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House Co-Sponsorship Memoranda
House of Representatives
Session of 2015 - 2016
Regular Session
MEMORANDUM
| Posted: | March 10, 2015 12:11 PM |
|---|---|
| From: | Representative Glen R. Grell |
| To: | All House members |
| Subject: | Pension Legislation -- PSERS Side-by-Side Hybrid Plan Design |
| In the near future, I will be re-introducing a pension reform proposal I first introduced in the 2009-10 Session as House Bill 2135. This alternative plan design will amend the Pension Code to change the Public School Employee Retirement System (PSERS) for new employees from a defined benefit program to a hybrid program that features elements of both defined benefit (DB) and defined contribution (DC) systems. House Bill 35 has been reserved for this legislation. Currently all members of PSERS receive a defined benefit at retirement that is calculated according to a specific formula that takes into account years of service, the three highest 12-month periods of salary and a multiplier. Pre-Act 120 employees earn a multiplier of 2.5 per year of service; Post-Act 120 employees earn a multiplier of 2.0 per year of service. My proposal would retain the qualities of a defined benefit program for half of the benefit, but at a lower level of benefit than the current system. For example, the proposal reduces the employee contribution rate from the current 7.5% for most employees to 3.25% and the multiplier would be reduced from 2% (under Act 120) to 1%. So, if an employee completes 30 years of service, for example, the employee would have a defined benefit component of 30% of final salary. The vesting time for the DB portion of the plan would be 10 years. This reduction in benefits will, over the long run, make the system more affordable for the commonwealth, taxpayers and school districts. Also, because the lower benefit level would apply only to individuals who become members of the system after the effective date of the new law, the system would not suffer any decrease in its ability to fund the retirement benefits of current annuitants and current members of the system. Because this plan design does not close the current plan, the so-called “transition costs” associated with closing a DB plan would not apply to this proposal. The hybrid benefit structure also enables the system to better handle downturns in the stock market because it reduces its costs and risk. In addition to the “safety net” 1% DB plan, the second feature of the hybrid plan would be a defined contribution element, which will allow members to have greater control over a portion of their contributions by allowing them to invest in one or more investment options created by PSERS. Employees would be required to contribute at least 3% of their salary to an Individual Annuity Savings Plan, a personal account to which all earnings of the individual’s investments would be credited. The employer match for the DC portion of the fund would be set in law at 2% and could not be negotiated to a higher number. Employees would be allowed to invest more than 3% of their salary up to the IRS limit. Upon retirement, an individual would receive the benefits accrued under the DB system, plus a number of options regarding his/her defined contribution earnings, including rolling them over into another account. PSERS would be responsible not only for creating investment options, but for managing them as well and for all other rules and regulations regarding transferring funds to and from different investments, procedures for deducting employee contributions, creating standards and criteria for reporting and other responsibilities. The side-by-side hybrid plan moves the Commonwealth to a plan design which more closely resembles private sector pensions, yet it averts the “transition costs” issue and should allow school employees to build an appropriate level of pension benefit upon retirement. Although this proposal only pertains to PSERS, a comparable proposal is being drafted for new state employees under SERS. The proposal also maintains the mandatory 4% floor in the employer contribution rate under the DB plan and expands the application of that floor to years when the funded ratio of the PSERS system is 100% or higher. If you have any questions, please contact my office at 783-2063. I would appreciate your support and cosponsorship. |
Memo Updated: March 10, 2015 12:12 PM