Public pension system officials can consider variable benefit or variable contribution arrangements to add flexibility and share risk, according to a report released Wednesday from the Center for State and Local Government Excellence and AARP.
The research report, Proactive Pension Management: An Elected Official's Guide to Variable Benefit and Contribution Arrangements, discusses the potential benefits for plans and beneficiaries that variable arrangements may offer.
Variable benefit arrangements include adjusting base benefits, cost-of-living adjustments, employee contribution levels, or some combination of each. The arrangements may be applied automatically once certain thresholds for plan funded status or investment return targets are crossed or can be applied by board action.
The report notes that aggregate funding of public pensions in 2018 was 72%, compared to 87% in 2007, while employer-required contributions were nearly 17% of payrolls, up from 10% in 2007. Reacting to every demographic trend or market condition would be too much of burden on public officials, but one way to meet pension systems' financial needs "in a proactive way is to implement variable benefit and/or variable contribution arrangements. Under such arrangements, a pre-set formula drives occasional adjustments in the plan to maintain long-term stability," said report co-author Gerald Young, a senior research associate at SLGE.
The report includes six case studies where variable arrangements were implemented in Colorado, Iowa, South Dakota, Utah, Virginia and Wisconsin. While Wisconsin adopted its arrangement more than 30s years ago, others such as Colorado are more recent. The report notes that "there is no one correct or standard approach to implementing these variable arrangements."
