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Case Study

Groundbreaking Pension Study Proves that DB Design Is the Most Efficient Use of Taxpayer Dollars

Pension reform continues to capture the headlines in various forms such as proposed changes to plan structure, the effect of public pension debt on governments and taxpayers, the question of who should bear the risk inherent in the capital markets, and the issue of retirement security for current and future generations. Within all of the debate, the fundamental question is whether the best vehicle to provide pension benefits is through a defined benefit (DB) or a defined contribution (DC) approach. Some pension reform advocates call for the public sector to adopt changes that mirror what has been done in the private sector, which has been primarily a move to defined contribution plans.

Like many statewide systems, Colorado’s pension reform resulted in elements of both DB and DC features, but unlike many state systems, Colorado does not participate in Social Security. Despite pension reform, scrutiny regarding the plan’s fiscal efficiency remained and some stakeholders continued to ask about alternatives.

The State determined that only a comprehensive study could respond to the questions being asked. The Colorado State Auditor’s Office commissioned Gabriel, Roeder, Smith & Company to conduct this comprehensive analysis.  Ms. Leslie Thompson, FSA, EA, MAAA served as the lead consulting actuary on the study and the main author for the report.

The key elements of the study include an analysis of retirement income, a review against peer groups, and a review of what new hires would receive under a mix of both public sector and private sector plan structures. By comparing the most recent tiers of benefits under all alternative plans, the study looked at the cost for keeping the new hire benefits the same and, conversely, the benefits for keeping the cost the same. This comprehensive report fully tackles the DB versus DC comparison using generally accepted quantification techniques to move the discussion to a more data driven and independent basis. It also provides a great deal of information on the delivery of benefit adequacy to public sector employees and retirees.

In July 2015, the Auditor’s Office released the report examining Colorado PERA’s retirement plan design comparing it to alternative public and private sector retirement savings options and Social Security. The study found the current Colorado PERA hybrid design is more efficient and uses taxpayer dollars more effectively than the other types of plans in use today.

The impact of this study is clear based on comments by highly regarded industry professionals and associations.

  • In a recent communication to NCTR members , Meredith Williams, current NCTR Executive Director and former CO PERA Executive Director stated:  “Indeed, alternative plans would provide a lower retirement benefit/replacement ratio for the same cost as the current COPERA model, according to the report, and would require greater contributions in order to replace the same retirement income. As I have said before, I think this is such an important new tool in all of our member systems’ toolkits, For any plan that is facing a “reform” challenge that would replace the DB model, this report is “just invaluable” in showing how all of the other alternatives are not as efficient or cost effective,” Williams stressed.
  • CO PERA Executive Director Gregory W. Smith has stated: “This independent analysis of the Colorado PERA retirement plan design provides policymakers with sound information and comprehensive comparisons of the costs and benefits provided by alternative plans.”

Read the report.