Innovative strategies for responding to changing demographics and market conditions are keeping public retirement plans sustainable, and Colorado PERA is a leading example, according to a new report from the Center for State and Local Government Excellence (SLGE) and AARP.
Since the recession in 2008, many retirement systems have struggled with changing demographics and reduced expectations for their investment returns, resulting in lower funded ratios for their pension plans. In many cases, making changes to address these challenges and maintain plan stability required legislative action.
In response, some plans have created formulas that
give plans the flexibility to make adjustments to their benefits and/or
contributions to maintain long-term stability that do not require unpredictable
or time-consuming legislative changes.
The report notes that such formulas “enable all stakeholders to understand how, when, and to what extent contributions or benefits might be subject to formula-based changes, and as a result, enable them to plan for the long term.”
Legislation passed in 2018 included this type of provision for PERA, called the automatic adjustment. Every June, PERA reviews progress toward its funding goal. If PERA is behind schedule, member and employer contributions will increase, and the annual increase decreases. If PERA is ahead of schedule, the annual increase will rise and contributions will decrease.
Prior to that legislation, making any changes to PERA’s contributions or benefits required legislation. Over the previous 15 years, annual contribution deficiencies resulted in a funding deficit of $4.6 billion.
The report highlighted PERA’s lengthy research and stakeholder engagement process. The resulting legislation, Senate Bill 18-200 affected employers, employees and retirees. Together with adjustable contributions and rate of annual increase, “PERA may be better able to meet its fiduciary responsibility to ensure all members will receive their earned pension benefit both in the short and long term.”
The report notes that while the economy has stabilized since the 2008 recession and many public pension plans have maintained or improved their funding rates, “relatively stable economic conditions are not guaranteed to prevail.” However, these variable funding structures may help pension plans in responding to shifting conditions.