Sharing Risk: Adjustable Pension Plans

An editorial in Governing discusses a new compromise between defined-benefit and defined-contribution pension plans that could help avert local pension fund shortfalls.  In simplest terms, conventional “defined-benefit” plans place risk on employers who must pay set benefits despite investment returns, while defined-contribution plans effectively shift that uncertainty onto the employees.  As described by the author, the adjustable pension plan divides the risk,

Adjustable pension plans (APPs) guarantee lifetime payments to employees. But unlike traditional defined-benefit systems, the size of the benefit would be adjusted based on the pension fund’s investment performance during the previous year. For employees, it means that while payments would often be less than under traditional defined-benefit plans, they would be secure.

According to the article, Maine is the first state to consider the approach, though other private-sector employers have adopted adjustable pension plans.

For more information, including a description of adjustable pension plans, see the complete article in Governing.