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

Even though some states have followed the trend of privateindustry in closing defined benefit plans in favor of analternative such as defined contribution or cash balance plans, ithasn’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 asunderfunded pension plans and even difficultyin recruiting new workers were instead amplified.

In fact, in the case studies for Alaska, Kentucky, Michigan, andWest Virginia, each of which closed their pension plans andswitched to an alternative, it was found that existing pensionunderfunding only grew worse once the plans were closed, and costsactually increased.

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

In addition, workers were exposed to greater retirementinsecurity—to the extent that West Virginia actually ended upreopening its closed pension plan.

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

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

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

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

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

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 andhad an unfunded liability of $6 billion.” Because the balanceshifted between active and retired participants, “there are nowmore than six retirees for every active worker—which can presentchallenges in managing a pension plan.”

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

Specifically, those analyses reviewed “the impact on the overalldemographics of the system membership; changes in the cost ofproviding benefits under the plan; the percent of the actuariallydetermined employer contribution made by the state and other publicemployers each year; the effect on the retirement security ofworkers impacted by the change; and the impact on the overallfunding level of the plan over time.”

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