The Maine Public Employees Retirement System had a dilemma.
In 2016, the MainePERS cost-sharing plan for about 300 local municipalities was 86 percent funded after two consecutive years of 1.5 percent returns on its assets. Sandy Matheson, the system’s executive director, worried what would happen if returns stayed well below the 6.875 percent assumed rate of return for several years.
Asking participating employers to contribute escalating amounts to make up the shortfall or arbitrarily cutting benefits for participants was not an option. Instead, the system asked Cheiron to stress test a range of likely scenarios.
As a result, MainePERS, with the help of Cheiron, created a defined benefit plan model in which employers, employees, and retirees share the investment risk. The arrangement sets annual minimum contributions and variable contribution caps—up to 12.5 percent for employers and 9 percent for employees.
If the plan suffers investment losses that would require higher contributions than the caps, the system will reduce the future cost of living adjustments over time until the shortfall is made up. However, those changes in COLAs can be reduced or eliminated if the plan subsequently earns more than it expects.
MainePERS also reduced its investment risk by lowering the system’s discount rate to 6.75 percent in July 2018. That’s among the lowest for any state retirement system.
MainePERS and Cheiron won a Society of Actuaries award for their paper describing the creative pension plan design.
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