Different Regulatory Environment Contributes to Survival of Public DB

December 11, 2007 (PLANSPONSOR.com) - A new study from the Center for Retirement Research (CRR) at Boston College suggests the different regulatory environment for public sector defined contribution plans is one of several factors contributing to their survival.

In their report, researchers Alicia H. Munnell, Kelly Haverstick, and Mauricio Soto point out the Employee Retirement Income Security Act (ERISA) imposes minimum standards for participa­tion, vesting, and funding on private plans while state and local plans are not covered by this legislation. ERISA also estab­lished the Pension Benefit Guaranty Corporation (PBGC), which collects premiums from private sector plan spon­sors and pays benefits (within limits and subject to certain restrictions) in the event of plan termination.

“The absence of these regulations [for state and local plans] could increase the desirability of defined benefit plans by lowering ad­ministrative costs and allowing later vesting,” the report said.

In addition, the researchers cited different workforce characteristics as another factor for public DB plan survival. The median years of tenure for private sector workers has decreased over the past 30 years, while that of public sector workers has increased. More employee unions also exist in the public sector, and unions support DB plans.

The report suggested the characteristics of public sector employers also differ from those of private sector employers. “[T]he demise of old firms in manufacturing and other industries and the rise of new firms in services and high tech provided an automatic mechanism for pension change in the private sector,” the researchers asserted. Since most governmental units exist perpetually, a move from a DB retirement system to a DC system is more difficult, the report said.

Additionally, shifting plan types in the public sector requires a political process, and public employees and unions generally resist such a change.

Public employers are also subject to less market pressure and have to worry less about how the financial volatility of DB plans affects their income statements or balance sheets, the researchers indicated. For private companies the volatility can generate substantial movements in cash flow and stock price.

Additionally, fluctuations in pension assets and liabilities might af­fect debt ratings and increase the cost of borrowing for public employers.

A severe drop in the stock mar­ket and/or interest rates will have less of an impact on public sector pension contributions since underfunded public plans do not have to comply with the legislated funding requirements that apply to private plans, the researchers concluded.

According to the report, states are beginning to explore DC plans and a couple now have a DC plan as their basic retirement savings vehicle for employees.

The CRR report is here .