Reform of the Pennsylvania public pension system, scrapping its defined benefit (DB) plan and implementing a hybrid set-up, could save the state’s taxpayers over $11 billion over the next 30 years, according to an actuarial report.
The proposed reform suggests closing its existing DB plans to new employees and instead enrolling them in a hybrid of both DB and defined contribution (DC) systems.
“This hybrid plan proposal does provide for future cost savings as new employees participate under the systems because their retirement benefits will be lower and less costly to the Commonwealth,” wrote Kenneth Kent, principal consulting actuary for the Pennsylvania systems.
According to the proposal, the Public School Employees’ Retirement System (PSERS) would establish a hybrid benefit tier effective July 1, 2015, enrolling all new and returning employees to a DB and DC plan.
Under the DB plan, members would earn benefits at a 2% benefit accrual rate. Employees would also contribute 1% of their first $50,000 in income for the first 25 years of employment and 7% of compensation over $50,000 or any service over 25 years into a newly created DC plan. For the State Employees’ Retirement System, the changes are to be made effective January 1, 2015.
By adding a DC plan to the current retirement system, the state intends to shift liabilities and risk from itself and employers to the participants.
“The cost reductions are both explicit and slow to emerge in terms of limits to the DB provided and implicit as a significant portion of the new retirement benefit structure will be delivered as a DC plan transferring the cost of investment risk and retirement longevity risk to the participants,” Kent said.
Pennsylvania’s retirement systems, which total $100 billion in assets, are facing almost a $50 billion unfunded liability that is expected to grow to more than $65 billion in just a few years. According to PSERS’ reports, the fund was 66.4% funded at June 30, 2012.
“The impact of the systematic underfunding and significant cash outflows on PSERS’ ability to earn increased investment income is becoming more evident over time,” said James Grossman Jr., CIO of PSERS, in September last year. “Not only does PSERS have fewer dollars to invest, it has also led to a more conservative investment risk profile, including reduced exposure to public equities.”
Pennsylvania Governor Tom Corbett also expressed his approval for the hybrid plans as he faces a $1.4 billion revenue shortfall in next year’s budget.