Existing pension underfunding only grew worse once the plans were closed. (Photo: Shutterstock)

Even though some states have followed the trend of private industry in closing defined benefit plans in favor of an alternative such as defined contribution or cash balance plans, it hasn’t helped either those states or their retirees.

So says a study from the National Institute on Retirement Security, which found instead that trying to head off problems such as underfunded pension plans and even difficulty in recruiting new workers were instead amplified.

In fact, in the case studies for Alaska, Kentucky, Michigan, and West Virginia, each of which closed their pension plans and switched to an alternative, it was found that existing pension underfunding only grew worse once the plans were closed, and costs actually increased.

Changing benefits for future hires did not do away with costs associated with legacy plans plagued by funding shortfalls.

In addition, workers were exposed to greater retirement insecurity—to the extent that West Virginia actually ended up reopening its closed pension plan.

Then there’s the issue of recruiting and retaining good employees. That became more difficult for the states that closed their pension plans, with Alaska, which closed its plan 13 years ago, finding that the problem was severe enough that its Department of Public Safety now “lists the ability to offer a defined benefit pension as a ‘critical need’ for the department.”

Not only did the state’s new defined contribution plan prove inadequate for the retirement needs of public employees, but the state found that the combined $4.1 billion unfunded liability for pension benefits in the Public Employees Retirement System and the Teachers Retirement System had grown by 2017 to $6.3 billion.

Kentucky, still in the news as it struggles to find a way out of its pension difficulties, had been underfunding its pension plans for years when it switched to a cash balance hybrid plan. Says the report, “The funded status of KERS NH has dropped every year for at least the past fifteen years. In fiscal year 2004, KERS NH was funded at 85.1 percent. By fiscal year 2018, the funded status was down to 12.88 percent.”

Switching plans couldn’t fix that, and the unfunded liability has continued to rise.

And Michigan, whose plan has been closed for 22 years, is continuing to pay benefits to its large retiree pool and still has “thousands of participating, active employees in the closed pension plan.”

Its funded status was at 109 percent when it closed in 1997, but “[a]s of September 30, 2017, the plan was 66.5 percent funded and had an unfunded liability of $6 billion.” Because the balance shifted between active and retired participants, “there are now more than six retirees for every active worker—which can present challenges in managing a pension plan.”

The study’s analyses reviewed both the key issues and the impact of the plan change over time.

Specifically, those analyses reviewed “the impact on the overall demographics of the system membership; changes in the cost of providing benefits under the plan; the percent of the actuarially determined employer contribution made by the state and other public employers each year; the effect on the retirement security of workers impacted by the change; and the impact on the overall funding level of the plan over time.”

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