Today, the Illinois Supreme Court struck down pension reform law as unconstitutional. The December 2013 law was designed to lift retirement age, cap pensionable salaries, and reduce cost-of-living increases. On the surface this will be viewed as a victory for the DB participants, but is it truly? The law’s intent was to help municipalities manage more appropriately contributions into the system. Through this appeal process “victory”, I fear that Illinois public systems will come under greater scrutiny, likely leading to more pressure to freeze or terminate DB plans for both existing and future employees. Instead of helping to secure a longer life for DB plans, which we feel is an absolute necessity, this court action may be the death knell.
Any movement to reduce participation in DB plans, while forcing future employees into DC-like programs, will further exacerbate a retirement crisis that is quickly unfolding in the US. We’ve discussed at great length the pitfalls of an employee-lead retirement program, so we won’t cover that here, but would encourage you to go to the KCS website at http://www.kampconsultingsolutions.com to view the many articles in our Fireside Chat series.
Lastly, if a DB system is not likely to be sustained, we would encourage both plan sponsors and board trustees to explore the benefits of alternative DB-like structures (hybrids), including Double DB, a fixed-cost retirement plan design, before migrating your employees to a DC plan. Asking an untrained employee to manage a very difficult assignment is just not fair, and the financial outcome will likely fall far short from what the participant would have experienced if they’d remained in a DB plan with a monthly annuity feature.