The Future of Public Pension Plans
Public plan sponsors and
the boards that run these
systems have been very
responsible in addressing
the financial crisis that
many of the systems have
gone through. And actuaries have been
providing them with information to make
whether the assumptions and costs for determining future benefit increases should be discussed on a different basis than those
assumptions that are used for budgeting.
RIZZO: I think you’re right, Ken, as one purpose in which the
market value of liabilities might be useful would be collective bargaining. But for funding and financial reporting, I don’t think so.
DB Versus DC
NORTH: I think that the public-sector defined benefit environment has a lot of things going for it. It doesn’t have the
regulatory burdens created in the private sector, such as solvency laws that require companies to have enough money to
cover their obligations at all times.
It was also a mistake to divorce ownership and executive
management from participation in private-sector plans, which
is what happened when they put caps on the benefits that could
be paid from plans as part of allowing pension plan regulation
to be driven by tax policy rather than labor and benefits policy.
Then there is the question: Who bears the risk? Employers
bearing the risk of DB plans in a risky investment environment
was more than most CFOs could handle. The same problem
exists with public plans, but since public plans should have a
longer life, solvency is not their primary objective—it’s intergenerational equity.
I believe public plans can hold out. The contributory DB
plan is actually the most cost-effective delivery system to
provide the best benefits at the least cost to taxpayers. The challenge is to keep the plans well managed and governed.
RIZZO: I agree that public-sector plans may be the last best
hope for preserving DB pensions in the U.S. I’d like actuaries
and everyone involved in the pension industry to work together to ensure that public plans are sustainable. And rather than
take positions that could have unintended and irretrievable
consequences leading to the total demise of all DB plans in the
country, we need to work together to preserve them.
There are many factors that influenced businesses to terminate their DB plans: the arcane and complex regulations the
federal government imposes on private-sector plans, funding
standards from Congress, accounting standards from the Financial Accounting Standards Board, and just the whole mentality
of business managers who are measured by what their last
quarterly earnings were.
KEN T: The typical employee in the private sector doesn’t have
a full understanding of how much savings you need to support
yourself. Even those who have saved for most of their working
lives face the challenge of a DC plan that has been affected by the
markets. When they come to retire, they have really two choices:
to live below their standard of living so they don’t eat through
their account balances or to live at their standard of living and
risk living beyond those balances.
RIZZO: Studies have shown that one of the big concerns of retirees is outliving their savings. They spend a lot less than they
could because they’ve got this deadline—the dollar amount of
their account balance. And it’s sad to see the 401(k) plans becoming 301(k) and 201(k) with market declines. It’s particularly
harmful for those who are at or in retirement because they don’t
have the horizon to recover the investment [losses].
NOR TH: The original concept of retirement income was a three-legged stool—Social Security, a DB plan, and your savings. Today
the opportunities on the savings side have expanded in the employer arena, but one of the three legs in the private sector (the
DB plan) is largely going away. The 401(k) plans are not retirement plans. They are savings plans.
RIZZO: A poorly designed DB plan may well be worse for the
employer than a well-designed DC plan. But a well-designed DB
plan seems a more efficient use of dollars than a well-designed
DC plan. Maybe we need to roll back some of the benefits, but a
well-designed DB plan pays the right amount to the right persons beginning at the right time, for the right length of time
with the right survivor options. And it does all this at the right
KEN T: Annuities are expensive for an individual to buy today.
The DB plan creates financial efficiencies through the pooling
of longevity risk. And there are efficiencies of investing. While
those workers in the private sector who do not have a DB plan
should be looking at annuities, they lose a great deal by having
to go and buy them themselves.
RIZZO: I’m concerned that there might be a knee-jerk reaction
that 2008, 2009 were very bad, and yet it’s only two years out of
a 100-year life of a lot of DB plans. It wouldn’t be a good thing
to start terminating DB plans, replacing them with DC plans.
The right response is to pare them back. If you can’t afford them
now and you cannot afford the forecasted cost in the future, then
let’s roll the benefits back some for years of service in the future.
NORTH: There are lots of stakeholders who have skin in the