Workers are shouldering more pension risk than ever

Traditional defined benefit pensions — once the cornerstone of retirement security — have largely vanished from the workplace as employers moved the responsibility for saving and investing onto workers. New research 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 now share 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.

Risk-sharing features began to take hold in pension plans after steep funding declines following the financial crisis, with state and local politics further accelerating the shift away from traditional pensions, researchers found.

In 2007, just 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. 

That shift has continued to accelerate in recent years. 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, that 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 an alternative plan design, the exact method of risk sharing can vary significantly.

A plurality of plans use what researchers refer to as COLA-based risk sharing that adjusts annual cost-of-living increases 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, that means some plans pay COLAs only from “excess return” accounts when investments exceed targets, while more recently, others tie annual COLA increases directly to the plan’s funded ratio, recent investment returns or both.

Another popular approach involves variable employee contributions — an arrangement wherein workers’ contributions can rise or fall based on funding needs or predefined rules, reducing the employer’s risk of covering shortfalls. In effect, this risk-sharing 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 use 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 also use individual accounts, but 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).

The fund, which serves over 500,000 members, has increasingly offloaded investment and longevity risk onto its members through the introduction of hybrid plans, stricter working time requirements and COLA reductions or freezes.

Currently, STRS members can choose between a defined benefit (DB), a defined contribution or a hybrid plan. Todd Gourno, the founder of Three Creeks Capital Management in Columbus, Ohio, and a former benefits specialist at STRS Ohio, said at least 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 for either 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 worked to increase the required number of working years for full retirement eligibility. Gourno said those changes have complicated retirement planning for his clients who are members of the teacher’s pension.

“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,” Gourno said.

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 period, pension payments remained flat even as inflation climbed by some 11%. 

And 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.

“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,” Gourno said. “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 say it’s crucial that government workers not assume they’ll be completely covered by their DB plan.

“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 said more people were having to increase their IRA distributions to make up for the income shortfall.

“We encourage people today that are not necessarily getting started, but maybe they’re midway through their career: ‘Listen, we’ve really got to get more in your 457(b), your 403(b) … your Roth IRA, because once you get to retirement, we just don’t have that same stability that we did 30 years ago in the pension system,'” Gourno said. “So that ownership, definitely that responsibility does get pushed onto them more.”