Some multiemployer pension plans have had their funded status deteriorate because of the difficult and volatile investment markets of recent years, leading to either increased contributions or reduced benefits—or in some cases both. For some multiemployer plans, this has made collective bargaining more difficult, reduced participant pay increases, and caused some employers to struggle to stay competitive. Multiemployer plan trustees may be looking for alternative, sustainable ways to provide participants with lifelong benefits that allow for more predictable contributions.

One alternative for multiemployer trustees to consider is changing the pension plan so that future accruals are paid through a variable annuity plan (sometimes referred to as adjustable pension plans). Much like changing to a defined contribution (DC) plan, changing to a variable annuity plan shifts the plan’s investment risk for future benefit accruals to the participants. A new Milliman white paper, “Variable annuities: A retirement plan design with less contribution volatility,” describes variable annuity plans and some advantages they may have over DC plans.

To download the entire paper, click here.

Here’s some good news about defined benefit (DB) plans: Public employees, in overwhelming numbers, are showing that they understand and appreciate the value of their defined benefit pension plans.

We know this is true because we studied the data from seven statewide retirement systems that offer employees the choice between a DB and a defined contribution (DC) plan such as a 401(k). The systems included in the study were Colorado Public Employees’ Retirement Association, Florida Retirement System, Montana Public Employees Retirement Association, North Dakota Public Employees Retirement System, Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio, and South Carolina Retirement Systems.

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Pensions & Investments picks up on the release of the new report on public retirement plan preferences, “Decisions, Decisions.” Here is an excerpt from P&I:

Public-sector employees overwhelmingly choose defined benefit plans over defined contribution plans when given a choice, according to a report by the National Institute on Retirement Security and Milliman.

In six states that offer new employees a choice between DB and DC plans, the report found that DB was chosen by most employees, ranging from 75% to 98% among the state plans.

“If you had an election with 75% of the vote (for a candidate), it would be well past a landslide,” Mark Olleman, a consulting actuary and principal at Milliman, said in a telephone interview. Mr. Olleman is co-author of the report, which was issued Thursday, with Ilana Boivie, an NIRS economist.

Statewide DC plans have lower investment returns than DB plans because DB assets are pooled and professionally managed, according to the report.

“Some states have considered moving from a DB-only to a DC-only structure in an attempt to address an unfunded liability,” the report said. “Making this shift, however, does nothing to close any funding shortfalls and can actually increase retirement costs.”

Reuters casts the findings in an even broader context, comparing public and private employer approaches to retirement:

To fix their persistent pension problems, some U.S. states are looking to reshape their retirement plans to resemble those in the private sector, but they may find may employees resistant and the savings elusive.

For more perspective, check out coverage from Plan Sponsor, AdvisorOne, Institutional Investor, and BenefitsPro. And you might also might appreciate the article from Investment News with our favorite headline so far: “This just in–DB plans rock.”

A new study of the retirement plan choice in the public sector finds that defined benefit (DB) pensions are strongly preferred over 401(k)-type defined contribution (DC) individual accounts.  The study analyzes seven state retirement systems that offer a choice between DB and DC plans to find that the DB uptake rate ranges from 98% to 75%.  The rate for new employees choosing DC plans ranges from 2% to 25% for the plans studied.

In recent years, a few states have offered public employees a choice between primary DB and DC plans.  The new study, Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers, analyzes the choices made by employees and finds that:

• When given the choice between a primary DB or DC plan, public employees overwhelmingly choose the DB pension plan.
• DB pensions are more cost-efficient than DC accounts because of higher investment returns and longevity risk pooling.   
• DC accounts lack supplemental benefits such as death and disability protection. These can still be provided, but require extra contributions outside the DC plan, which are therefore not deposited to the members’ accounts.
• When states look at shifting from a DB pension to DC accounts, such a shift does not close funding shortfalls and can increase retirement costs.
• A “hybrid” plan for new employees in Utah provides a unique case study in that it has capped the pension funding risk to the employer and shifted risk to employees.

Read more…

An article by Steve White and Mark Olleman in Benefits Magazines, “Rethinking the Pension Freeze,” examines a benefits strategy that combines elements of both defined benefit (DB) and defined contribution (DC) while taking advantage of an existing pension plan.

As California goes, so goes the nation? 

According to the AP, the board of the California State Teachers’ Retirement System (CalSTRS) has delayed a decision about whether it should decrease the rate of return it expects to receive on its investments.

“The investment assumption is the single most important assumption we work with,” said Mark Olleman, a consulting actuary at Milliman Inc. “The primary risk is that over the long term, what happens if we don’t achieve investment return assumptions?”

The dilemma: if the returns shrink, local school districts and the state would be asked to pay more to ensure the fund has enough money to pay pension benefits to retired teachers. Unfunded pension obligations for government employees could cost states tens of billions of dollars in coming years.

As the AP story points out, CalSTRS has grown an average of 8.6% per year over the past 30 years, including when it lost one-quarter of its value between 2008 and 2009.

The expected annual rate of return for CalSTRS has been set at 8% since 1995 but consultants and investment staff have advised the board that the fund should decrease its expected rate of return to 7.5% annually.

Because of the complexity of the issue, the board decided that it will revisit the matter in November.

Stay tuned.