How Pension Plans Boost Retention in the Public Sector

Public sector organizations face a double challenge when it comes to hiring and retaining employees. First, despite significant progress in 2023, average public sector wages lagged the private sector by 27.5%. Second, today’s public sector workforce is significantly older than the private sector, which means the industry is more impacted by the “silver tsunami” as Boomer employees retire.

The resulting hiring crunch means many government, education, health care and public safety jobs often go unfilled for months at a time. For example, one in four state government jobs is open, with many described as “persistently vacant.” The competition for talent has many public sector organizations looking for differentiators beyond compensation to help attract and retain talent. A defined benefit (DB) pension plan, a traditional public sector benefit, offers one such differentiator.

The Value of DB Plans in the Public Sector

As of 2023, 86% of public sector employees had access to a DB pension plan, compared to just 15% of employees in the private sector. Defined benefit plans incent and reward long-term public sector careers with guaranteed income in retirement. The plans encourage employees to stay with their employer, with benefits and vesting determined based on years of service. In addition, when considered with compensation, DB plans help make public sector jobs more competitive — even if the short-term wages are lower.

For difficult-to-fill public safety positions, DB pension plans are a critical part of recruiting and retention. Many entities tailor their plans with a lower retirement age for public safety employees to enable workers to retire with full pension benefits at a younger age. Along with offering an appealing benefit to prospective and existing employees, lower retirement age requirements help ensure public safety employees can retire before they are physically unable to do these demanding and often dangerous jobs.

Optimizing DB Plans: 4 Considerations for Employers

As workforce dynamics and demographics shift, simply offering a DB plan may not be enough to make the benefit a recruiting and retention differentiator. In addition, employers must weigh financial implications before adding a DB plan or expanding existing plan participation and benefits.

1. Emphasize advantages that appeal to younger generation workers.

Gen Z (born 1997-2012) and Millennials (born 1981-1996) have different career goals and expectations. Younger employees are more likely to change jobs and prioritize flexibility, portability of benefits and diverse experiences. That means the traditional advantages of defined benefit pension plans that mattered most to Boomers, like long-term stability and guaranteed income in retirement, may resonate less with younger generations. Instead, employers may want to emphasize the potential for financial security and reduced investment management burdens when communicating DB pension plans to younger employees.

2. Focus on increasing financial literacy.

Don’t assume employees know what a DB pension plan is and how it works. Research reveals that 43% of Americans don’t know what a 401(k) is, and one in five employees don’t know whether they are participating in a defined benefit or defined contribution plan. To help employees appreciate the value of a DB plan, provide ongoing educational communications and tools that build increased financial literacy. When employees understand the plans, there’s a direct positive impact on recruiting and retention. Seventy-four percent of Millennials say they pursued their public sector job because the employer offered a pension, and 84% remain in the job because of the benefit.

3. Pension changes come with long-term liabilities.

Budget is the primary factor for employers considering adding or expanding DB pension benefits as part of their talent strategies. While enhancing pension benefits can help fill staffing gaps in the short term, the changes require long-term financial commitments. Even though the added pension benefits may not need to be paid out for several years, the entire liability is recognized right away from a GASB accounting perspective. For example, if long-term pension liabilities increase by $10 million, the annual accounting expense in the year the increase is adopted also increases by $10 million. Furthermore, depending on state law and the plan’s funding policy, benefit enhancements may result in increased cash contributions for a period of 20 or more years.

4. Assess the plan’s funding assumptions regularly.

Monitoring the plan’s actuarial assumptions used to value the liabilities and ensure appropriate funding levels is critical. Defined benefit plan experts can conduct experience studies that analyze economic market conditions and historical data, such as mortality rates, retirement patterns and salary increases, to provide insights to guide plan decisions and future assumptions. Regular experience studies, conducted every three to five years, also help anticipate changes in market movements and identify shifts in participant behaviors to allow plan sponsors to proactively adjust their assumptions and reduce the volatility of pension costs over time.

The public sector industry professionals at CBIZ can help you review your pension plan strategy and identify opportunities for enhancements to support recruiting and retention efforts. Connect with a member of our team and gain access to more resources.

This article includes input from Bill Karbon, Executive Vice President and Director of Compliance for the Retirement & Investment Solutions practice of CBIZ. With Bill’s actuarial and compliance knowledge and experience, he is responsible for leading his region’s actuarial practice and consulting with clients on retirement and pension solutions.