While experts point to ERISA and the Pension Protection Act of 2006 as contributing to the demise of private-sector pension plans, public plans are not expected to follow their corporate brethren anytime soon.
“Traditional pension plans are not going out of existence everywhere by any means,” said Joshua Gotbaum, guest scholar in the Economics Studies Program at the Brookings Institution and a former executive director of the Pension Benefit Guaranty Corp.
“They're still the dominant form in the public sector in the U.S. They are dominant in northern Europe. They are dominant in Canada etc., etc.,” Mr. Gotbaum said.
Public plans held $3.6 trillion in defined benefit assets out of a total of $6.117 trillion as of Sept. 30 among the 1,000 largest U.S. retirement plans, according to Pensions & Investments data.
However, even though public DB plans remain open, they still face challenges being in the public arena. Specifically, in a number of states, underfunding remains a deep concern and pension reform legislation on the state and local levels is being widely discussed.
While the actual closing of DB plans on the public level is rare, smaller plans have taken that step. For example, Jacksonville, Fla., is currently in negotiations with collective bargaining units to close the city's three pension funds to new employees. New employees would instead be enrolled in a defined contribution plan.
Joey Greive, the city's treasurer and chief investment officer of the city retirement system, said in an earlier interview the general employees fund is about 65% funded, and the corrections officer and police and fire pension funds are below 50% funding currently. The total unfunded liability for the three funds — which have combined assets of about $3.8 billion — is between $2.8 billion and $3 billion, Mr. Greive had said.
States like Illinois, whose five state pension systems have $129.8 billion in total unfunded liabilities and an aggregate funding ratio of 37.6% on a market-value basis as of June 30, have attempted pension reform measures to reduce benefits but are hamstrung by state constitution requirements.
Other states, however, have been able to make changes to their defined benefit plans due to concerns about underfunding. Rather than switching to a defined contribution plan model, they've closed their traditional DB plans and moved to some kind of hybrid or cash-balance plan for their state plans.
One of the largest retirement systems to move to a hybrid plan in recent years was the $44.4 billion Tennessee Consolidated Retirement System, Nashville, which created the Hybrid Pension Plan for State Employees and Teachers for state employees, higher-education employees and public school teachers hired after June 30, 2014.
The defined benefit plan component requires a 5% employee contribution and 4% employer contribution, while the defined-contribution component requires a separate 5% employer contribution and a 2% employee contribution, with an opt-out feature.
Tennessee Treasurer David H. Lillard Jr. originally proposed the hybrid plan in 2013 despite the retirement system having a funding ratio of over 90%. His reasoning, he said in a news release at the time, was that “it is important to take a long view when trying to anticipate what a retirement plan's future costs will be. Based on the actuarial projections and other information my staff and I have studied, we believe changes are needed now to protect taxpayers, employees and retirees in the future.”
Other public plans that made similar moves included the $47.6 billion Michigan Public School Employees Retirement System, Lansing, which created a hybrid plan for employees hired on or after July 1, 2010; and the $16 billion Kansas Public Employees Retirement System, Topeka, which created a cash balance tier for new employees hired after Jan. 1, 2015.