Pension Reform: What
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Pension Reform: What ’ s Next?. September 30, 2011. 2. Today ’ s topics. Current pension reform proposal Senate Bill S.2018 Pension reforms in other states Group discussion. Current reform proposal

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Pension Reform: What ’ s Next?

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Pension reform what s next

Pension Reform: What’s Next?

September 30, 2011


Pension reform what s next

2

Today’s topics

  • Current pension reform proposal

    • Senate Bill S.2018

  • Pension reforms in other states

  • Group discussion


Pension reform what s next

Current reform proposal

S. 2018: An Act Providing for Additional Pension Reform and Benefits Modernization


Pension reform what s next

Senate Bill – S. 2018

Affecting new members after 1/1/2012:

  • Increases salary average period from 3 years to 5 years

  • Increases minimum retirement age from 55 to 60

    • Members cannot retire before age 60

    • Review by Admin. & Finance every 5 yrs for new members

  • Increases age to reach maximum age factor from 65 to 67

  • Eliminates termination retirement allowance


Pension reform what s next

Senate Bill – S. 2018

Affecting new members after 1/1/2012:

  • Reduces age factors by .15% for each year below age 67

  • For members with at least 35 years of service, reduces age factors by .125% each year


Pension reform what s next

Senate Bill – S. 2018

  • Reduces age factors*:

    Age Current Proposed Proposed

    Factor (1-34 yrs) (35+ yrs)

    67 .025 .025 .025

    65 .025 .022 .0225

    62 .022 .0175 .01875

    60 .020 .0145** .01625

    58 .018 n/a n/a

    55 .015 n/a n/a

  • * Factors subject to review by Legislature if normal retirement age for Social Security changes

    **Minimum age factor for in service death benefits would be .0145 instead of .015


Pension reform what s next

Senate Bill – S. 2018

Benefit impact for new members after 1/1/2012

Examples:

  • Regular retiree w/ 30 years at age 60:

    Current: .020 x 30 = 60% of 3-yr average

    Proposed: .0145 x 30 = 43.5% of 5-yr average

  • Regular retiree with 35 years at age 60:

    Current: .020 x 35 = 70% of 3-yr average

    Proposed: .01625 x 35 = 56.875% of 5-yr average

  • R+ retiree with 34 yrs of service at age 58:

    Current: .018 x 34 = 61.2% + 20% = 80%

    Proposed: would not be eligible to retire!


Pension reform what s next

Senate Bill – S. 2018

Affecting new members after 1/1/2012:

  • Begins the R+ 2% add-on after 23 years rather than 24:

    • Member age 60 with 30 years:

      .0145 x 30 = 43.5% + 14% = 57.5%

    • Member age 60 with 35 years:

      .01625 x 35 = 56.875% + 24% = 80%

  • Reduces contribution rate for any member with at least 35 years of creditable service

    • Rate reduced to 4% for non-R+ members

    • Rate reduced to 6% for R+ members


Pension reform what s next

Senate Bill – S. 2018

Affecting current members:

  • Beginning on 1/1/2012, charges 8.25% interest (v. 4.125%) on refund buybacks made more than one year after member returns to service.

  • Grants up to 4 years of service credit to members who retired before 9/1/2000 and had a maternity leave before 1/1/75; benefit increase on 1/1/12.

  • Increases minimum survivor benefit from $250/month to $500/month beginning 7/1/2011.

  • Members subject to forfeiture pursuant to §15, must pay back any benefits received after the date of offense for which member was convicted.


Pension reform what s next

Senate Bill – S. 2018

Affecting current members:

  • Would increase COLA base from $12,000 to $13,000

  • Would amend c. 32, §28K to allow members on a part-time or full-time leave of absence for the purpose of acting as a representative of an employee organization to receive creditable service for such leave provided the member makes the full monthly retirement contributions (previously, this provision only applied to members on a full-time leave).


Pension reform what s next

Senate Bill – S. 2018

Affecting current members:

  • Would allow a member who:

    • retired on or before May 17, 2004,

    • chose Option A or Option B, and

    • married a same sex partner before 5/17/05

      to change his or her option to Option C using the factors that were in effect on the member’s retirement date.

  • Change must be requested by 7/1/2012


Pension reform what s next

Senate Bill – S. 2018

Affecting current members who retire after 1/1/2012:

“Anti-spiking” provision #1:

  • The final salary average will exclude any increases that exceed the average of the prior two years by more than 10%...


Pension reform what s next

Senate Bill – S. 2018

Anti-spiking example - Administrator

Affecting members who retire after 1/1/2012

Average of % diff Capped

YearSalaryprior 2 yrs(10% max)Amount

09-10$120,000

10-11$125,000

11-12$135,000 $122,500 10.2%$134,750

12-13$155,000 $130,000 19% $143,000

13-14$160,000 $145,000 10.3%$159,500

Ave:$150,000 $145,750


Pension reform what s next

Senate Bill – S. 2018

Anti-spiking example - Teacher

Affecting members who retire after 1/1/2012

Average of % diff Capped

YearSalaryprior 2 yrs(10% max)Amount

09-10$70,000

10-11$72,000

11-12$80,000* $71,000 12.7%$78,100

12-13$82,500 $76,000 8.6% $82,500

13-14$89,000** $81,250 9.5% $89,000

Ave:$84,667 $83,200

* 3% raise + $4,000 stipend + extra $2,000 longevity

** 3% raise + stipend, longevity + lane change (Masters + 60)

Based on exemptions, the cap may not apply….


Pension reform what s next

Senate Bill – S. 2018

Affecting current members who retire after 1/1/2012:

  • Anti-spiking provision – exemptions

    Does not apply to increases resulting from…

    • an increase in hours of employment

    • a bona fide change in position, excluding a modification in the salary or salary schedule negotiated for bargaining unit members under chapter 150E

    • the performance of additional services as described in c. 32, § 1.

  • Anti-spiking provision – retirement contributions

    • Any retirement contributions withheld on capped compensation will be refunded to the member with interest at the actuarial assumed rate (8.25%)


Pension reform what s next

Senate Bill – S. 2018

Affecting current members who retire after 1/1/2012:

  • “Anti-spiking” provision #2:

    • If the difference in annual regular compensation between any 2 consecutive years of the last 5 years of creditable service exceeds 100%, the retirement allowance will be based on the average of the last 5 years (instead of the last 3)


Pension reform what s next

Senate Bill – S. 2018

  • Would require PERAC to develop regulations regarding the maximum earnings for post-retirement employment; goal appears to be to increase current limit by $15,000.


Pension reform what s next

Pension Reform

Pension Reforms in

Other States


Pension reform what s next

Pension reforms passed nationally since 2010:

  • 39 states have adopted changes; mores states contemplating reforms

  • Intent of reforms were to Restore/Preserve sustainability of plans

  • Massachusetts reforms are to modernize and preserve plan sustainability


Pension reform what s next

Types of pension reforms passed nationally:

  • Final Average Salary

    • Most changes increased FAS from 3 to 5 years; at least one increased from 1 year to 3 years; one from 5 to 8 years

  • Vesting Requirements

    • Most changes increased from 5 to 10 yrs.

  • Employee Contributions

    • Most of the changes were in non-Social Security states and increased from .5% to 5%

  • Age and Service Requirements

    • Most changes increased the age at retirement; reduced actuarial factors


Pension reform what s next

Types of pension reforms passed nationally:

  • Service Purchases

    • Changes either increased the employee cost; eliminated certain types of purchases or capped the number of years purchased;

  • COLA Benefits

    • Most changes reduced COLA benefits or tied COLA changes to funded status or investment rate of return. When COLA’s were reduced they were reduced to a level that is more advantageous than Massachusetts COLA policy

  • Re-employment after retirement

    • Require employers to make a contribution to retirement fund; limit earnings in retirement


Pension reform what s next

Employee and Employer Groups affected by the changes:

  • Depending on state and type of change, the reforms were applicable to:

    • New members only;

    • Active and retired members;

    • Active members who had yet to vest;

    • Active members who were less than 5 years away from retirement;

    • Some of the changes were applied incrementally;

    • Some states tied their reforms, or retraction of the reforms to:

      • the funded status of the plan, or the investment rate of return of the system

    • Massachusetts proposed changes affect both active and retired members


Pension reform what s next

2

Group discussion


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