Defined Benefit Plans still Popular with Public Pension Systems

Concerns about whether public entities will be able to meet their future pension obligations are prompting lawmakers nationwide to scrutinize government workers' retirement benefits, with some states legislating ways to shore up the plans, such as raising retirement ages or increasing employee contributions.

For example, Kentucky Gov. Steve Beshear in June signed legislation that bumps up the retirement age for new employees and requires state employees to contribute 1% of their earnings to their retirement plans for the first time. The new law also shrinks annual cost-of-living adjustments from 5% to 1.5%.

In New Hampshire, Gov. John Lynch signed legislation earlier this summer that places a cap on the maximum retirement benefit state workers may receive.

This year's activity continues a trend sparked in the early part of the decade in response to poor investment performance by public pension funds. Since then, however, most of the funds have recovered. In fact, the vast majority of more than 2,600 public pension plans are fiscally sound, according to a January report by the Government Accountability Office. Many experts consider a funded ratio of about 80% or better to be adequate for government pensions, and the GAO found that 58% of 65 large public entity pension plans were funded to that level in 2006.

At least two other analyses of public pensions' fiscal health reached similar conclusions: A 2007 report by the Pew Charitable Trusts' Center on the States found that states have saved enough to cover about 85% of their long-term pension costs. Meanwhile, Wilshire Associates Inc.'s recent report on state retirement systems estimates that the ratio of pension assets to liabilities for all 125 state pension plans was 95% in 2007, up from an estimated 88% in 2006.

While public entities may continue to fine-tune elements of their defined benefit pension plans to make them less costly, it is unlikely that they will soon adopt the defined contribution approach as the private sector did when its defined benefit plans became too expensive, experts say.

In fact, no state has created a broad-based defined contribution plan since Alaska did so in 2005, according to the National Conference of State Legislatures in Denver. Michigan is the only other state to offer a defined contribution plan as its primary retirement vehicle, which has been in place since 1999.