No Quick Fix: Closing a Public Pension Plan Leads to Unexpected Challenges

No Quick Fix: Closing a Public Pension Plan Leads to Unexpected Challenges tracks the experience of five states that shifted new employees away from defined benefit (DB) pensions to defined contribution (DC) or cash balance plans.

Among states that switched to a DC plan, costs rose, negative cash flow grew, and employee turnover increased. Additionally, the retirement security of plan participants in DC plans was negatively impacted because of a high degree of “leakage” of retirement assets from the DC accounts that replaced pension plans.

The states examined in the report are Alaska, Kentucky, Michigan, Oklahoma, and West Virginia.

The report is authored by Dan Doonan, NIRS executive director, Tyler Bond, NIRS research director, and Celia Ringland, NIRS research associate.

The report’s key findings are as follows:

• Among the states studied, employer costs increased significantly after closing a pension plan. In some states, poor funding practices preceded the plan closure, with improved funding discipline only after closing the plan. Even 26 years after one of these plans was closed, employer costs remain high. In contrast, the ongoing contributions of new active members combined with sound funding practices show strong results.
• In the closed plans, cash flows have become more negative over time as demographics shift and the plan begins to spend down its assets. The Michigan State Employees’ Retirement System plan is furthest along in this regard, as the plan pays a growing share of its assets as benefit payments. Despite higher costs and larger contributions, the plan’s high negative cash flow throughout the Great Recession forced more plan assets to be sold at a discount while markets took time to rebound.
• Despite claims that younger workers will be attracted to savings-based plans, including cash balance and DC plans, the available retention data shows poor retention in the new plans or tiers. Workforce management has become a challenge in many of these states with closed plans.
• Many workers are cashing out their DC plan account balances when leaving a public sector job, and the evidence indicates those dollars are unlikely to be used for producing retirement income. The available data suggests that DC plans are failing to help many workers accumulate sufficient retirement savings.
• The West Virginia Teachers Retirement System, which was closed and then reopened, shows that reopening a closed pension plan is a viable option that can reverse many of the harmful trends documented in this report if reopening is combined with contribution discipline. In West Virginia, pension plan costs have stabilized and the funded status continues to climb.