09282010 VRS COMPARISON~
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Overview
Comparison of Virginia Retirement System To
A Defined Contribution System
For Emptoyee Pensions
Need for legislative request for local flexibility
Overview
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• Funding
•Unfunded Liability
• Future
• Potential Modifications
• ~enenc uesc
•JLARC Study
5. Proposed Legislative Package item -
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Importance of Retirement Benefits
oRecognition that retirement is part of
employees' quality total
compensation package
olmportant for competiveness as an
employer
oFair to Taxpayers
Mayor's Committee on Pensions
Councilman Glenn Davis
Jim Flinchum Vice Chair
_ - ---- - _ _
Managing Principal, Bay
Capital Advisors - Report Issued September 3, 2010
, Recommendation:
Flexibility to determine how to continue
Anthony Jemigan The Pinnacle Group to provide benefits in a way that is fair
to both employees and taxpayers
Hank Kim Executive Director and
Counsel for the National , Not full agreement on best direction
Conference on Public for future
Employee Retirement . Some want to maintain commitment to
Systems employees
Tom Langley President, Langley 8 • Some want to require employeeS t0
participate in Defined Contribution Plan
McDonald
Kenny Pravetz Battalion Chief, Virginia
Beach Fire Department ~
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9/28/2010
Virginia Retirement System (VRS)
AFC x 1.7% x Yrs. = Annual Pension
Most Other Neighbor States Have Higher
Income Replacement, But Employees
Contribute
Income Replaced / Employee
Contribution
54% / 5.0%
60% / 4.5% ~
59% / 5.0% 51 % / 0% ~
47% / 0% 55% / 6.0%
Source: JLARC s[aff analysis of state retirement plan documentation, 2008.
Note: Va. Beach new employees hired 7-1-f0 pay 5%.
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9/28/2010
VRS and Social Security Benefits Replace
More Than 80% of Pre-Retirement Income
100~
90
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° Security
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O 60 eero.r
Social
V 5ecunty
~ 50
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on secunry
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~ 30
Q VRS VRS
0 20
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Source: JLARC staff analysis of VRS and Social Security Administration data, 2008.
Funding VRS Benefits
o Investment earninqs - pay 68% of all benefit costs
o Employer contributions - set every two years,
based on actuarial analysis and demographics
o Employee contributions - established in statute at
5% of salary; most employers, including Virginia
Beach, pay on behalf of employee
Note: Va. Bench new employees pay 5% effective 7-1-f0
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9/28/2010
R
Virginia Beach Contributions
(Percent of Payroll)
_
; Fiscal Year
Rate li
_--- _
Fiscal Year
Rate '
!1998 11.88% 2006 15.25%
',1999 13.59% (7/1/06 -11/30/06) 17.18%~
' 2000 13.59% (12/1/06 - 6/30/07) 17.24%•
2001 13.01% (7/1/07-12/30/07) 17.24%
2002 12.50% (1/1/08 -6/30/08) 17.95%~
2003 11.00% 2009 16.48%
2004 11.00% 2010 16.48%
2005 15.25% 2011 17.58%
'Note: Enhanced benefit coverage for hazardous duty employees added for EMS employees
12/1/06. Increased multiplier to 1.85% for hazardous duty employees 1/1/O8.
Source: VRS
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Table 2
Virginia Beach Annual Contribution VRS Pension
9/28/2010
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PLAN 1
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PLAN 2
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Benefit Fonnula: ---
----- --
- ---- ----
-General Employees AFC x YRS Service x.0170 No Change
-Public Safety AFC x YRS Service x.Ol 85 No Change
(plus $12,456 annually until social security)
AFC Calculation 3 Highest Years 5 Highest Years
Unreduced
Retirement: 50 Years Old/30 years Service Age and Service = 90
-General Employees 50 Years Old/25 Years Service No Change
-Public Safety
COLA First 3% of CPl First 2% of CPI
+ Next 4% of CPI x 0.5 + Next 8% of CPI x0.5
Cap of 5% Cap of 6%
Local Employee Currently 5% paid by City
Contribution No option to change Optional 0-5%
"as set forth in #H871P9 and H870 (BUDGET) (State Budgel (H830) Aoas not ini~ose employee coMribution on current
statr Am~.lcyc~o..~. d~ot m[I~~ir~~ 59~ conirihution tor now Slat~ en~~,I~Vi~«)
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Selected VRS Information for
Virginia Beach
o Current VRS rate paid by City: ~~.ss°~o of payroii: $so.sm
. Sworn Officers 23.19% of payroll
~ General Employees 14.53% of payroll
o Actuarial study projects rates will increase 1.5%
more in FY13 to total of 19.13%
o City of Virginia Beach VRS has an unfunded liability
of $275.1 million at June 30, 2009, or 80% funded
(most recent data, based on 2008 data)
o In 2002 unfunded liability was $23 million or 97%
funded
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Unfunded Liabilities at
June 30, 2009
o VRS stafe employees:$2.9 Billion
o Teachers (entire state): $8.1 Billion 84% funded
o Total local employees in VRS: $2.2 Billion
o The City of Virginia Beach: $275.1 Million, or 80%
funded
o Caused by investment perFormance and actuarial
assumptions different than actual
Virginia Retirement System
Investment Performance Summary
As of June 30, 2010
10 Year 3.1 %
5 Yea r 3.1 %
3 Year -4.9%
1 Year 14.1 %
Quarter -4.0%
Month -0.8%
Fiscal YTD 14.1%
Calendar YTD -0.5%
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9/28/2010
Defined Benefit (DB) Plans More
Cost Effective
o DB less expensive than DC for same level of benefit
^ Longevity risk pooling in DB saves 12%
^ Maintenance of portfolio diversification saves 5%
^ DB superior return save 26%
o Study by AON consulting
o"No one can dispute that public pension plans have
efficiently and prudently discharged their responsibilities
to provide stable and secure income streams - a record
that DC is unlikely to achieve" - Girard Miller
Defined Contribution (DC) Plans
o No implicit or explicit guarantee of retirement income
o Employers (and usually employees) contribute to
plan over career
oAmount of funds in account to meet retirement
needs depends on:
1. amount of "ER'' and °EE~' contributions
2. investment returns
3. lifespan
4. individual investment portfolio management
o Employee bears investment risk
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Advantages and Disadvantages of Defined
Benefit and Defined Contribution Plans
Advantages:
/ Employees are guaranteed specific
benefit for life at time of retirement
/ Benefit amount is formula driven
including years of service and salary
/ Rewards long term employees
/ More cost effective than DC plans to
provide the same level of benefit
Disadvantages:
o Employer responsible to ensure system
has sufficient funds
o Requires actuarial projections
o Difficult to include in budget projections ~
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Advantages:
/ Employees and employer contribute a~
~ specific amount each period
I/ Employee is responsible for investment
decisions
/ Tends to be more portable
/ Generally has shorter vesting period
/ Easier to administer
/ Easy to include in budget projections
Disadvantages:
o Employee is not guaranteed specific
amount at retirement
o Less cost effective than DB plans to
provide the same level of benefit
Proposed Legislative Package Item
oAmend Code of Virginia to enable Virginia
localities to:
oDevelop a defined contribution plan instead
of the current VRS defined benefit plan for
new employees
^ At new employee's option
^Full portability
oOption: allow Virginia Beach to be able to
develop its own DC plan as a model for the
state