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Pension Reform: What ’ s Next?

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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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Presentation Transcript
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Today’s topics

  • Current pension reform proposal
    • Senate Bill S.2018
  • Pension reforms in other states
  • Group discussion
slide3
Current reform proposal

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

slide4
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
slide5
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
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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

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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!

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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
slide9
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.
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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).
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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
slide12
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%...
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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

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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….

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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%)
slide16
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)
slide17
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.
slide18
Pension Reform

Pension Reforms in

Other States

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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
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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
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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
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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
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2

Group discussion

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