities, “cash balance plans still have a very real possibility of additional unfunded liabilities,” said Rich Hiller, senior managing director, government markets, at TIAA-CREF in Denver.
To Mr. Hiller, hybrid plans are the way to go. Under Mr. Hiller's definition of a hybrid plan, a public retirement system has both its legacy defined benefit plan and a new defined contribution plan. Although the plans are separate, they work together — along with Social Security — to typically replace 75% of a participant's income.
The key, Mr. Hiller said, is to design a proper defined contribution plan that does not resemble a 401(k) plan. The plan should include limited high-quality, low-cost options, target-date funds and guaranteed annuity options.