Saving Public Defined Benefit Plans

Source: Ronald D. Peyton, Karen Harris, Callan, Research, Talking Points, September 2014

The funded status of public employee defined benefit (DB) retirement plans continues to garner great debate in the industry and press. DB plans are the primary vehicle for ensuring retirement income security for public workers, and Callan believes these plans are viable and necessary in this sector. In 2011, Callan published a report to initiate discussions around what went wrong in the past that left many of these plans woefully underfunded. We suggested ways to nurse them back to health by promoting DB plans and providing them with ongoing support. We revisit the topic in 2014, but now with a more urgent goal of saving public pensions amid persistent low funded levels and a burgeoning movement to disassemble them. The following talking points will help to move the discussion forward around the importance of DB plans. We expand on each point and support our assertions with research, data, and actuarial considerations.

1 DB plans serve many purposes beyond providing constituents with retirement income.
2 DB plans are proven to be extremely cost effective and reliable in delivering basic retirement income security—when the rules of DB finance are followed.
3 Many public DB plans are underfunded today, but not because of paltry long-term returns. It is primarily because plan sponsors’ contributions were neither sufficient nor consistent enough to properly fund the benefits promised.
4 New benefits cannot be funded out of better-than-average investment returns simply because average returns is all one can expect over the life of the plan.
5 DB plan funding surpluses and deficits occur as part of the normal cycle of investment market returns.
6 Plans that implement an actuarially sound funding policy will achieve 100% funded status over the long run. Over the short term, the plan could veer off course because of market cycles.
7 Healthy DB plans are underpinned by a sustainable benefit design, a strong governance process, and the sponsor’s commitment to regularly fund the plan. ….