Puerto Rico’s Pension System: Knocking on Heaven’s Door
Published on May 30, 2010
The Employees Retirement System of the Commonwealth of Puerto Rico (the “ERS”) is a trust created by Act 447 of May 15, 1951 to provide pension and other benefits to retired employees of the government of Puerto Rico and its instrumentalities. According to the Management’s Discussion and Analysis included in the ERS’s most recent financial statements, the system “since its inception lacked proper planning.”1 The problem was (and to a certain extent still is) that the level of both employer and employee contributions was relatively low and was not actuarially determined, while the level of benefits was statutorily defined and bore no relation to employee contributions or to the investment yield of the systems assets.
In 1973 the benefit structure was “enhanced” without enacting a corresponding increase in contribution levels. As government employment increased in the mid-to-late 1970s, partially in response to the general economic slowdown, the gap between the assets available to pay benefits and the actuarial obligation began to widen.
In 1990 the Puerto Rico legislature enacted Act 1 of 1990, which reduced some benefits and increased the retirement age from 55 to 65 in order to provide a more affordable structure. In addition, contribution levels were increased and Act 447 was amended to provide that any future proposals to increase benefits be supported by an actuarial analysis and include a financing source.
Notwithstanding these changes, by the year 2000 the large accrued unfunded actuarial liability of the system required further action. As a result, the defined benefit plan was closed to new plan members joining after January 1, 2000. Government employees hired after that date would participate in a defined contribution plan known as System 2000, which is funded solely from employee contributions. Under System 2000 employer contributions continue at the same level but are applied to partially fund the accrued actuarial liability of the defined benefit plan that was closed in 2000.
Therefore, the ERS currently consists of three different benefit structures that are administered pursuant to their respective statutory requirements.