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Pension Reform: What ’ s Next?

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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  1. Pension Reform: What’s Next? September 30, 2011

  2. 2 Today’s topics • Current pension reform proposal • Senate Bill S.2018 • Pension reforms in other states • Group discussion

  3. Current reform proposal S. 2018: An Act Providing for Additional Pension Reform and Benefits Modernization

  4. 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

  5. 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

  6. 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

  7. 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!

  8. 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

  9. 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.

  10. 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).

  11. 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

  12. 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%...

  13. 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

  14. 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….

  15. 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%)

  16. 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)

  17. 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.

  18. Pension Reform Pension Reforms in Other States

  19. 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

  20. 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

  21. 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

  22. 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

  23. 2 Group discussion

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