recent paper from the National Association of State Retirement Administrators, In-Depth: Risk Sharing in
Public Retirement Plans, looks at how different public retirement plans have
incorporated a variety of risk-sharing features into their plan designs.
Colorado PERA is included as a case study for its use of automatic changes to
contribution rates and benefit levels.
the paper notes, a primary objective of any retirement plan is to provide
income during retirement by moving a portion of compensation from the working
to the retirement years. And while a variety of factors impact the
effectiveness of a retirement plan, a few things are especially important:
adequate contributions and investment returns, as well as predictions of
inflation and the life expectancy of plan members. There are risks – meaning
there is a chance of a financial loss compared to what is expected – with each
of these factors.
readers of PERA on the Issues will be familiar with the following formula:
or, Contributions + Investment earnings = Benefits + Expenses.
revenue a retirement plan receives must, over time, equal the cost of the
benefits and expenses the plan pays. If the assumptions underlying any of those
factors change over time – if contributions decrease or investments earn less
than expected, or if benefits or expenses grow faster than inflation – another
factor of the equation must shift or the plan gets out of balance.
bears the impact of those changes – who takes on the risk and when those
changes should occur – must be addressed. As the paper notes, “Nearly every state in recent years enacted
reforms to [their] pension plans…. As a result, although most public
employers in the U.S. have retained [Defined Benefit] plans, in many plans,
more risk has shifted from employers to employees.”
different states, cost-of-living adjustments have been reduced, employees have
been required to work longer or to a higher age, employee contributions have
been increased, and employers have paid higher costs.
paper focuses on risk sharing plans that do two things compared to traditional
Defined Benefit or defined contribution plans. First, they distribute risk
among both employees and employers. And second, they articulate who bears what
risk and how, before the loss or gain actually occurs.
Plans in which either the
employees or the employers bear all the risk may experience bad outcomes.
“Plans in which risks are strategically and optimally assigned…may be found
to be more sustainable,” the paper notes.
The paper points to the
automatic adjustment feature of Senate
Bill 200, approved in 2018, as an example of risk sharing based on the
relationship between contribution rates, which are set by the Legislature, and
the rate determined by the actuarial experience of the plan’s level of funding
(the actuarially-determined contribution, or ADC). Put simply, when the actual
rate of contributions to PERA is less than 98 percent of the ADC, the statute
requires that employer and employee contribution rates go up by up to 0.5 percent in any one year, not to exceed an
additional 2 percent total increase. Conversely,
if the rate of contributions were to reach 120 percent or more of the ADC, the
contribution rates would decrease. A direct payment to PERA from the state as
well as changes to retirees’ cost-of-living adjustments are also triggered.
The paper notes that it is
unusual for such contribution and benefit increases or decreases to be
contingent on the ratio between actual contribution levels and the ADC, and
that they are projected to eliminate PERA’s unfunded liability by 2047.
Read more about PERA’s Automatic Adjustment Provision here.
Defined benefitA mandatory retirement savings plan in which a participant’s future benefits are known or can be calculated, but contributions are subject to adjustments. Automatic adjustment provisionAn automatic change to PERA contributions (employer, employee, state direct distribution) or the Annual Increase based on funding levels.