Study Identifies Common Element of Well-Funded Public Plans

According to the report, while each of these plans experienced less than expected investment gains over the 10-year study period beginning in 2000, each remained well-funded. The researchers said this suggests that the funding policies they used are strong, and worthy of examination by other public pension systems.  

The features of plan design and process that helped these six plans remain affordable and sustainable over the long term include: 

• Employer pension contributions that pay the full amount of the annual required contribution (ARC), and that maintain stability in the contribution rate over time;  
• Employee contributions to help share in the cost of the plan; 
• Benefit improvements, such as multiplier increases, that are actuarially valued before adoption and properly funded upon adoption;  
• Cost of living adjustments (COLAs) that are granted responsibly, for example through an ad hoc COLA that is amortized quickly, or an automatic COLA that is capped at a modest level;  
• “Anti-spiking” measures that ensure actuarial integrity and transparency in pension benefit determination; and 
• Economic actuarial assumptions, including both the discount rate and inflation rate, that can reasonably be expected to be achieved over the long term. 

The researchers contend that in the current discussion on unfunded liabilities and pension reform, what is often missing is an understanding of the considerable variation in the financial health of public pension plans. “While it is true that some state and local pension plans are not well-funded, and a few are severely underfunded, there are still many public pension plans that are consistently well-funded, even in the wake of the Great Recession,” the report says. “The existence of such well-funded pension plans illustrates that public pensions can be designed to be affordable and sustainable.”  

The study was conducted via a comprehensive analysis of the funding policy, benefit design and economic assumptions for the following six public pension plans: 

• Delaware State Employees Pension Plan. 
• Idaho Public Employee Retirement Fund, 
• Illinois Municipal Retirement Fund, 
• New York State Teachers’ Retirement System, 
• North Carolina Teachers & State Employees Retirement System, and 
• Teacher Retirement System of Texas.