US - Moving public defined benefit schemes over to defined contribution will not cut costs, while hybrid schemes could be a way forward, the National Association of State Retirement Administrators (NASRA) has argued.
Research director Keith Brainard told Global Pensions there were advantages of incorporating elements into DC plans that were found in DB schemes, such as mandatory participation and annuitisation of assets.
“DC plans are moving in some ways in the direction of DB plans,” he said. “The two do not need to be polar opposites, and are not mutually exclusive.”
Brainard said NASRA was in support of DB plans, but also of progressive changes in DB plans that advanced many of the objectives supported by DC advocates. However, he dismissed claims that simply changing public DB schemes to DC would cut costs.
Closing a plan to new members would starve the plan of future contributions, said Brainard: “It may seem counter intuitive, but its much harder to generate savings especially in short by closing DB pension than one might initially expect.”
When California governor Arnold Schwarzenegger proposed the closure of DB plans in the state, Brainard claimed analyses done by CalPERS and LA country actuaries showed savings would take several years to begin to materialise. “And even then they were not substantial and would take many more years to generate meaningful savings,” he said.
Brainard also rejected claims that public sector pension benefit costs were placing a burden on the taxpayer.
State local governments were spending a little less on public pensions as a percentage than a decade ago he said. Costs had risen in the last couple of years as employer contribution rates rose in response to a decline in investment markets, said Brainard.
“There are a number of cases where employer contribution rates declined in the past to very low levels, sometimes as low as 0. Now those contribution rates are going back up, and when you had a contribution rate of, say 2%, and it jumps to 8%, that can wreak havoc on a budget and make it seem like pension costs are out of control,” said Brainard. “Eight percent is not an outrageous contribution rate.”
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