Keith Brainard, research director for the National Association of State Retirement Administrators, said much is made about the funding levels of public pensions and their relation to the overall health of those plans.
“Underfunded is a matter of degree, not kind,” Brainard said. “The fact that a plan is underfunded is not in itself problematic.”
He said there are several other key factors in determining whether a pension plan is healthy. One key factor is the demographics of the plan.
Thirty years ago, many plans were underfunded, but had a larger ratio of contributing participants than retirees, he said, so underfunding wasn’t a problem.
“If you’re significantly underfunded and you’ve got more retirees than you have active plan participants, chances are you’ve got a pretty big problem,” Brainard said.
Another key factor, he said, is the required current and future contribution rates. “In my view, the failure to make required contributions, especially chronically, is the leading cause of underfunded pension plans,” he said.
Other factors indicating the health of a public pension plan, according to Brainard, include:
Length of the funding amortization period;
- Reasonableness of actuarial assumptions;
- Sustainability of plan design;
- Governance structure;
- Fiscal health of plan sponsor; and
- Commitment of the plan sponsor to continue to fund the plan.
Read more about public pensions and actions states are taking in the January 2009 State News magazine.