Well-Funded Public Pensions Share Common Traits

Well-funded public pension systems in the U.S. share a number of common practices, according to a new research paper from the Center for State and Local Government Excellence.

The Center examined four public pension systems with a long tradition of being well-funded—Delaware Public Employees’ Retirement System, Illinois Municipal Retirement Fund, Iowa Public Employees’ Retirement System and North Carolina Retirement Systems—to determine what they have in common.  According to a report from the Center, the systems have all lowered their annual investment assumption to 7.5% or less in recent years and have adjusted employer and employee contributions as needed to meet funding requirements.

While each of the defined benefit plans has a unique history and legal framework, they share these practices:

• a commitment to fund the annual required contribution in both good and bad financial times;
• conservative, realistic assumptions that are adjusted based on experience; and
• changes to benefit levels and contribution rates as needed.

For example, plan design changes to the Delaware plan for employees hired after January 1, 2012, included:

• Increased employee contribution from 3% to 6% of salary over $6,000;
• Increased normal retirement age from 62 with five years of service or 60 with 15 years of service to a new normal retirement age of 65 with 10 years of service or 60 with 20 years of service; and
• Increased vesting period from five years to 10 years of service.

The funded ratio for the Delaware plan as of 2014 is 95.8%. The funded ratios for the plans studied range from 87.6% to 99.8%.

“Even as the public focuses on the new accounting standards issued by the Governmental Accounting Standards Board, the most important issue for taxpayers, employees, and employers alike is that there is a clear plan to fund the government’s pension obligations,” says Elizabeth K. Kellar, president and CEO of the Center for State and Local Government Excellence, in the report.

The report, “Success Strategies for Well-Funded Pension Plans,” may be found at www.slge.org.