South Carolina's pension plans, and more specifically the need for funding to maintain these plans, appears in the news periodically. The concepts below can help city officials and the public make sense of this complex issue.
Defined benefit plan, defined contribution plan
The state's pensions are known as defined benefit plans. When eligible participants retire through service credit or because of disability, they can receive a monthly retirement benefit payment for life. This is unlike defined contribution plans like 401(k)s, in which the amount of money accumulated in the account represents the entire benefit the plan will provide the retiree. Funding for defined benefit plans comes from monthly contributions from the employee and employer, as well as investment income.
Defined benefit plans were once common, but these plans have become increasingly rare. The value and security that a pension offers can be a powerful recruitment tool for employers who have them.
South Carolina Retirement System
With nearly 200,000 active, contributing members and more than 140,000 retirees and others receiving benefits, the South Carolina Retirement System is the largest pension plan operated by the SC Public Employee Benefit Authority.
The system is open to employees of state agencies, colleges and universities, public school districts, and is open to many municipal and county elected officials and employees.
South Carolina's Retirement System Investment Commission manages the investment of assets for this and the other state pension plans.
Police Officers Retirement System
The Police Officers Retirement System has more than 27,000 contributing members and nearly 18,000 people receiving monthly benefits. Its name reflects the employee group it first served, but it has other types of public employees participating as well, like firefighters and magistrates.
PORS has contribution rates and retirement eligibility rules that differ from SCRS, and local governments can choose to join the system.
Pension plans maintain funds intended to pay their obligations to retirees and other beneficiaries. The amount the plan will need to eventually pay participants can grow to be greater than the amount currently available. The difference is known as the unfunded liability, and it is often used as a measure of a plan's sustainability.
As an example, SCRS had an actuarial liability, or amount expected to be paid in future benefits, of approximately $48 billion as of July 1, 2017. It had an actuarial value of assets of $27 billion. This leaves an unfunded actuarial liability of $21 billion as of that date. The unfunded liability of South Carolina's plan is the result of investment underperformance, the granting of unfunded benefits like the Teacher and Employee Retention Incentive program, and cost-of-living adjustments, according to the SC Public Employee Benefit Authority.
Pension plans in many states have sought to find ways to reduce their unfunded liabilities in recent years, especially since the Great Recession. In 2012 and in 2017, the SC General Assembly enacted legislation designed to improve funding and shrink the unfunded liability. The legislation changed both the funding process and the benefits available to employees hired after July 1, 2012. Further changes could occur, but the obligation to pay benefits which have previously accumulated remains set in the state's constitution and in the South Carolina Code of Laws.