U.S. public sector defined benefit pension plans that have switched to a defined contribution model have experienced negative cash flows and increased costs and employee turnover, according to a new report by the National Institute on Retirement Security.

The report analyzed five public sector pension plans including those in Alaska, Michigan and West Virginia. It found the Michigan State Employees’ Retirement System, which closed its DB plan and shifted to a DC model in 1997, has become “deeply underfunded” with an unfunded actuarial liability of more than US$6.1 billion, equivalent to 69 per cent of the plan’s resources that are needed to pay future benefits.

Read: Alaska considering return to DB pension model in public sector

“All of these pension plans have experienced, or likely will experience, higher negative cash flow as a result of their closure that leads to a spend-down period,” said the report. “In some of these states, such as Michigan, where the SERS plan has been closed for more than a quarter of a century, they are having to sell assets to make benefit payments. This action makes a downturn in the markets more damaging because fewer investments are held until markets rebound.”

The shift from a DB plan to a DC plan can also negatively impact employee attraction and retention efforts. Following the closure of Alaska’s two public DB plans in 2006, the state’s Department of Public Safety reported difficulties recruiting and retaining new state troopers, noting among employees who left to work in a different state, 72 per cent cited the availability of a public pension as a reason for leaving. Alaska has since considered reopening its DB plans to incentivize public sector workers.

The report also noted the reopening of a closed DB plan can reverse negative impacts. The West Virginia Teachers Retirement System, which reopened in 2005, has since reduced its unfunded liability to $2.7 billion as of July 1, 2022, down from $4.1 billion as of July 1, 2008. During that same period, the plan’s funded status climbed from 50 per cent to 76 per cent.

Read: How the CMHC closed its DC pension and returned to a DB plan