October 11, 2012 (PLANSPONSOR.com) – As state and local governments have reformed pension plans to address economic concerns, the use of defined contribution (DC) plans is evolving.
A joint research project of the Arthur N. Caple Foundation and the National Association of Government Defined Contribution Administrators conducted by the Center for State and Local Government Excellence finds pension plan changes fall into five categories:
- Increasing current and/or new employee contribution levels;
- Increasing the age and/or length of tenure required to be eligible for normal retirement;
- Reducing or eliminating cost-of-living adjustments (COLAs) for new and/or current employees;
- Changing the way pension formulas are calculated to reduce pension benefits; and
- Offering a hybrid and/or defined contribution plan instead of a traditional defined benefit plan.
The research paper says the current environment within which public sector retirement plans are operating suggests that changes will continue to occur with the responsibility for financing retirement benefits shifting more toward employees.
According to the report, managing long-term risk and cost are the primary drivers for a shift toward more dependence on defined contribution plans. Governments are looking for ways to reduce costs to overcome the short-term impacts of the recession, reduce investment risk and provide long-term financial stability. Many public officials are concerned with the long-term costs of their current defined benefit programs and will continue to redesign these plans and consider alternative retirement arrangements. However, the report notes, most of the changes implemented to date, including switching to hybrid and core defined contribution plans, usually affect new employees.