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HomeMy WebLinkAbout04. (Handout) CCCERA/CalPERS comparisonHand' u� h T £ L CENTRAL COSTA COUNTY SANITATION DISTRICT Pension Issues Presented by John E. Bartel, President Bartel Associates, LLC April 2, 2014 Tonic Agenda CCCERA Compared to Ca1PERS 1 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? q odclientakentral contra costa sanitary distriMprojectst20Mba centralsa t 14- 04- 02.docx CCCERA COMPARED TO CALPERS ■ Cost for any retirement system 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 (B-A) ) April 2, 2014 CCCERA COMPARED TO CALPERS Tnvestment Retnrn (NPt of F.Yn,-ncnel cC S 30.0% — 20.0% _ ----- .._ — - 10.0% — 0.0% - -- - — -10.0% °0 0 0 °o 0 0 0 0 0 \ N N \ N N N N N N N N N N N N N N N N N N N N N �D N N CCCERA (12,13 1) -20.0% 30.0% _F CaIPERS (6/30) - (B/j� April 2, 2014 2 MS DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION PA, April 2, 2014 3 DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Can vary from year to year Can vary from year to year Employee Contributions Always 100% Employer Contributions Typically 100% after 5 or 10 years. '' l 1 April 2, 2014 Employee Employer Vestin (How much of the promise does employee "own" ?) 4 Usually set by statute but can be negotiated Varies from one year to the next — "Whatever is Necessarv" Employee Contributions Always 100% Retirement Benefit Typically 100% after 5 or 10 years. M3 DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Met", .. ,. ......... e�M. .............. ..., µ.m.. ----- x ... rr..r'.'.r rxrrrwrrww�...+..w.vw.. ............... ........ rruwrww Very Portable Retirement Generally Very Portable Employee takes vested Employee chooses account balance with between them when leaving. 1. deferred retirement Significant tax benefit (benefit earned disadvantage for amounts while at City, protected 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 BA'` Apri12, 2014 5 DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Pre - retirement - Same as retirement, except employer contributions become 100% vested at death C)April 2, 2014 Death Who Accepts Risk. & Reward Investment Return Mortality Retirement Inflation i0 F FQ KS Pre - retirement — Employee contribution with interest Post - retirement — Employee can elect lower benefit to provide survivor continuance 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 VAApril 2, 2014 F @7 S 0 q 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) BA) ' April 2, 2014 V71"CW4,06 e' BENEFIT AT RETIREMENT IF CONTRIBUTION IS' 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) ` rBz)lApril 2, 2014 M3