Pension Study Consultants Have History Defending Expensive Pension Plans

The company the Michigan Legislature choose to do an independent study on teacher pension costs concluded previously that closing defined benefit pensions plans is a bad idea.

That's what the Segal Co. said in a study about the Nevada public employee retirement system.

"While many find the stable cost structure of a defined contribution plan attractive, the closure of a defined benefit plan to new members would make the cost of the defined benefit plan increase significantly," the company wrote in its report for Nevada.

Legislators passed a teacher pension reform bill this summer that kept the defined benefit system in place but required a study be done on switching to a defined-contribution 401(k)-style system that more closely mirrors the private sector. 

Michigan's teacher pension program is underfunded by more than $22 billion.

Sen. Phil Pavlov, R-St Clair, chairman of the Senate Education Committee who wants to close the defined benefit pension plan, said he's still looking forward to seeing the results of the Segal study, which is due Nov. 15.

"I'll be very interested in what they say in the study," Sen. Pavlov said. "I hope it isn't a study that's based on any foregone conclusions. If that is the case, we will have wasted the $140,000 the taxpayers are paying to have the study done."

Senate Bill 1040 was the legislation in question. Sen. Pavlov and Sen. Mark Jansen, R- Grand Rapids, championed a version of the bill that would have switched all teachers into defined contribution plans. House Appropriations Chair Chuck Moss, R-Birmingham, and the administration of Gov. Rick Snyder disagreed. They said the switch would be too expensive for the state to immediately make the change.

This argument is based on so-called "transition costs." Pension funds often switch assumptions about how government will pay for the unfunded liabilities of a system. Typically, this accounting change suggests that once the old plan has been closed, government would pay down these liabilities with more cash up front.

However, those who favor closing the system point out that these costs aren't really due to the transition. Regardless of when the change takes place, the cost of the current underfunded plan will have to be addressed.

"Basically the discussions we've had were divided along philosophical lines," Sen. Pavlov said. "Our position was that once we change to a defined contribution system nobody is left on the hook for the costs going forward."

Making the change forces officials to address the gap between the inadequate funding and actual costs. Delaying the change simply allows officials to delay the day when the costs must be addressed. As long as the current defined benefit system is open to new members the underfunded liabilities continue to increase.

Segal was one of three consulting firms that submitted bids to do the study.