HomeMy WebLinkAbout03. Presentation by Bartel on Defined Benefit v. Defined Contribution PlansIn
S.
WAWL
CENTRAL COSTA COUNTY SANITATION DISTRICT
Pension Issues
Presented by John E. Bartel, President
Bartel Associates, LLC
April 2, 2014
Topic
Agenda
CCCERA Compared to CalPERS I
Is one system safer, cheaper, etc. than the other?
Defined Benefit versus Defined Contribution 3
Major risks for each?
Who assumes risk?
Cost if target benefit at retirement is the same?
Benefit at retirement if cost (annual contribution) is the same?
Bbl
�snmral came cons aniurY duinsiyxnjecul20lJ bacm�nlun 4.04 -02dwx
CCCERA COMPARED TO CALPERS
• Cost for any retirement system
Contributions = Benefit Payments I Expenses -- Investment Return
• Contribution policy can result in short teen volatility
• Ultimately, if benefits are the same then Investment Return Expenses
drives plan cost
(B
April 2, 2014
CCCERA COMPARED TO CALPERS
Investment Return (Net of Expenses)
a S
=q
I 30 0° o
20.0 °o
10.0%
0.0 °/0
•_ -•-
- TCp�- T- _._Tp'
-_'T _Tpp
N rn
8 O
O C O O
O O
S O O S a 0G
8
= N N ` l'• N N N
\ N
\ N N N N N
O O O O O O O C
1 N N N N N N ry Q.
-10.0%
N I'D N N
-
.`ry-� r-4
-
- 20.0%
CaIPERS (6r30)
- 30.0%
— - - - - -
-
- -- - --
-
\l Apnl 2, 2014
Z
'
DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION
Defined Contribution Defined Benefit
-- -- P)A" Pl #n
Nature of Promise
% of base pay each year Annuity, beginning at
into employee's account. retirement, payable for as
long as employee lives.
Retirement Benefit
Level
Whatever account Benefit Formula
balance at retirement can % of Final Average
provide Compensation based on
agency service and
benefit factor
(B')April 2, 2014
3
cCS-
DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION
Defined Contribution ! DefinpA Bedofit
Plan
Contribution Level
Can vary from year to Employee
year
Can vary from year to
year
Employee
Contributions
Always 100%
Employer
Contributions
Typically 100% after 5 or
10 years.
BApril 2, 2014
Employer
V
(How much of the
promise does employee
"own " ?)
4
Plan
Usually set by statute but
can be negotiated
Varies from one year to
the next — "Whatever is
Necessarv"
Employee
Contributions
Always 100%
Retirement Benefit i
Typically 100% after 5 or] '
10 years.
DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION
Defined Contribution
Defined Benefit
pan
_�—
)"
Defined Co4trlbutib,6 ; i
Death
Defined Benefit
retirement, except j
;Yan
employer contributions
Plad
become 100% vested at
Post - retirement —
Portability-
Employee can elect
Very Portable
Retirement
1
Generally Very Portable
Employee takes vested
Employee chooses
Who Accepts
_
account balance with
between
Employee
them when leaving.
Investment Return
1. deferred retirement
Employee
Significant tax
Employer
benefit (benefit earned
Retirement
disadvantage for amounts
while at City, protected
Inflation
distributed and not
by "salary" inflation if
"rolled over" < age 59%2.
working for most CA
public agencies) or
2. accumulated employee
contributions with
interest
A' April 2, 2014
5
DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION
r@ CKS P .
1 (B')April 2, 2014
6
ACC
Defined Contribution
Defined Benefit
pan
_�—
)"
Pre - retirement - Same as
Death
Pre - retirement —
retirement, except j
Employee contribution
employer contributions
with interest
become 100% vested at
Post - retirement —
death
Employee can elect
lower benefit to
provide survivor
continuance
Who Accepts
_
_
Risk & Reward
Employee
Investment Return
Employer
Employee
Mortality
Employer
Employee
Retirement
Employer
Employee
Inflation
Employer
1 (B')April 2, 2014
6
ACC
DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION
■ Studies consistently show defined contribution plans earn 1 to 2 percentage
points less (net of expenses) than defined benefit plans
• DC plan investments tend to be more conservative
• DC plan expenses tend to be higher as a percentage of assets
■ For individual to be certain they get benefit for life they must:
• buy an annuity
• accumulate more than is necessary on average or
• run the risk of outliving balance
BA, April 2, 2014
PFCD-cs
COST IF TARGET BENEFIT AT RETIREMENT IS THE SAME
- -�
■ If target is to replace 60% of earnings at age 65 retirement
• DB plan does this with 13% of pay (7% assumed earnings)
• DC plan does this with 18% of pay (6% assumed earnings)
• DC plan does this with 21% of pay (5% assumed earnings)
B/I April 2, 2014
8
V 'I
7AC S
BENEFIT AT RETIREMENT IF CONTRIBUTION IS THE SAME
■ If contribution each year is 10% of earnings the benefit for age 65 retirement
• DB plan gets to 50% of pay replacement (7% assumed earnings)
• DC plan gets to 35% of pay replacement (7% assumed earnings)
• DC plan gets to 30% of pay replacement (7% assumed earnings)
BAApnl 2, 2014 9