Magazine article Government Finance Review

Strategies for Well-Funded Pension Plans

Magazine article Government Finance Review

Strategies for Well-Funded Pension Plans

Article excerpt

The funded status of public pensions remains a hot topic, yet the pension plans that are well funded get little attention. State and local pension plans hold an aggregate of $3.77 trillion in assets (1) and have 14.4 million active members and 9 million retirees. Public employees and employers contribute to pensions during an employee's working years. Why is it, then, that some pension plans are better funded than others?

The Center for State and Local Government Excellence examined four defined benefit pension systems that have a long tradition of being well funded: the Delaware Public Employees' Retirement System, Illinois Municipal Retirement Fund, Iowa Public Employees' Retirement System, and North Carolina Retirement Systems. The study (available at www.slge.org) found certain characteristics common to all of these well-funded plans.

SUSTAINED COMMITMENT TO FULL FUNDING

Whether the stock market is up or down, these pension systems have been able to count on receiving the full annual required contribution. Funding for the plans typically comes from a combination of investment returns, employer contributions, and employee contributions. For example, all 2,969 governments that participate in the Illinois Municipal Retirement Fund (IMRF) are required to pay 100 percent of their annual required contribution (ARC). As a result, the IMRF has remained over 80 percent funded, even after the 2008 economic downturn. In 2013, the IMRF had a funded ratio of 87.6 percent.

Likewise, the North Carolina Retirement Systems have been able to count on receiving the full ARC, with just one exception. In fiscal year 2010-2011 the General Assembly appropriated only 73 percent of the ARC calculated by the actuary to the Teachers' and State Employees' Retirement System (TSERS). In 2014, TSERS had a funded ratio of 94.89 percent and the Local Governmental Employees' Retirement System had a 99.8 percent funded ratio.

The Iowa Public Employee's Retirement System (IPERS) had a different challenge--a statutory cap on its combined employer-employee contribution, unchanged since 1949. Legislation passed in 2006, 2010, and 2012 has made it possible for IPERS to develop a new combined employer-employee contribution funding policy. IPERS is now authorized to adjust the contribution rates up or down each year by up to one percentage point. IPERS has now reached a funded ratio of 82.7 percent.

The Delaware Public Employees' Retirement System (DPERS) has remained over 90 percent funded, even in the years after the economic downturn. Like the other plans in this study, DPERS has experienced a consistent commitment to full funding of the ARC in good and bad financial times.

CONSERVATIVE, REALISTIC ASSUMPTIONS

Each of the pension plans in the study has taken steps to adjust assumptions, based on experience. The Delaware Public Employees' Retirement System reduced its annual investment assumption from 8 percent to 7.5 percent in 2011. The Illinois Municipal Retirement Fund has a longstanding investment return assumption of 7.5 percent. Strikingly, it did not adjust that assumption during the 1995-1999 period of stock market growth, when the fund's average return was more than 17 percent. …

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