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Home My WebLink About09282010 VRS COMPARISON~ I I 9/2 ~ - ' ~, ~ ~~ ~ Overview Comparison of Virginia Retirement System To A Defined Contribution System For Emptoyee Pensions Need for legislative request for local flexibility Overview . _ .~. - . .._ .. ~ . : __. - _. - - . . -. . _ • Funding •Unfunded Liability • Future • Potential Modifications • ~enenc uesc •JLARC Study 5. Proposed Legislative Package item - ~_...~,._...~~~m~ .._..-~.;.~-,_.,._ e -~~i..~~.°~~ 1 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 ~ 9/ZS/zolo 2 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%. 6 9/28/2010 VRS and Social Security Benefits Replace More Than 80% of Pre-Retirement Income 100~ 90 ~ ° gp ~ Sociat _,,,,, ° Security v 70 n ~ O 60 eero.r Social V 5ecunty ~ 50 li after v 40 ~;a~ on secunry N ~ 30 Q VRS VRS 0 20 ~ 10 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 4 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 9 5 Table 2 Virginia Beach Annual Contribution VRS Pension 9/28/2010 ~ ,. ~ ~ ~ ~ ~ ~ ~ , ~~ ~ ~~ i ~ i PLAN 1 - - - - ~ PLAN 2 - 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~«) 11 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 $23 million or 97% funded 6 9/2$/zolo ~ 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% ,4 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 10 9/28/201 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 ~ `~ ~ 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