New Brunswick’s New Shared Risk Pension Plan

Employer defined benefit pension plans have long been an important component of the U.S. retirement system. Although these plans are disappearing in the private sector – replaced by 401(k)s – they remain the prevalent retirement plan arrangement in the public sector. But these public sector defined benefit plans are currently under financial pressure, as two financial crises since the turn of the century have caused liabilities to soar and assets to plummet. The response so far among state and local plan sponsors has been to suspend or eliminate cost-of-living adjustments, cut back sharply on benefits for new employees, and raise employee contributions. Some states have also introduced a defined contribution component. While the cutbacks hav e sharply reduced future costs, they have been ad hoc and unexpected. The question is whether a more orderly and predictable way can be devised to share risks, and perhaps head off trouble in advance. The Netherlands certainly offers one model of risk s haring; this brief discusses an adaptation of the Dutch approach closer to home –namely New Brunswick’s Shared Risk Pension Plan introduced in May 2012. The discussion proceeds as follows. The first section reviews the problem of risk in employer defined benefit plans. The second section describes New Brunswick’s response – the Shared Risk design and the regulatory framework for supervising such plans. Th e third section discusses the response of union representatives of workers covered by the new program. The fourth section considers what lessons U.S. plans can draw from the New Brunswick approach. The final section concludes that the Shared Risk approa ch is an important evolutionary step, and potentially an attractive alternative to the traditional defined benefit plan design.