Traditional defined benefit (DB) pensions, once the cornerstone of retirement security, have largely vanished from the workplace as employers shifted the responsibility for saving and investing onto workers. New research now shows that even the remaining pensions are evolving in the same direction.
According to the nonprofit Center for Retirement Research at Boston College, an increasing number of public-sector pension plans are now sharing investment and longevity risk between employers and employees. Roughly half of all state and local government workers are covered by plans with some form of risk-sharing design.
### The Rise of Risk-Sharing Pension Plans
Risk-sharing features began to take hold in pension plans after steep funding declines following the financial crisis. State and local politics have further accelerated the shift away from traditional pensions, researchers found.
– In 2007, only 34 of the 250 plans in the Public Plans Database had adopted some form of risk sharing.
– By 2014, that figure more than doubled to 80 plans.
– As of 2025, 108 state and local pension plans include some form of risk sharing, covering about 55% of active members, according to the Center for Retirement Research.
However, this figure may overstate the share of workers actually affected, since many plans applied the new features only to employees hired after the reforms took effect.
### How Employers Are Offloading Plan Risk
Across the 108 pension plans using alternative plan designs, the methods of risk sharing can vary significantly.
A plurality of plans use what researchers refer to as COLA-based risk sharing. This approach adjusts annual cost-of-living increases (COLAs) based on the pension’s performance and funded ratio — a measure of how much money the plan has compared to how much it owes in promised benefits.
In practice, this means:
– Some plans pay COLAs only from “excess return” accounts when investments exceed targets.
– More recently, other plans tie annual COLA increases directly to the plan’s funded ratio, recent investment returns, or both.
Another popular approach involves variable employee contributions. In this arrangement, workers’ contributions can rise or fall based on funding needs or predefined rules, reducing the employer’s risk of covering shortfalls. Effectively, this strategy cuts a worker’s take-home pay when the plan does poorly and increases it when the plan performs well.
An equal share of plans now uses a hybrid approach, combining a smaller traditional pension with a defined contribution (DC) or cash balance (CB) plan. The idea is that the pension offers a modest core income, while the DC or CB component limits the employer’s exposure to investment and longevity risks.
A small percentage of pension plans—about 4%—also use stand-alone cash balance plans. These plans use individual accounts where the employer controls how contributions are invested and guarantees a minimum return. At retirement, account balances are automatically converted into an annuity, giving retirees a steady income for life while the employer assumes the longevity risk.
### A Case Study: Ohio Teachers’ Pension
Risk-sharing strategies have become a core part of some pension plans, like Ohio’s State Teachers Retirement System (STRS), which serves over 500,000 members.
The fund has increasingly offloaded investment and longevity risk onto its members through:
– The introduction of hybrid plans,
– Stricter working time requirements,
– COLA reductions or freezes.
Currently, STRS members can choose between a defined benefit (DB), a defined contribution, or a hybrid plan.
Todd Gourno, founder of Three Creeks Capital Management in Columbus, Ohio, and a former benefits specialist at STRS Ohio, noted that some members who opted for these risk-sharing plans are seeing lower payouts in retirement compared to what they would have received through the direct benefit plan.
Only a fraction of members have elected the DC or hybrid plan, but even among those who belong to the DB plan, benefits aren’t what they used to be. Facing rising costs and worsening longevity risks, STRS Ohio has increased the required number of working years for full retirement eligibility.
Gourno explained, “It’s a big deal. We’re having to recalculate when they can actually go out and retire, mainly because they’re forced to work longer. And if they don’t, they receive a reduced benefit, and that reduction prior to their full retirement is quite large.”
Retired STRS members have also seen their benefits effectively reduced in recent years. Due to a worsening funded ratio, COLAs were frozen for more than 150,000 retired Ohio teachers for five years starting in 2017. During that time, pension payments remained flat even as inflation climbed by about 11%. Cost-of-living adjustments in the years since have done little to close that gap.
This year, STRS Ohio announced a 1.5% COLA for 2026—nearly half the adjustment that Social Security beneficiaries saw.
Gourno said, “The risk to members is that they play by the rules for 30 or 35 years, and then the rules change on them and they can’t really do anything about it. So there is more risk now on the DB side.”
### Planning in the Age of Risk-Sharing Pensions
As pension plans continue to adopt risk-sharing features, advisors emphasize the importance for government workers not to assume they’ll be completely covered by their DB plans.
“What we’re suggesting to people is they have to take more responsibility with what they’re saving, unlike they did, let’s say, 30 years ago, when teachers retired,” Gourno said. “Because what we know is, if that COLA is not stable, people are losing purchasing power.”
During the five-year COLA freeze for retired Ohio teachers, Gourno noted that more people had to increase their IRA distributions to make up for the income shortfall.
—
The landscape of public-sector pensions is shifting, making it critical for workers to understand these changes and plan accordingly for retirement security.
https://www.financial-planning.com/news/workers-are-shouldering-more-pension-risk-than-ever
