The Center for State and Local Government Excellence recently launched an interactive map showing a sample of state and local governments that have made major reforms to their pension plans.

Users of the map can view how other state and local pension systems are amending their plans, so that they can continue to provide pension benefits in a fiscally sustainable way that will also provide retirement security to public-sector employees, says Dr. Joshua Franzel, vice president of research at SLGE.

The online map, a diagram of the United States, provides public data on negotiated changes to defined benefit plans in the public sector. It houses information on 20 states, six counties, and 19 cities.

Of the 45 locations highlighted on the map, 32 have links to public data on plan designs. The creators behind the map explain that locations were selected because they have made substantive changes to their public pension plans over the past decade. On the map, state governments are represented by blue icons; local governments are represented in red.

In 2009, SLGE surveyed two groups of government HR professionals, representing nearly 400 members, and found 21% of respondents reported that their governments had made changes to their retirement plans since the beginning of the recent recession.

The reforms included raising employee and/or employer contributions, increasing the years required to vest in pensions and replacing a defined benefit plan with a defined contribution plan.

The map was constructed in Google Maps and is embedded on the center's website.

"What's unique about the map is that it presents information on negotiated pension reforms in one central location on the SLGE website," says Alex Brown, an SLGE research assistant who was a part of the team that created the map.

Users interested in a state or local jurisdiction can click on the area in the map. They will see a hyperlink line of text describing the change enacted by the state or locality. Clicking on the hyperlink will take users to an external source that describes the changes in greater detail.

For example, West Virginia's teachers' plan converted back to a DB plan after 17 years of offering a defined contribution plan, while Massachusetts eliminated a pension law that allowed elected officials to claim a year of service for working one day in a calendar year. Nine counties and cities changed the conditions of their cost-of-living allowances benefits, primarily reducing and freezing the COLA terms.

It took about two months to create the map, and SLGE hopes the online map will help state and local decision-makers, legislators and financial officers to make informed decisions regarding their pensions in the future.

For public-sector benefits and HR professionals, the map represents an opportunity to look at the changes other states and localities have made to DB plans and determine whether some negotiated changes might be applicable to their own plans.

"We hope the map and the project spur continued thought and conversation on different ways to address pension plan reform on the state and local level," Franzel says. "This is the first step of a larger pension reform project we will be conducting in 2011. Our research team wanted to document what was going on throughout the country."

The map, however, doesn't represent the entire universe of state and local pension changes. "It's a good sample. The team collected our information from a wide range of respected government and research sources," Franzel explains.

The center will continue to update the map over time. Phase two of the project will include in-depth case studies to examine plans' situations before and after the changes were made, analyzing whether there are any overriding themes that can be learned from the plan amendments.

The team will try to determine if there are lessons that can be learned by other states and localities from plan changes and reforms that have already been implemented.

"The value of the map for DB professionals and advisers is that it can offer a clearer picture of what is happening with state and local DB plans in certain parts of the country. As an outsider, it's difficult to know what is happening in each state and municipality," says Jon Waite, the director of investment management advice and chief actuary of SEI's institutional group.

DB plans continue to struggle

SEI's recent research indicates that some state and local plans are struggling to come up with a sound investment strategy to alleviate their huge funding deficits. "They are looking for every return down the road and diversification options," Waite says. Of course, some public pension plans are better-funded than others.

"Certainly the 2008 financial crisis hurt funding levels, but there are probably state and local governments that have promised too much in the way of benefits, relative to what they are able to support with their tax base," he observes.

SLGE also published a research brief titled "The Funding of State and Local Pensions: 2009-2013," in which researchers from the Center for Retirement Research at Boston College analyzed the effects of the 2008 economic downturn on 126 state and local government pension plans, specifically their funding levels.

Researchers found that the ratio of assets to liabilities for the sample dropped from 84% in 2008 to 78% in 2009, the lowest funding ratio in 15 years. Looking ahead, the authors write that "the ultimate outcome will depend on the performance of the stock market, but under our most likely scenario, funding ratios will decline to 72% by 2013."

Crafting strategies to improve the funding ratios of state and local pension plans will largely depend on the performance of the economy and financial markets, because state and local leaders have few options to enrich funding levels.

For instance, "states and localities may have only limited ability to increase employee contributions, because some state courts have ruled that the public employer is prohibited from modifying the plan for existing employees," the report notes. In addition, "higher contributions from new employees will take a long time to have any substantial effect. Thus, if funding levels are to be restored quickly, the money must come primarily from tax revenues."

Furthermore, "the recession has decimated tax revenues and increased the demand for state and local services. Thus, finding additional taxes to make up for market losses will be extremely difficult," researchers assert. Still, "one small step that would be viewed as a commitment to responsible funding would be for states and localities to at least pay their full annual required contributions."

Global comparisons

The 2010 global pension index, which assesses the performance of private and public sector pension systems, ranked the U.S. 10th of 14 countries, compared to sixth place among 11 countries in 2009.

Researchers considered more than 40 factors in evaluating retirement income systems, including the system's adequacy, sustainability and integrity. Mercer and the Australian Center for Financial Studies also based the ranking on the costs of each country's system; the level of home ownership; asset allocation; and the effect of divorce on the provision of retirement benefits.

The analysts acknowledge, "there is no perfect [pension] system that can be applied universally around the world .... as every system is different and has arisen from each country's particular economic, social, cultural, political and historical circumstances."

Still, each system embodies "certain features and characteristics ... likely to lead to improved benefits, an increased likelihood of future sustainability of the system, and a greater level of confidence and trust within the community." The Netherlands, Switzerland, Sweden and Australia topped the list, while Canada placed fifth and the UK sixth. Germany, Japan and China landed at the bottom of the index.

Income from pensions still prevalent

Retirement income from employer-sponsored retirement plans is more prevalent among retirees today than in 1975, when sweeping new retirement plan regulations were enacted, most notably the Employee Retirement Income Security Act, finds the Investment Company Institute.

In 2009, 34% of retirees received income, either directly or through a spouse, from private sector retirement plans, up from 21% in 1975. The median income was $6,000 in 2009, up from $4,500 in 1975 (in 2009 dollars).

"Looking at the entire period from 1975 to 2009, the data show that contrary to conventional wisdom, private sector pension income has become more prevalent, not less prevalent, over time," says ICI senior economist Peter Brady.

"Retirement policy discussions often seem to start from the premise that retirees' pension income has fallen over time. This report refutes that belief and provides some historical context for these policy discussions by examining trends in retirement income from private sector pensions," Brady adds.

However, more workers today are at a company with a defined contribution plan, rather than a defined benefit plan. In 1975, 87% of participants in private sector retirement plans had primary coverage through DB plans.

By 1998, 56% of active participants in private sector retirement plans were covered by a primary DC plan, and 39% had a supplemental DC plan.

"The good news is private sector retirement income has increased over time and, to date, the shift from DB pensions to DC pensions has not led to a decline in private msector pension income," Brady explains.

Lee Barney, editor of Money Management Executive, a SourceMedia publication, contributed to this article. 

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