Rockefeller Researchers Release Public Pension Risk-Sharing Guidebook for Policymakers
ALBANY, N.Y. (January 27, 2021) — The Project on State and Local Government Finance (SLGF) at the Center for Policy Research (CPR), located at the University at Albany’s Rockefeller College of Public Affairs and Policy, has released a new guidebook and series of fact sheets to help public pension policymakers evaluate and manage risks. The guidebook, entitled “Public Pension Risk-Sharing Policies: A Policymaker’s Guidebook,” will serve as a valuable tool for policymakers.
Public pension plans across the country face many risks, including investment risk, longevity risk, and inflation risk. In traditional defined-benefit (DB) pension plans that are widely used in U.S. state and local governments, the governments assume most of these risks. On the other hand, in traditional defined-contribution (DC) plans, employees bear most of these risks. Risk-sharing policies — such as contingent cost-of-living adjustments (COLAs), contingent employee contributions, hybrid DB-DC plans, and conditional indexation policies — can allow governments to share these risks with plan members and increase the long-term sustainability of public pensions.
The guidebook, funded by Arnold Ventures, is based on a research project conducted by Rockefeller College’s Donald J. Boyd, Gang Chen, and Yimeng Yin. The three have extensive experience analyzing government finances and risks in public pension systems. In this project, they examine how risk-sharing policies affect governments and pension plan members. The guidebook raises eight questions for policymakers to consider when they introduce risk-sharing policies into their pension systems.
- What are the primary risks for pension systems to share?
- What are the possible ways to share risks?
- How will risk-sharing policy design choices determine who will be affected and how?
- What is the goal of risk sharing? Is it risk reduction, cost reduction, or both?
- How much can governments expect to save if risk-sharing policies are adopted?
- How would pension benefits and member contributions be affected by risk-sharing policies?
- What kinds of risk-sharing policies are allowed in your pension system?
- Are there win-win possibilities for governments and plan members?
“Risk-sharing policies are used by many state and local pension systems in the United States and internationally. This guidebook provides an overview of risk-sharing options and their potential impacts on the costs, benefits, and risks of pension plans,” stated Chen.
“We have raised and answered many policy design questions in this research,” said Boyd. “Our guidebook, along with the fact sheets, will help policymakers in state and local governments navigate complex pension policy issues and make better-informed choices.”
Yin, a researcher at the Center for Policy Research, designs and maintains the simulation model used for the analysis in the guidebook. He notes that results from the simulations help illustrate the tradeoffs between reducing contribution costs for governments and taxpayers, and protecting workers and retirees from the risk of lower benefits.
The Project on State and Local Government Finance (SLGF) is dedicated to conducting research on fiscal issues in state and local governments in the United States. Its central mission is to produce objective, rigorous, and in-depth analysis to inform and educate policy makers and stakeholders of state and local governments, to help them make better financial management decisions.
Click the links below to view the full Public Pension Risk-Sharing Guidebook and Fact Sheets.
- The Guidebook
- Fact Sheet #1: Overview of risk-sharing policies
- Fact Sheet #2: Contingent COLAs
- Fact Sheet #3: Contingent employee contributions
- Fact Sheet #4: DB-DC hybrid
- Fact Sheet #5: Conditional indexation
- Fact Sheet #6: The South Dakota Retirement System approach
- Fact Sheet #7: Cost reduction and risk reduction