The investment consulting firm Callan Associates has published an enlightening set of discussion topics that present well-researched facts about the value of defined benefit pension plans.
DB plans have come under increased scrutiny in recent years as funding issues have negatively affected some states and municipalities. Some of these concerns were tied to the Great Recession, which caused public entities to reprioritize their spending. The bottom line, though, is that public pensions are an efficient means of retirement security and a relative bargain for taxpayers because their benefits extend beyond pension checks.
Callan, which advises institutional investors worth a combined $1.8 trillion in assets, states that well-funded public pension plans are ones that have effective anti-spiking measures, use “reasonable” actuarial assumptions and require employees to pay their share of contributions.
Other highlights from the report include:
- Many underfunded plans are underfunded not because they haven’t reached their investment goals, but because the plan sponsors did not make the necessary contributions. Callan said that even the worst-performing funds earned an annualized 9.17 percent return over the 30 years ended June 30. However, annual contributions are required to fund a pension system’s normal costs and to support accrued liabilities if the system is underfunded. If those contributions aren’t made, then the system suffers.
- Defined benefit plans provide benefits to the community at large. “When retirees spend pension payments, they support state and local economies,” the report states. That is certainly true regarding OPERS. In 2013 OPERS paid more than $6.6 billion in pension benefits and health care coverage to more than 196,000 Ohioans and their beneficiaries. For every dollar of taxpayer contributions to OPERS, $3.67 is returned to the Ohio economy.
- Retirement plans should not provide overly generous benefits during times of full funding or excess funding. While actuarially sound plans will achieve full funding over the long term, there will be fluctuations in the short term because of market cycles.