NCPERS Study Sees More Volatility from Fewer DBs


Pension beneficiaries keep receiving their pension checks in good as well as bad economic times, making them an important driver of market stability. 


The National Conference on Public Employee Retirement Systems (NCPERS) bills itself as the largest trade association for public sector pension funds, representing more than 500 funds throughout the United States and Canada.

Given its position as an aggressive advocate for the interests of public pensions and pensioners, it’s no surprise NCPERS occasionally buts heads with fiscal conservatives in Congress and in state legislatures across the United States, many of whom would like to see taxpayer spending on pensions go down significantly. In its latest report, NCPERS slams efforts made by various lawmakers in recent years to reduce public expenditures tied to pensions, “such as cutting benefits, increasing employee contributions, and adopting plans that force retirees to shoulder all risk.”

The report comes at a time when public and private pensions alike are struggling to hold up funding levels amid stubbornly low interest rates, increased volatility and weaker economic growth. According to NCPERS, the economic, financial and revenue volatility in global markets is actually directly tied to the reduced health of the public and private pension systems.

“We know from experience and careful study that the assault on public-employee pensions has come at a great cost to individuals who worked and sacrificed for the promise of a reliable income in retirement,” says Hank Kim, executive director and counsel of NCPERS. Kim explains the latest research from NCPERS draws on empirical data from sources including the U.S. Census Bureau, the Bureau of Labor Statistics, the Bureau of Economic Analysis, and the Tax Policy Center, and analyzes both national and state data. In one key area of focus, the study looked at the how the percentage of the workforce that is shifted to defined contribution (DC) plans, such as 401(k) plans, impacts various forms of volatility.

“At the national level, we calculated the standard deviation for three measures of volatility within each decade,” NCPERS explains. “We then examined the relationship between the percentage of the workforce that was shifted to DC plans and economic volatility using nonparametric statistics. We found that the shift to DC plans exacerbated economic, financial, and revenue volatility. We found for each 1% shift of the workforce to DC plans, economic volatility rises by 2%. For each 1% shift to DC plans, financial volatility rises by 8%. And for each 1% shift to DC plans, revenue volatility increases by 54%.”

NEXT: Local impacts even more severe, NCPERS says 

The economic modeling behind these specific figures is pretty complex, but the basic underlying arguments will be familiar. The idea is that the steady flow of pension income to older, typically non-working segments of the population lacking other income sources leads directly to greater economic activity and stability than would otherwise be the case, strengthening rather than weakening the economy as a whole. In addition, the cool-headed and longer-term outlook of pension funds (compared with individualized DC accounts owned by novice investors) helps to dampen volatility and increase market rationality.

Explaining these effects, NCPERS researchers suggest “pension funds are the great stabilizers of our economy. When individual investors run for the door during market downturns, pension funds are there to stay. They are long-term investors and remain in the market for the long haul. This provides financial and economic stability that is needed for economic prosperity.”

At the state level, the NCPERS analysis projects even more harmful effects from the defined benefit (DB) to DC shift, “with economic volatility rising an average of 10.5% for each negative change to defined benefit plans, and revenue volatility rising 65.1%.”

“Pension beneficiaries keep receiving their pension checks in good as well as bad economic times,” says NCPERS Director of Research Michael Kahn. “Incomes from jobs and investments may decline during hard economic times, but pension checks provide an economic cushion and help local economies thrive.”

Critics of public pensions, of course, will observe that it’s not exactly by choice that companies and governments are shifting away from pensions in favor of DC plan arrangements. Already cash-strapped plan sponsors cite tougher regulations, insurance requirements, new mortality assumptions and numerous other factors that have come together to make offering an open-ended pension benefit a much more challenging proposition for today’s employers, public or private. For its part, the new NCPERS analysis does not really wade into these challenging issues.  

The full analysis is presented here