Public Defined Benefit Pension Research Articles

Solvency and performance persistence of defined benefit private and public pension plans

PurposeThis study aims to examine the solvency and performance persistence of defined benefit private and public pension plans (DBPPs) in the Republic of Congo.Design/methodology/approachThe authors use the 2 × 2 contingency table approach and the time product ratio (TPR)-based cross-product ratio (CPR) on data covering ten years from 2011 to 2020, with variable funded ratios and excess returns, to determine the solvency and performance persistence of defined benefit pension plans.FindingsThe authors document a lack of solvency and performance persistence in DBPP funds. They conclude that the solvency and performance of DBPP funds are not repetitive. The previous year's private and public defined benefit pension funds’ results do not repeat in the current year. Hence, the current solvency and performance of defined benefit pension funds are not good predictors of future funds' solvency and performance.Originality/valueTo the best of the authors’ knowledge, this study is the first to combine solvency and performance to examine the persistence of defined benefit pension plans in sub-Saharan Africa.

The association between public pension fund characteristics and pension accounting choices

PurposeThe choice of accounting methods is critical in measuring the performance and sustainability of a public defined benefit pension (DBP) plan, and such measurement has an impact on the effectiveness of the entire pension system. Prior literature rarely discusses the choice and rationale of the accounting assumptions for public DBP plans. This study fills the gap by investigating whether crucial plan characteristics, including operational performance, financial health, sponsor fiscal stress, and audit quality, are associated with the accounting assumptions of public DBP plans.Design/methodology/approachThe sample includes 1,170 plan-years from the intersection of the Center for Retirement Research and public DBPs' annual financial reports for the years 2001–2013. This study develops regression models to examine the relationship between the characteristics of public DBP practices and DBP accounting choices.FindingsThe empirical results show that the public DBPs that have better investment performance, higher funding status, less fiscal stress, and that are audited by Big 4 accounting firms are more likely to adopt conservative accounting choices.Originality/valueThe study documents the impact of crucial pension plan characteristics on public DBP managers' accounting choices, which were not extensively discussed in pension literature. The findings help us understand the rationale for employing different accounting treatments in the context of public pension fund practices. In addition, the study sheds light on policy implications for the future reform of public pension regulations.

The impact of pension governance practices on the public defined benefit pension performance

PurposeThe purpose of this paper is to investigate the impact of the public pension governance practices on the public defined benefit pension (DBP) fund performance.Design/methodology/approachTo provide a holistic evaluation of public DBP performance, this study first employs the Data Envelopment Analysis (DEA) approach to construct a relative performance measure that simultaneously takes into account the association between investment inputs and performance outputs across DBPs in our sample. A DEA regression model is then constructed to empirically examine the impact of pension governance on public DBP performance.FindingsUsing 1,544 hand-collected observations in the USA from 2002 to 2013, the findings show that the public DBP plans with a small board, appointed board trustees, and a separate investment council exhibit better performance.Practical implicationsThe effectiveness of pension governance has increasingly drawn public attention, as it affects the performance of the public DBP plans that especially matter to public employees. The empirical findings of this research offer insights into recent calls to reexamine public DBP management practices and to carry out related public pension fund policy reforms.Originality/valueThe examination of public DBP governance practices in this study enriches the governance literature, particularly research on public pension funds, by using public sector data. Second, by applying the DEA method to evaluate the relative performance of public DBP funds, this study obtains a more comprehensive analysis of the public pension governance.

Investment-Based Transition Costs Associated with Closing a Public Defined Benefit Pension Plan

Defined benefit retirement plans for state and local government employees are underfunded in most jurisdictions. Policymakers and analysts have proposed closing these traditional pensions and enrolling public-sector workers in defined contribution plans similar to 401(k) retirement plans. One objection to such a change is that once a pension plan is closed to new entrants it must adopt a more conservative, lower-yielding investment portfolio that will require higher taxpayer contributions. These higher contributions are referred to as transition costs and increase the cost of pension reforms. I analyze optimal investment portfolios for open and closed pension plans, showing that portfolio allocations differ only slightly and that these differences appear only over long periods. Thus, the actual transition costs associated with pension reforms are likely to be far smaller than has been claimed.

An analysis of risk-taking behavior for public defined benefit pension plans

This paper presents the first comprehensive study on the determinants of public pension fund investment risk and reports several new important findings. Unlike private pension plans, public funds undertake more risk if they are underfunded and have lower investment returns in the previous years, consistent with the risk transfer hypothesis. Furthermore, pension funds in states facing fiscal constraints allocate more assets to equity and have higher betas. There also appears to be a herding effect in that CalPERS equity allocation or beta is mimicked by other pension funds. Finally, our results suggest that government accounting standards strongly affect pension fund risk, as higher return assumptions (used to discount pension liabilities) are associated with higher equity allocation and portfolio beta.

Several popular and academic pieces of late have expressed concerns regarding the sustainability of public defined benefit pension funds. Since the onset of the Great Recession, concern has increased. In this paper recent arguments are analyzed in the context of three related data sets: panel data on public sector pensions spanning 2001-2009, historic asset return data, and business cycle data.

Several popular and academic pieces of late have expressed concerns regarding the sustainability of public defined benefit pension funds. Since the onset of the Great Recession, concern has increased. In this paper recent arguments are analyzed in the context of three related data sets: panel data on public sector pensions spanning 2001-2009, historic asset return data, and business cycle data. Findings generally indicate that while public sector plans have suffered a difficult decade, current anxieties may be somewhat overwrought. Several remedial policies are investigated. Remedial policies, such as improving plan administration, altering portfolio allocations, and increasing both employee and employer contributions, are observed to be more promising than either freezing or closing the funds.

Deferred Compensation for K-12 Public Defined Benefit Pension Plans: An Empirical Analysis for Five State Plans

State K-12 education defined benefit (DB) retirement plans have received renewed attention for severe under funding problems. Less attention has been given to the benefit side of plans that often incorporate behavioral incentives contributing to under funding problems. To extend understanding of deferred compensation in K-12 pension plans, this study uses a unique dataset of retiree characteristics and salary histories to analyze deferred compensation in a selected sample of K-12 pension plans. Results indicate sizable levels of deferred compensation for each plan using five alternative measures of deferred compensation, with substantial differences across plans, job classes, and age groups. Our results contradict the assertion that large pension values are largely the result of large employee/employer contributions, with the largest pension values for plans with the lowest historical funding levels. We also find that reduced benefits for early retirement provided an even larger incentive for younger retirement than full, unreduced benefits.

Deferred compensation for career employees in public defined benefit pension plans: evidence from Colorado PERA

SUMMARYWith significant under funding of public defined benefit pension plans, public debate often focuses on funding problems, neglecting benefit-side factors that contribute to under funding. In this study we examine the benefit side by calculating the value of deferred compensation, using a unique dataset of salary histories for recent university retirees covered by the Colorado Public Employees Retirement Association plan. We find sizable levels of deferred compensation that is associated with retirement age and period, job class, service years, and to some extent gender, with administrators receiving the highest levels. We also find wage–earning profiles to underestimate salary growth for higher-paid employees.

Implicit Compensation for Career Employees in Public Defined Benefit Pension Plans: The Colorado PERA Case

We report on implicit compensation provided by the Colorado Public Employees Retirement Association plan using a unique data set of salary histories of recent university retirees. Implicit compensation is the difference between the expected present discounted value of retirement benefits and retirement account balances. Our results indicate sizable implicit compensation across four measures with strong evidence of significant relations on job class, retirement age, retirement period, and service years and some evidence of a gender effect. The results provide a historical baseline that should be useful in the design of compensation models with more realistic estimates of implcit retirement compensation.

The Economic Function of Underfunded Pension Plans

The Economic Function of Underfunded Pension Plans