The URL can be used to link to this page

Home My WebLink About03. (Handout) John Bartel PresentationCENTRAL COSTA COUNTY SANITATION DISTRICT Pension Issues Presented by John E. Bartel, President Bartel Associates, LLC June 17, 2014 Tonic Agenda CCCERA Compared to CalPERS 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? B/ 1 ,:',1icn1Meen1m1 contra —M sanitary dis1nWp,,,1cc1.,,2014 \ha ccnlm]= 14- 0647.doce l 3 �s.�� 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/1 June 17, 2014 1 CCCERA COMPARED TO CALPERS Investment Return (Net of Expenses) 30.0% 20.0% 10.00/0 0.0% _ T fl N CI _ f ri fl fl Z cJ Ci m fl .p f1 7 c1 „ C7 Cd N - 10.0 % -20.0% —*— CCCERA (12.31) —W- Ca1PERS (6.30) -30 O',b B/1 June 17, 2014 2 O E Nr `7 CI fl ('I CI ci CC S DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION � I Defined Contribution Defined Benefit Plan Plan Nature of Promise % of base pay each year into employee's account. Annuity, beginning at retirement, payable for as Contribution Level long as employee lives. Employee I Retirement Benefit year Level Can vary from year to Whatever account Varies from one year to Benefit Formula balance at retirement can the next — "Whatever is % of Final Average provide Necessary" Compensation based on Vesting agency service and (How much of the Employee benefit factor B/t June 17, 2014 3 DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Defined Contribution Defined Benefit Plan Plan Contribution Level Can vary from year to Employee I 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 Employee (How much of the 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. Bjj June 17, 2014 4 7 DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Defined Contribution Defined Benefit Plan Plan Portability 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'h. working for most CA Employee public agencies) or Employer 2. accumulated employee 6 contributions with interest BA June 17, 2014 5 ' DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Defined Contribution Plan Defined Benefit Plan Pre - retirement - Same as retirement, except employer contributions become 100% vested at death Death Pre - retirement — Employee contribution with interest Post - retirement — 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 B/I June 17, 2014 6 tM 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 B/I June 17, 2014 7 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) /1 B June 17, 2014 8 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) BAJune 17, 2014 r7cs: