HomeMy WebLinkAbout05.a.1) (Handout) Presentation comparing (1) Contra Costa Employees Retirement Association (CCCERA) and California Public Employees' Retirement System (CalPERS), and (2) defined benefit plans and defined contributiC
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CENTRAL CONTRA COSTA SANITATION DISTRICT
Pension Issues
I
Presented by John E. Bartel, President
Bartel Associates, LLC
July 17, 2014
AGENDA
Topic
Summary 1
I �
CCCERA Compared to CalPERS 3
Is one system safer, cheaper, etc. than the other?
Pension Benefits 5
Ability to negotiate or change benefits 6
Defined Benefit versus Defined Contribution 9
Sample Alternative Plan Benefit Designs 16
(BA-) July 17, 2014
SUMMARY
■ CCCERA vs. Ca1PERS
• Single biggest driver of system cost is investment return
• Two systems have almost identical historical returns
• Other issues impact short or long term cash flow
• Moving from CCCERA to Ca1PERS would have noticeable staff and
consultant cost
I
I
(B
l 1 July 17, 2014 1
SUMMARY
� 1
■ Defined Benefit vs. Defined Contribution Plans
• Moving to DB or DB /DC Hybrid likely requires legislation
• Defined Benefit Plan
❑ Generally more efficient than Defined Contribution Plan
❑ Creates more volatility (risk) for District
i
❑ Requires employees accept some risk to mitigate District risk
❑ Not consistent with private sector benefits
• Defined Contribution Plan
❑ Generally less efficient than Defined Benefit Plan
❑ Results in less volatility (risk for District
❑ Consistent with private sector benefits
Jul y 17, 2014 2 .499&
I -
CCCERA COMPARED TO CALPERS
1
• Cost for any retirement system
Y
Contributions = Benefit Payments + Expenses — Investment Return
• Contribution policy can result in short term volatility
• Ultimately, if benefits are the same then Investment Return — Expenses
drives plan cost
1 L1f i ! July 17, 2014 3 Ag&
CCCERA COMPARED TO CALPERS
Investment Return (Net of Expenses)
30.0% - - - - --
20.0%
1000.
0.0%
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OO H
9 H
` ` N
N C! N f"J CJ
O O O
`! N \! N C,
N N N N � r r Ni
C-1 3 tF) izi
- 10.0oAu
-20.0%
t-CCCERA{0 -2L31 j
— —
—0—Ca1PER5(6 30)
- 30.0�% 0 -
(BOA")
July 17, 2014
4
CURRENT BENEFITS
BA) July 17, 2014
5
C"C
ABILITY TO NEGOTIATE OR CHANGE BENEFITS
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■ Current Employees:'
• California Supreme Court has ruled that pension benefits are individual
vested right....this means Board cannot unilaterally or negotiate lower
future benefit accruals unless each employee is given something of equal
or greater value
• Could negotiate to allow employees to opt into lower future accruals but:
❑ Negotiations would be very difficult and
❑ IRS has refused to rule on this when asked to do so through the
private letter ruling process
This is a legal issue and since Bartel Associates is not a law firm we strongly suggest the
B/ 1 ' July 17, 2014 6 '
Tier 1
Tier 2
Tier 3
Membership
Pre 1/1/2011
Post 1/1/2011
Pre 1/1/2013
PEPRA
Post 1/1/2013
• Formula
• 55
• 62
• 67
2.00%
2.37%
2.42%
2.00%
2.37%
2.42%
1.3%
2.0%
2.5%
• Benefit Cap
100% Comp.
100% Comp
None
• Post Retirement Survivor
Allowance
60%
Continuance
60%
Continuance
60%
Continuance
• Cost of Living Adjustment
3%
3%
3%
• Final Average Salary
12 months
12 months
36 months
• Terminal Pay
Unlimited
1 year
None
• Pensionable Wages Cap
No cap
No Ca
2014 $138,077
■ Social Security
None
None
None
BA) July 17, 2014
5
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ABILITY TO NEGOTIATE OR CHANGE BENEFITS
i
■ Current Employees:'
• California Supreme Court has ruled that pension benefits are individual
vested right....this means Board cannot unilaterally or negotiate lower
future benefit accruals unless each employee is given something of equal
or greater value
• Could negotiate to allow employees to opt into lower future accruals but:
❑ Negotiations would be very difficult and
❑ IRS has refused to rule on this when asked to do so through the
private letter ruling process
This is a legal issue and since Bartel Associates is not a law firm we strongly suggest the
B/ 1 ' July 17, 2014 6 '
ABILITY TO NEGOTIATE OR CHANGE BENEFITS
■ Future Employees
• PEPRA members:
❑ Member on or after 1/1/13
❑ Much lower benefit formula (2% @ 62)
❑ Cap on salaries used to determine benefit
• Non PEPRA members:
❑ Membership before 1/1/13 but hired on or after 1/1/13
❑ Same benefit as those hired before 1/1/13
❑ Limits on compensation that can be used to determine benefit
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4BM/1. July 17, 2014 7
ABILITY TO NEGOTIATE OR CHANGE BENEFITS
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• Could negotiate to provide lower benefits to future hires
Tier 12 Tier 23 Tier 34
❑ Employer Normal Cost 21.23% 18.79% 10.92%
❑ Member Contribution Rate 11.25 11.25 11.00
❑ Total Normal Cost 32.48 30.05 21.92
❑ Percent of current workforce 77% 21% 2%
❑ Likely requires legislation to provide lower benefits for future
PEPRA members
❑ Likely requires legislation to provide lower benefits for future hires
that are not PEPRA members. This group will make up a decreasing
portion of new hires (Likely decreasing to approximately 0% in
about 20 years)
O Would have no impact on Unfunded Liability
2 Became member before January 1, 2011.
3 Became member between January I, 2011 and January 1, 2013.
4 Became member on or after January 1, 2013.
qBJuly 17, 2014 8 '
DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION
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Defined Contribution
I
Defined Benefit
Plan
Plan
Nature of Promise
Can vary from year to
% of base pay each year
Annuity, beginning at
into employee's account.
retirement, payable for as
Can vary from year to
Employer
Ion as employee lives.
year
Retirement Benefit
the next — "Whatever is
Level
Necessary"
Whatever account
Benefit Formula
balance at retirement can
provide
Employee
% of Final Average
Compensation based on
Contributions
promise does employee
agency service and
Always 100%
"own " ?)
benefit factor
(B
July 17, 2014
DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION
Prc"ICKS
Defined Contribution
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Defined Benefit
Plan
Plan
Contribution Level
Can vary from year to
Employee
Usually set by statute but
year
can be negotiated
Can vary from year to
Employer
Varies from one year to
year
the next — "Whatever is
Necessary"
Vesting
(How much of the
Employee
Employee
Contributions
promise does employee
Contributions
Always 100%
"own " ?)
Always 100%
Employer
Retirement Benefit
Contributions
Typically 100% after 5 or
Typically 100% after 5 or
10 years.
10 years.
0-)
(B'A July 17, 2014
10
r3cm-ni
DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION
Defined Contribution
Plan
Defined Benefit
Plan
Defined Benefit
Portability
Retirement
Very Portable
Generally Very Portable
Employee takes vested
retirement, except
Employee chooses
account balance with
employer contributions
between
them when leaving.
become 100% vested at
1. deferred retirement
Significant tax
death
benefit (benefit earned
disadvantage for amounts
while at District,
distributed and not
protected by "salary"
"rolled over" < age 59'/2.
inflation if working for
continuance
most CA public
agencies) or
Employee
2. accumulated employee
Employer
Employee
contributions with
Employer
Employee
interest
(B
!)July 17, 2014
11
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DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION
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Defined Contribution
Defined Benefit
Plan
Plan
Pre - retirement - Same as
Death
Pre - retirement —
retirement, except
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
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12
USD
DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION
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■ 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
9July 17, 2014 13 '
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)
BJuly 17, 2014
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VC-C S P q
BENEFIT AT RETIREMENT IF CONTRIBUTION IS THE SAME
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■ 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 (6% assumed earnings)
• DC plan gets to 30% of pay replacement (5% assumed earnings)
BAJuly 17, 2014
15
BENEFIT AT RETIREMENT IF CONTRIBUTION IS THE SAME
�C S
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ACC
Alternative
Tier 3
1
2
3
PEPRA
DC Plan
Hybrid
DB
• Formula
• 55
• 62
• 67
1.3%
2.0%
2.5%
N/A
0.65%
1.00%
1.25%
1.3%
2.0%
2.5%
• Benefit Cap
None
N/A
None
None
• PRSA
60%
N/A
None
None
• COLA
3%
N/A
2%
2%
• Final Average Salary
36 months
N/A
36 months
36 months
• Terminal Pa
None
N/A
None
None
Is DB Member Contribution
50% NC
None
50% NC
50% NC
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ACC
BENEFIT AT RETIREMENT IF CONTRIBUTION IS THE SAME
(B"*)
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I BENEFIT AT RETIREMENT IF CONTRIBUTION IS THE SAME I
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Alternative
Tier 3
1
2
3
PEPRA
DC Plan
Hybrid
DB
• CCCSD DC Contribution
• Guaranteed
N/A
4%
2 %
N/A
• Match
-
100% up to
100% up
-
• Member DB Contr.
11.00
6%
to 3%
10.00
• Member DC Contr.
0.00
Member
Member
-
• Total Cost
21.92%
Contr.
Contr.
20.00%
• Contribution Vesting
10.92%
10.0%
10.0%
10.0%
• Member
Always
Always
Always
Always
100%
100%
100%
100%
• District (DC only)
N/A
100% at 5
100% at 5
N/A
ears
ears
(B"*)
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I BENEFIT AT RETIREMENT IF CONTRIBUTION IS THE SAME I
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• Likely requires legislation to provide lower benefits for future
• PEPRA members
• New hires that are not PEPRA members.
• Would have no impact on Unfunded Liability
(EAD July 17, 2014 18
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Alternative
Tier 3
1
2
3
PEPRA
DC Plan
Hybrid
DB
• Total Cost
• CCCSD DB Normal Cosi
10.92%
-
5.00%
10.00%
• CCCSD DC Contributio
-
10.0%
5.00
-
• Member DB Contr.
11.00
-
5.00
10.00
• Member DC Contr.
0.00
6.0
3.00
-
• Total Cost
21.92%
16.0%
18.00%
20.00%
• District Cost
10.92%
10.0%
10.0%
10.0%
• Likely requires legislation to provide lower benefits for future
• PEPRA members
• New hires that are not PEPRA members.
• Would have no impact on Unfunded Liability
(EAD July 17, 2014 18
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