CalPERS Highlights Hybrid Pension Plans
(January 17, 2012) — The California Public Employees’ Retirement System (CalPERS) has highlighted the National Association of State Retirement Administrators (NASRA)’s brief on hybrid plans maintained by state retirement systems.
“Findings from the brief maintain that diversity in plan designs are critical because a one-size-fits-all solution for public retirement systems may not meet different states’ human resource needs, fiscal conditions and frameworks,” CalPERS wrote on its website. Additionally, according to NASRA’s initial brief, critical elements of public pension plan design known to promote retirement security include: mandatory participation, shared financing, pooled investments, benefit adequacy, and lifetime benefit payouts.
CalPERS said: “These features are a proven means of delivering income security in retirement, retaining qualified workers who perform essential public services, and providing an important source of economic stability to every city, town, and state across the country.”
In November, NASRA issued the brief noting that hybrid plan designs have been receiving increased attention as states find that closing a traditional defined benefit pension plan to new employees could increase—rather than reduce—costs, and that providing only a 401(k)-type plan does not meet retirement security, human resource, or fiscal needs.
NASRA’s brief examined two types of hybrid plans in use in the public sector:
1) A cash balance plan, which marries elements of traditional pensions and individual accounts into a single plan
2) A combination of a smaller traditional defined benefit (DB) pension with an individual defined contribution (DC) retirement savings account, referred to as a “DB+DC plan”
An example of the demise of defined benefit pension plans — perhaps portraying the future demand for a hybrid approach — came earlier this month when Shell revealed that it would launch a defined contribution scheme for new hires.
Shell, which offered one of the remaining open DB schemes on the FTSE100, cited ‘falling in line with ‘market trends’.
The statement, which was issued in December, said: “The Company announced today that it is proposing to develop a UK defined contribution pension plan for new hires to Shell to reflect market trends in the UK.”
The statement continued: “Active members of the Shell Contributory Pension Fund (SCPF) and the Shell Overseas Contributory Pension Fund (SOCPF) will continue to accrue pension benefits within those plans on the same basis as now. The Company has confirmed that its commitment to funding the SCPF and SOCPF remains unchanged. Further details of the proposed pension plan for new hires will be made available as the design is progressed.”
Increased longevity, poor investment returns, and a reluctance to shoulder the risk of holding onto DB pension schemes has meant the number of this type of fund has shrunk over the last decade in the UK and around the world.