The National Institute on Retirement Security released astudy last week that analyzed six state pensionplans that remained well-funded through the recession. The purposeof the study was to learn what best practices exist tokeep plans financially strong.

“Lessons from Well-Funded Public Pensions” analyzed sixstate-level pension plans that vary in size and type of employeethey represent in order to achieve a wide sample. The market valueof assets in the plans in 2010 was approximately $300 billion, or10% of total public pension assets.

Plans covered in the study include:

• Delaware State Employees Pension Plan
• Idaho Public Employee Retirement Fund
• Illinois Municipal Retirement Fund
• New York State Teachers' Retirement System
• North Carolina Teachers & State Employees RetirementSystem
• Teacher Retirement System of Texas

Despite two downturns in the 10-year period between 2000 and2009 when the plans were studied, and even though they experiencedless-than-expected investment gains, the plans remained well-fundedthrough the recession.

The plans shared the following features:

1. Employer contributions paid the full amount of the annualrequired contribution and were at least equal to the normalcost.
2. Employee contributions helped share the cost of the plan.
3. Improvements in benefits were valued before implemented, andwere properly funded upon adoption.
4. Cost of living adjustments were granted responsibly.
5. Anti-spiking measures ensured actuarial integrity.
6. Reasonable economic actuarial assumptions that could beachieved long-term.

Diane Oakley, NIRS executive director, noted in a webinarreviewing the findings of the study that most employee’scontribution rates are fixed. Furthermore, they account for lessthan half of total annual contributions, forcing employers

to bear the cost of increased contributions in the event ofunderperformance or longevity increases. One way to restructurecontribution rates to ease the burden to employers, the studyfound, is to implement adjustable contribution rates. If anunfunded liability increases the overall contribution rate, theincrease will be split between the employee and the employer.

One consequence of an adjustable employee contribution rate isthat it will affect employees’ take-home pay every year. Analternative strategy is to have a fixed employee rate that covers aportion of the long-term expected cost of the plan.

From the report: “This fixed rate includes two components: a setportion of the normal cost, plus an additional rate for potentialcost volatility that can lead to an increase in the unfundedaccrued liability. … Even if this fixed rate will not change fromyear to year, it can still be subject to change if the underlyingnormal cost rate changes in the case of a benefit enhancement.”

Oakley also called attention to pension “spiking,” which is anabnormal, unanticipated increase in pension benefits.

“To the extent it occurs, pension spiking can be harmful to thefinancial health of the pension plan,” she said, because it createsan unfunded liability. Furthermore, she said, it’s unfair to otherplan participants and taxpayers.

One way to counter spiking is the increase the number of yearsover which salaries are averaged to determine benefits, the studyfound, and to exclude pay from overtime or unused paid timeoff.

Another measure enacted by the six plans in the study was to capthe final average salary used to determine benefits.