HomeMy WebLinkAboutStaff Report 3275
City of Palo Alto (ID # 3275)
City Council Staff Report
Report Type: Action Items Meeting Date: 1/22/2013
City of Palo Alto Page 1
Council Priority: City Finances
Summary Title: Staff Response to Colleague's Memo Concerning Pension
Benefits
Title: Response to Colleagues' Memo on Employee Benefits
From: City Manager
Lead Department: Human Resources
Recommendation
Staff recommends that Council receive input and provide guidance, on issues related to the
City’s strategy for reforms and innovations in employee retirement plans and pension. The
Council’s direction for this session anticipated the following purposes:
1. Educate the public and employees about CalPERS pensions and how they work
2. Inform the public and employees about the recently enacted pension reform and how it
impacts the City of Palo Alto
3. Enumerate the limitations on the City’s options given our participation in the CalPERS
system and the requirements of state law.
4. Explore additional pension legislation to close remaining loopholes and to give cities
broader decision making power in regards to their pension plans.
Staff recommends, at a minimum, the following action by the Council:
DRAFT MOTION: I move that the staff explore additional pension legislation with our legislators
and other parties (such as the League of California Cities) to close remaining loopholes and to
give cities broader decision making power in regards to their pension plans. (Agenda Item later
this evening on Legislative Matters anticipates this action).
I further move that staff continue to work with our employees and the public to fully
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understand the facts about pensions and the status of the City’s efforts to manage our costs
and provision of benefits while maintaining a talented work force.
Background
Council proposed exploring a sustainable model of pension, health and other benefits in its
Colleagues’ Memo dated June 15, 2012. Beginning with the Council meeting of October 15,
staff created a foundation for this discussion with a review of the components of total
compensation (salary, health benefits, retirement savings/pension, paid time off, etc.) and their
relationship to recruitment and employee engagement. This report, the second in a series of
three reports, seeks to educate the public and City employees about the CalPERS pensions
system, explain the Public Employee Retirement Law (PERL) and the Public Employee Pension
Reform Act (PEPRA) that became effective January 1, 2013, and provide a foundation for policy
discussions and long-term strategies from Council regarding employee pensions. Many of these
issues are subject to collective bargaining with the City’s recognized bargaining units and to
state law.
The primary objective of PEPRA is to ensure that employees share in paying the normal pension
cost, introducing a lower-formula second pension tier, and in this regard Palo Alto has been in
the forefront of implementing cost-cutting pension practices as permissible under existing law.
Before PEPRA, Palo Alto had already implemented second tier CalPERS plans and negotiated
that employees pay their full percentage of pension cost for nearly every employee group. A
review of our standard Bay Area survey cities indicates that only 41% of cities have created
second pension tiers for miscellaneous employees and 50% for public safety. Additionally, 25%
of survey cities continue to provide City-paid employee pension contributions and only one
agency pays some portion of the employee pension contribution for safety employees.
Most of the PEPRA changes apply to new, future employees. PEPRA does not do enough,
however, to address the hurdle that California agencies still face covering the cost of
increasingly expensive employee pensions for current active employees and retirees. Cities
operating under the CalPERS pension system will experience increasing costs and the lack of
flexibility provided to cities will put downward pressure on salaries and health benefits.
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PEPRA does level the playing field for competing for talent for the long-term, with all new
CalPERS agency non-safety employees earning the same 2% at 62 pension benefit formula
across CalPERS agencies statewide. It also caps pensionable earnings, imitating social security.
There the flexibility ends, leaving CalPERS cities like Palo Alto with few alternatives to
traditional defined-benefit pensions short of further legislation. If the City wished to hire
employees with alternate retirement benefits but no defined-benefit CalPERS pension, we
could not legally do so. Attachment A is an analysis of PEPRA’s impact to Palo Alto. At Council
request, staff has sought employee feedback about the desirability and the perceived value of
various benefits through two facilitated employee forums. (Attachment B is a summary of the
employee feedback).
Discussion
What is a “defined benefit” pension? A “defined benefit” pension is a retirement plan that
guarantees a fixed monthly retirement allowance, calculated according to the plan formula,
when certain prerequisites are met. CalPERS’ retirement allowances are calculated based on
three factors:
Service Credit - generally, the number of years the employee worked
Benefit Factor - the percentage of Final Compensation an employee is entitled to for
each year of service. For most CalPERS’ plans, the benefit factor increases with the age
of the employee at retirement
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Final Compensation - either the highest single year or the average of the highest three
consecutive years of the employee’s compensation
Defined benefit examples. For example, under CalPERS’ “2%@ 60” formula, which is now in use
for Palo Alto employees hired after July 2010 in non-safety positions, pension is calculated at
age 60 by taking the number of Years of Service x .02 (Benefit Factor) x Final Compensation
equal the Annual Retirement Allowance, as shown in the two examples below.
A non-safety employee who retires under that formula at age 60, with 30 years of service and a
final compensation of $70,000 will receive the following annual retirement allowance:
30 Years of Service
X .02 Benefit Factor
X $70,000 Final Compensation
= $42,000 Annual Retirement Allowance
A safety employee, who retires at age 55 under the “3% at 55” formula, with 30 years of service
and a final compensation of $70,000 will receive the following annual retirement allowance:
30 Years of Service
X .03 Benefit Factor
X $70,000 Final Compensation
= $63,000 Annual Retirement Allowance
Both of these examples reflect the second tier pension formulas adopted by the City over the
past few years. The majority of existing employees maintain their tier one formula benefits of
2.7% at 55 for non-safety employees and 3% at 50 for safety employees, which result in a
higher pension benefit. PEPRA made no changes in this regard.
Benefit increases with age. The above illustrated examples do not tell the entire story, because
the benefit factor increases with age. The “2% at 60” plan, for instance, pays a factor of 1.092
for early retirement at age 50, increasing incrementally to a factor of 2.418 at age 63 or older.
This translates to an annual pension of $50,778 at age 63, up from an annual pension at age 60
of $42,000. At Attachment C are detailed charts showing the available percentage of final
compensation for the CalPERS’ safety and non-safety plans according to age/benefit fact and
years of service. Note that the reduced benefit formulas and increased retirement age
provisions under PEPRA, explained later in this report, create new defined benefit formulae for
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all miscellaneous (non-safety) and safety employees. Moreover, CalPERS pensions are subject
to inflation adjustments up to 2% each year but cannot exceed the national rate of inflation.
How are CalPERS’ defined benefit pensions funded? Three sources fund CalPERS’ pensions.
First, employees generally contribute a percentage of their annual pay toward their
pension. Historically, statute sets that amount, and for most commonly-used plans it is
7% or 8% for non-safety employees and 9% for safety. Employers may agree to pay
some or the employees’ entire portion, and many have done so. A comparison of Bay
Area pension plans shows that 25% of local agencies pay all or part of the employees’
portion of pension. For fiscal year 2014 the employee contributions will be a combined
7.945% for non-safety employees and 9% for safety employees (not including new
pension tiers). Under PEPRA, employee contribution rules and procedures will be
changing, as described in this report and the attachments.
Second, the entire CalPERS’ system has investment earnings (or losses) arising from
investment of system assets in stocks, bonds, real estate and other investment vehicles.
This source of funding varies from year to year, sometimes dramatically. Gains are
available to fund pension benefits. Losses must be made up by the agencies providing
additional funding. If investment earnings are not high enough, CalPERS will just pass
the bill onto the city. CalPERS reports total returns varying as shown in the table below.
2012 YTD ending 10.31.12 4.1%
3 year period ending 9/30/12 9.3%
5 year period ending 9/30/12 0.1%
10 year period ending 9/30/12 7.3%
Third, employer contributions provide the balance of needed funds. Employer
contributions may decline when investment returns rise and increase when returns fall
and/or when actuarial assumptions adjust to reflect higher system costs. Every year,
CalPERS transmits an actuarial study to each participating employer stating the
percentage of payroll that the employer must pay to fund benefits for its current
employees and retirees. Employers must pay the entire employer contribution each
year. In the last 15 years, employer contributions have varied from zero (when
investment earnings were very high) to more than 24.6% of payroll for non-safety
employees and 33.4% of payroll for safety employees in fiscal year 2014. This translates
that, for every $1 in qualified pension salary, the city pays $0.25 and $0.33 respectively.
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What are Palo Alto’s pension costs?
For fiscal year 2014 CalPERS provided the following pension costs:
CalPERS Required Employer
Contribution
FY 2012-13
June 30, 2010
FY 2013-14
June 30, 2011 Difference
Non-safety 15,800,795$ 16,208,975$ 408,180$ 3%
Safety 7,870,938$ 8,322,938$ 452,000$ 6%
Total 23,671,733$ 24,531,913$ 860,180$ 4%
Funded Status
Total Unfunded Liability (AVA Basis)153,941,378$ 176,609,601$ 22,668,223$ 15%
Total Unfunded Liability (MVA Basis)300,666,178$ 256,827,528$ (43,838,650)$ -15%
Non-Safety
Funded Ratio (AVA Basis)80%79%-1%
Funded Ration (MVA Basis)62%69%7%
Safety
Funded Ratio (AVA Basis)83%81%-2%
Funded Ration (MVA Basis)65%72%7%
* The Actuary Value of Assets (AVA) is used to establish funding requirements and the funded
ratio on this basis represents the progress toward fully funding future benefits for current
participants. The funded ratio based on the Market Value of Assets (MVA) is an indicator of the
short-term solvency of the plan.
End of the “Reversal”. A long-standing retirement pay practice is ending for Palo Alto
employees because of PEPRA and the City’s policy that employees pay their full share of
pension costs. When a city employee retires, they must designate a 12 month period during his
or her service in CalPERS as their “final compensation period.” Prior to employees paying the
full employee retirement contribution, an employee retiring was eligible for reversal of
Employer-Paid Member Contributions (EPMC). The City would reverse the applicable 7, 8 or 9
% employer-paid member contribution paid out of a retiring employee’s wages, by increasing
their salary by the applicable 7, 8 or 9% and the employee would then pay the contribution
directly to CalPERS.
However this “reversal” was only applicable if an employee was designating the final 12 month
period preceding the effective date of retirement. Any employee who designated an earlier
period as their highest 12 months would not be eligible for the EPMC or “reversal.” Since
employees are now paying their full employee retirement contribution, this “reversal” is no
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longer available.
The Colleague’s Memo posed the following questions about public pensions.
I. How should the costs of pensions be shared between employers and employees?
Cost sharing is a critical issue in pension design. There are two primary means of lowering
pension costs for employers: reducing benefit levels and achieving greater cost sharing from
employees. Of the two, only cost sharing has the potential to impact employer costs in the
short and medium term. This is because under current law, pension benefit levels are generally
considered to be “vested,” which means that employers are prohibited from making significant
reductions for existing employees. Lower pension formulas may be applied only to new hires,
resulting in a longer time horizon for cost-reduction.
By contrast, employers may lawfully seek additional cost sharing from current employees.
Changes in cost sharing generally are subject to collective bargaining and may be subject to
other limitations, as described in part below. The new PEPRA legislation fails to increase cost
sharing options for the City, since we have already achieved employee pick up of the employee
pension costs. Years down the road, the City may have more options but these are restricted
over the next five years.
Because Palo Alto provides pensions through the CalPERS system, the City must comply with
the cost-sharing procedures and limitations in the Public Employees Retirement Law (PERL), as
amended by the Public Employee Pension Reform Act (“PEPRA”), which took effective January
1, 2013. Under the PERL, the employee contribution amount is fixed by statute and ranges
from 5% to 9% of earnings. Pension formulas and cost-sharing for Palo Alto employees are
shown below:
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Pension Formulas and Employee Contributions by Employee Unit
Non-Safety (Miscellaneous)
SEIU Mgmt
(Unrepresented)
Utilities Mgrs
Formula 2.7%@55 2%@60 2.7%@55 2%@60 2.7%@55 2%@60
Eff Date 2007 2010 2007 2010 2007 2010
Current EE
Contribution
Amount
8% 7% 8% 7% 2%* 2%*
*Currently negotiating increased EE pension contribution
Safety
POA Police Mgrs Assoc IAFF Fire Fire Chiefs' Assoc
Formula 3%@50 3%@55 3%@50 3%@55 3%@50 3%@55 3%@50 3%@55
Eff Date 2002 2012 2002 2012 2001 2012 2001 2012
Current EE
Contribution
Amount
9% 9% 0%* 0%* 9% 9% 9% 9%**
*Will be negotiating increased EE pension contribution this fiscal year
**Employee contribution for 4 members of Fire Chiefs Association will reset to 5.1% in March 2013
based on concession agreement in MOA.
The question of who actually pays the employee contribution has historically been subject to
negotiation, as employee pension contributions falls within the scope of representation under
the Meyers Milias Brown Act (MMBA). However, for new employees, PEPRA establishes
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mandatory formulae and cost sharing of pension benefits, leaving little negotiating discretion
over the legislatively mandated changes. Non-Safety employees hired on or after Jan. 1, 2013
will receive the new 2% at 62 pension formula; new public safety employees as of Jan. 1, 2013
will receive the new formula (2.7% @ 57) that is closest to the formula provided to safety
members in the same retirement classification offered by the City on Dec. 31, 2012).
PEPRA provides as of Jan. 1, 2013, that the new employee contribution rate will be at least 50%
of the total “normal cost” for the pension plan. This DOES NOT mean 50% of the pension
contribution costs and in fact is far less than that cost. An employer may not pay any part of
new members’ employee contribution. If the terms of a contract between an employer and its
employees in effect on Jan. 1, 2013, would be impaired by the equal sharing of normal cost for
new employees, the equal sharing of normal cost will not apply until the contact contract
expires, is renewed, amended or otherwise extended. Local agencies throughout the state are
seeking to understand CalPERS’ instruction regarding how it will implement cost-sharing for
employees hired on or after January 1, 2013. CalPERS has issued guidance in the form of a
Circular Letters, such as attached in Attachment D.
PEPRA also addresses cost-sharing for existing employees, in two ways. First, after January 1,
2018, PEPRA authorizes employers to bargain for current employees to pay 50% of the normal
cost so long as the employee contribution does not exceed 8% for Miscellaneous and 12% for
Police & Fire. This language and its implementation are not entirely clear. In Palo Alto, most
employees already pay their full statutory PERS contribution of 7%, 8% or 9%. PEPRA appears to
authorize Palo Alto to negotiate, after January 1, 2018, additional increments up to the PEPRA
cap of 8% for Miscellaneous and 12% for Safety employees. At this point, with limited guidance
from CalPERS, it appears that this provision will apply to Tier 2 non-safety employees (who
currently pay 7%) and safety employees (who currently pay 9%). Second, PEPRA authorizes
employers and employees to agree to share the employer contribution, but prohibits
employers from imposing cost-sharing of the employer share in the absence of an agreement
with labor.
In sum, Palo Alto and its employees have already achieved substantial cost sharing through
employees’ agreement to pay their full PERS contribution. Going forward after 2018, the
Council has authority to consider seeking additional cost sharing, through negotiations where
appropriate, with respect to employees paying50% of the normal cost, capped at 8% for
Miscellaneous and 12% for Safety. In addition, at any time when contracts are open, the
Council may consider seeking additional cost sharing of the employer contribution through
collective bargaining process.
Finally, Council should be aware that there is active litigation over the question of whether
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there is a constitutional limit to the extent of costs that can be shifted to employees without
impairing vested pension rights, and if so, what is that limit. San Jose voters enacted changes
to that city’s pension system that shifted substantial costs onto current employees who wish to
retain current benefit levels. San Jose unions have challenged that cost shift on the theory that
it violates members’ constitutional vested contract rights. The matter is in litigation in the
Superior Court.
II. Should the City establish a hybrid plan combining defined benefits, defined contributions,
and social security?
PEPRA has answered this question in the negative and precludes such options. The question of
whether the City should establish a hybrid plan combining defined benefits, defined
contributions and social security is moot short of new State legislation. Retirement planning
has long held that a three-fold approach yields the most predictable results for the retiree by
spreading risk. The three foundational pillars of retirement have been social security, employer
pension and personal savings. A defined benefit plan is one where the employee, upon
retirement, is entitled to a fixed periodic payment. The asset pool - available to pay benefits -
may be funded by employer or employee contributions, or a combination of both. But the
employer typically bears the entire investment risk and must cover any underfunding as the
result of a shortfall that may occur from the plan’s investments. Conversely, defined
contribution plans are a type of retirement plan in which the amount of the employees’ annual
contribution is specified. Individual accounts are set up for participants and benefits are based
on the amounts credited to these accounts (through employee contributions and, if applicable,
employer contributions) plus any investment earnings on the money in the account. Only
contributions to the account are guaranteed, not the future benefits.
In the last two decades, the traditional three-fold approach almost entirely disappeared from
the private sector, as corporate defined-benefit pension plans were being phased out in favor
of defined-contribution programs, such as 401(k) employee savings accounts. A 2010 survey by
Towers Watson, the global consulting firm, found that only 17% of Fortune 100 companies still
offer a defined-benefit plan, down from 67% in 1998. Those that offer direct-contribution
plans, such as 401(k)'s, total 58%, up from 10%. There is more emergent data and studies that
challenge the effectiveness of 401(k) plans for providing adequately towards retirement.
Despite the decline, 36% of the country's small and medium companies still offer pensions, and
there is a slight trend towards combining defined benefit pension benefits with 401(k) plans
among companies, according to Towers Watson. That study, as written up in HR Magazine, is
detailed in the attached Attachment E.
Currently, Palo Alto uses two of the three traditional retirement planning vehicles: a pension
plan and optional voluntary employee savings. Palo Alto’s pension plan is described in detail
elsewhere in this report. The City supports employee’s savings by sponsoring a defined
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contribution 457 plan, although the City does not contribute any funds. Employees may defer a
portion of gross compensation each year, up to an annual dollar limit, which is $17,500 for
2013. The 457 plan offers a "Catch-Up" provision for employees over age 50, which allows
employees to contribute an additional annual amount of $5,500. Currently 55% of employees
actively participate in the 457 plan.
Establishing a hybrid pension/social security plan would either necessitate that the City commit
to change to the one CalPERS plan that combines social security with a lower-level CalPERS
pension, or exit CalPERS. This is because the CalPERS system only provides for one social
security plan (that may or may not still be open to new entrants).
CalPERS has an option to combine social security with a lower pension formula called a “Section
218 agreement.” This option would only be available for non-sworn future new hires and any
current employees who vote in agreement to join Social Security. For safety employees, all
members of their bargaining group would have to vote and approve the change. If the City
were to pursue the CalPERS Social Security plan, staff will need to investigate how would the
plan work in conjunction with PEPRA.
The alternative scenario for adopting a hybrid pension/social security plan is for the City to
leave CalPERS altogether. In that case, the City must pay a sum to CalPERS that will secure the
pensions already in the system. CalPERS has informed the Administrative Services Department
(ASD) that the City’s cost to exit CalPERS is estimated to be between $600,000,000 and $1
billion.
III. What is the appropriate and sustainable vesting for pension rights?
The question of what is the appropriate vesting schedule for pension rights is the subject of
much scholarly debate and developing legal case law. A “vested” benefit is one that has
matured into an irrevocable contractual right. It cannot be taken away or otherwise impaired
without the member’s consent, except in extremely limited circumstances. According to
CalPERS, California law establishes that public employee retirement benefits are a form of
deferred compensation and part of the employment contract. At the time when the employee
provides service to his public employer, he earns rights to the deferred compensation. To be
eligible for any service retirement (as opposed to disability or industrial disability retirement)
active employees must be at least 50 years of age and have at least five years of credited
service. Frequently the term “vested” indicates that the employee earned the minimum
number of credited service years and that a pension will be due to the employee upon reaching
50 years old. A member’s initial allowance is subject to annual cost-of-living adjustments
(“COLAs”) that account for changes in the applicable cost of living index each year.
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IV. Are retroactive pension increases justifiable and, if not, how can they be prohibited?
Retroactive pension increases are prohibited under PEPRA.
PEPRA now prohibits retroactive pension increases. The new law prohibits public employers
from granting retroactive pension benefit enhancements that would apply to service performed
prior to the date of the enhancement. In addition, if a change in a member’s classification or
employment results in a benefit enhancement, such enhancement applies only to service
performed on or after the operative date of the change. This provision applies to both classic
and new members. Note that annual cost-of-living adjustments are excluded from this
prohibition. This is an important and long overdue change.
V. Should the city offer employees a choice of significantly reduced pension packages in
exchange for more desirable near term compensation and employment terms?
The City is currently restricted to offering pension packages offered by CalPERS. The CalPERS
system, the largest public pension system in the U.S., offers a set group of packages, none of
which is a significantly reduced package. It would not be possible for the City to offer anything
else unless the City exits CalPERS altogether.
VI. How should the timing of negotiations and the City’s position in negotiations relate to
The Long Range Financial Forecast?
The City’s Long Range Forecast provides the basis for the funding resources and service cost to
run the City, and it provides the information needed to attain cost savings that may be
necessary to make up funding shortfalls. Each union negotiation features a financial overview
to share the fiscal forecast with employees. Therefore it is advantageous to update the long
range forecast before the next round of negotiations, which will begin the Summer 2013. The
coming union bargaining schedule is set forth below:
January 2013 UMPAPA
January 2013 SEIU Hourly
March 2013 Begin discussions with PMA (pension cost sharing issue)
June 2013 Deadline PMA
Begin SEIU
December 2013 Deadline SEIU (contract expires)
Begin PMA, POA, Fire
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June, 2014 Deadline POA, PMA, Fire (contracts expire)
Resource Impact
At this time funding isn’t required. However, if a study is necessary, staff will come back to
Council for such a request.
Attachments:
Attachment A - PERPRA Effect on CalPers Pension Benefits (PDF)
Attachment B - Summary of Employee Feedback (PDF)
Attachment C - Percentage of Final Comp Charts (PDF)
Attachment D - Circular Letters (PDF)
Attachment E - HR Magazine Article (PDF)
1
Attachment A
CalPERS PENSION BENEFITS:
STATE LAW, PENSION REFORM & IMPACTS ON PALO ALTO
State Law Mandates for Local Agencies Offering CalPERS
Pensions
Palo Alto Benefits
Pension
Formulas and
Retirement
Age
State Law as of 12/31/2012
CalPERS offers employers a menu of pre-defined basic and
enhanced benefit formulas for Miscellaneous (Non-Safety) and
Safety (Police & Fire). In general, employers contract with
CalPERS for one of the formulas after bargaining with employee
organizations. The benefit factor is a percentage of pay to which
members are entitled for each year of service. It is determined at
the member’s age at retirement and one of the following
retirement formulas that the employer has contracted for.
Misc: 2% at 55, 2% at 60. 2.5% at 55, 2.7% at 55, 3% at 60
Safety: 2% at 50. 2% at 55, 2.5% at 55, 3% at 50, 3% at 55
In 1999, the California Legislature amended the pension law to
allow the state to offer enhanced pension formulas: 3% at age 50
for Safety and 2.7% at age 55 for Miscellaneous. Subsequently,
the Legislature authorized cities and other local government
agencies to adopt the same enhanced benefit formulas.
The California Courts have held that a pension formula generally
“vests” at the time it is promised, which means the promise is
binding and cannot be reduced during the employees service or
retirement, subject to certain limited exceptions. For this reason,
reduced formulas are applied only to newly hired employees.
Palo Alto Pension Benefits as of 12/31/2012
Palo Alto last moved to enhance benefit formulas in 2002 for
Police and Fire and in January 2007 for Miscellaneous
employees. Beginning in July 2010, the City has been
negotiating lower more sustainable benefits for newly hired
employees. Currently, Palo Alto’s pension formulas are:
Miscellaneous (Non-Safety) Employees
Tier 1, hired before July 16, 2010: 2.7% at 55
Tier 2, hired on or after July 17, 2010: 2% at 60
Police & Fire
Tier 1 Fire, hired before June 8, 2012: 3% at 50
Tier 1 Police, hired before December 2012
(estimated): 3% at 50
Tier 2 Fire, hired on or after June 8, 2012: 3% at 55
Tier 2 Police, estimated to change in December 2012:
3% at 55
2
PEPRA
Effective January 1, 2013, all newly hired employees must be
enrolled in the following pension plans:
Miscellaneous Employees: 2% at 62
Police & Fire: PEPRA includes three formulas – 2% at 57,
2.5% at 57, and 2.7% at 57 – and mandates that the
employer use the formula closest to status quo. After
January 1, 2013, an employer could bargain to use a
lower formula, but may not impose a lower formula in
the absence of an agreement.
Note: Employees who move from one CalPERS or reciprocal
employer to another after Jan. 1, 2013, are not considered new
employees, unless there is a break in service of more than six
months. PEPRA requires that employees who move from one
public employer to another be enrolled in the new employer’s
formula that would have applied on December 31, 2012.
PEPRA’s Impact on Palo Alto
PEPRA will add a 3rd pension tier for both Miscellaneous and
Safety, applicable to employees hired on or after Jan. 1, 2013
(except that employees previously employed by another
CalPERS or reciprocal employer will move into Tier 2):
Miscellaneous Tier 3: 2% at 62
(earliest eligibility 50 years @1.426% - 2.5% @ 67 years of
age)
Safety Tier 3: 2.7% at 57
(earliest eligibility 50 years @2% - 2.7% @ 57 years of age)
3
State Law Mandates for Local Agencies Offering CalPERS
Pensions
Palo Alto Benefits
Calculation of
Final
Compensation:
Single Highest
Year or
Average of
Three
Consecutive
Highest Years
State Law as of 12/31/2012
The CalPERS basic pension benefit is calculated using the average
of the three highest consecutive earning years.
CalPERS allowed employers to select an enhanced benefit of
basing pension on the single highest earning year.
Palo Alto Pension Benefits as of 12/31/2012
Palo Alto moved to single highest year in 1983 for
Miscellaneous and 1981 for Fire and Police. Beginning in
2011 for Public Safety, the City began negotiating a return to
three-year final averaging as part of its effort to adopt more
sustainable pensions for new employees. Currently, Palo
Alto plans are as follows:
Miscellaneous (Non-Safety) –
All Miscellaneous: single highest year
Safety (Police & Fire) –
Fire, hired before June 7, 2012: single highest year
Police, hired before December 6, 2012 (estimated):
single highest year
Fire, hired on or after June 8, 2011: average of three
highest years
Police, hired on or after Dec. 7, 2012: average of
three highest years
PEPRA
Effective January 1, 2013, pensions must be calculated using the
average of the three highest consecutive years. This change
applies only to new employees hired on or after Jan. 1, 2013,
except that employees with prior public service will be enrolled in
the local plan in effect on December 31, 2012.
PEPRA’s Impact on Palo Alto
For all employees hired on or after Jan. 1, 2013, pensions will
be based on the average of three highest consecutive years,
except that Miscellaneous employees hired from another
CalPERS or reciprocal employer will remain eligible for single
highest year.
4
State Law Mandates for Local Agencies Offering CalPERS
Pensions
Palo Alto Benefits
Base
Retirement
Allowance on
Regular Pay
State Law as of 12/31/2012
State law defines compensation as that which is payment for the
member's services performed during normal working hours or
for time during which the member is excused from work because
of holidays, sick, disability, and other leaves, vacation (taken, not
cashed out). State law also defines special compensation.
Special compensation is outside of base pay but still included in
pensionable earnings. Examples are bilingual pay or fire
inspector certification pay.
Palo Alto Pension Benefits as of 12/31/2012
Memoranda of Agreement may contain provisions for
special compensation for employees to receive payment for
special skills, knowledge, abilities, work assignment,
workdays or hours, or other work conditions as permissible
under PERL.
PEPRA
For employees hired on or after January 1, 2013, pension must
be calculated on normal monthly rate of pay. Excludes some
payments such as vacation, sick leave, overtime and other
special pay categories. In December, 2012, CalPERS issued an
interim regulation stating that many categories of payments that
were previously pensionable as “special compensation” will still
be considered “pensionable compensation” under PEPRA. Palo
Alto is seeking clarification from CalPERS.
PEPRA’s Impact on Palo Alto
Will be subject to further consultation with CalPERS.
5
State Law Mandates for Local Agencies Offering CalPERS
Pensions
Palo Alto Benefits
Cap on
Pensionable
Compensation
State Law as of 12/31/2012
CalPERS limits safety pensions at either 80% or 90% of final
compensation. Miscellaneous employees are not subject to these
limits, although generally are covered by lower formulas and in
most cases are unlikely to reach 80% or 90% of final
compensation.
Otherwise, CalPERS pensions apply to all compensation up to the
federal limit in Internal Revenue Code section 401(a)(17),
currently $250,000.
Palo Alto Pension Benefits as of 12/31/2012
The limits in state and federal law apply to Palo Alto
retirees.
PEPRA
For employees hired on or after January 1, 2013, PEPRA caps the
amount of compensation that can be used to calculate a
retirement benefit at:
$ $113,700for employers participating in social security
$136,440for employers not participating in social security.
The cap is adjusted annually based on the Consumer Price Index
for All Urban Consumers or otherwise by the Legislature.
Employers are barred from adopting any supplementary defined
benefit plan. Employers may contribute to a defined contribution
plan, subject to certain limitations.
PEPRA’s Impact on Palo Alto
Palo Alto does not participate in social security. New
employees hired on or after Jan. 1, 2013, except those with
prior CalPERS or reciprocal service, will be subject to
$136,440 cap on pensionable income.
At this time, Palo Alto does not have a program in place to
make deferred compensation contributions on behalf of all
employees. However, employees can make voluntary
contributions to deferred compensation plans made
available.
6
State Law Mandates for Local Agencies Offering CalPERS Pensions
Palo Alto Benefits
Cost Sharing:
Employee
Contributions
to Pension
Costs
State Law of 12/31/2012
CalPERS establishes a fixed mandatory employee contribution:
Misc. Basic Plans (Tier 2) – 7%
Misc. Enhanced Plans (Tier 1) – 8%
Safety All Plans – 9%
Employers may agree to “pick up” part or all of the employee
contribution.
In addition to the employee contribution, which does not change
from year to year, CalPERS determines annually an amount that the
employer must pay to fund the benefits owed to retirees and
current employees. CalPERS’ actuaries determine the employer
contribution by adding the employee contributions to the system’s
investment returns and subtracting those sums from the total
amount required to fund the system.
Funds collected from employees and employers fund two types of
liabilities:
the “normal cost” of pension benefits, which is the amount
that must be set aside this year to pay for the pension
obligations earned by active employees this year,
incorporating CalPERS’ rate of return and employee
demographic assumptions, and
any “unfunded liabilities,” which are funding gaps generated
by shortfalls in the projected rate of return on investment,
changes in employee demographic assumptions (such as
employees living longer), etc.
Palo Alto Pension Benefits as of 12/31/2012
Palo Alto began “picking up” the employee contribution in
1981 for Fire and Police and in 1983 for Miscellaneous
employees. In 2007, the City began to bargain for
employees to resume paying the employee contribution for
Miscellaneous employees.
Currently:
SEIU, IAFF, Battalion Chiefs, POA and
Managers/Professionals pay full employee
contribution of 7%, 8% or 9%, depending on the
employee’s benefit formula.
PMA pays 0%.
UMPAPA pays 2%.
In addition to the employee contribution, as of June 30,
2011, CalPERS actuaries calculated Palo Alto’s pension
liabilities as follows (expressed as a percent of payroll):
Miscellaneous
Normal cost 10.360%
Unfunded liabilities 14.240%
Total = 24.600%
Safety
Normal cost 18.658%
Unfunded liabilities 14.786%
Total = 33.444%
7
PEPRA
The cost-sharing provisions of PEPRA are complex and not clearly
drafted. CalPERS is working to clarify the implementation of the
new law. Clean-up legislation, implementing regulations or
litigation may be required in order to clarify the meaning of several
of the provisions.
New employees – sharing the “normal cost.” PEPRA states that
employees hired on or after Jan. 1, 2013, must pay “at least” 50% of
the normal cost of their pension or the current contribution rate of
similarly situated employees, whichever is greater. CalPERS has
informed Palo Alto that new Miscellaneous members will pay 6.25%
and new Safety members will pay 11.25%.
Current employees – sharing the “normal cost.” After Jan. 1, 2018,
PEPRA authorizes employers to bargain for current employees to
pay 50% of the normal cost so long as the employee contribution
does not exceed 8% for Misc and 12% for Police & Fire.
The employer contribution. PEPRA also authorizes employers and
employees to agree to share the employer contribution, but
prohibits employers from imposing cost-sharing of the employer
share in the absence of an agreement with labor.
PEPRA’s Impact on Palo Alto
Palo Alto is at or close to the goal set in PEPRA for employee
cost sharing. Except for Police Managers and UMPAPA, all
Palo Alto employees already pay their full employee PERS
contribution (7%, 8% or 9%).
After 2018, PEPRA allows employers to negotiate an
additional increment, not to exceed 8% for Miscellaneous
and 12% for Safety, as labor contracts are open.
Under PEPRA, the City could seek to negotiate additional
employee contributions towards the employer portion. Any
such negotiations would require agreement and would not
be subject to impasse procedures.
8
OTHER PENSION REFORM CHANGES
Restrictions on
Hiring Retirees
PEPRA requires new retirees to sit out for at least 180 days before returning to work as a retiree. The local agency’s governing
body may make exceptions for critically needed positions. The 180-day rule does not apply to police or fire retirees.
Forfeit Pension
on Felony
Conviction
PEPRA requires a pension be forfeited upon a felony conviction related to the performance of official duties. It appears that
this requirement only applies to pension benefits earned after the date of the felony. PEPRA states the rule applies to both
new and current employees, although CalPERS has stated it believes the rule may violate the vested rights of current
employees.
Eliminate
Airtime
CalPERS allows employees to purchase service credit for years in excess of those actually worked, known as “air time.”
Effective January 1, 2013, PEPRA bans the practice of allowing the purchase of “air time.” PEPRA applies the ban to both new
and current employees. CalPERS has stated that it believes the application of this rule to current employees may violate
vested rights.
Prohibit
Retroactive
Benefit Increases
Historically, CalPERS has required benefit increases to apply to all service earned by current employees, including service
already earned in prior years. Effective January 1, 2013, PEPRA requires that any enhancements to formulas or benefits must
occur prospectively and not retrospectively.
Prohibit Pension
Holidays
CalPERS calculates the annual contribution for all employers. Participating employers must pay the full amount of the annual
required contribution as determined by CalPERS. In some past years, when high returns on investments led to funded status
well over 100%, CalPERS granted employers a “pension holiday,” meaning employers were not required to contribute to
CalPERS for that year. Effective January 1, 2013, PEPRA prohibits pension holidays, except if (a) the plan is more than 120%
funded; (b) excess earnings could result in disqualification of tax deferred status; and (c) the CalPERS board finds that
additional contributions would conflict with its fiduciary duty.
Other changes PEPRA makes other changes, including requiring local elected members first elected after January 1, 2013, to receive pensions
based on the highest average compensation earned as an elected member; instructing CalPERS to develop regulations to
adjust costs between employers where excessive compensation is paid by a successor agency; increasing Disability
Retirements for certain public safety employees; and requiring equal health benefits vesting rules for non-represented and
represented employee groups.
9
ATTACHMENT B
Summary of Employee Feedback
Benefits/Pension 12/12/12
Health/Pension
Forum
1/10/13
Health/Pension
Forum
Total
Health Care Plan –
City Pays 100%
10 90 190
Health Care Plan –
City Pays 90%
67 3 70
Health Care Plan –
City Pays 75%
0 0 0
Health Care Plan –
City Pays 60%
3 0 3
Health Care Waiver -
$284
8 2 10
Dental Plan – Current 39 15 54
Dental Plan – City
Pays Less
2 2 4
Vision 5 3 8
Short Term Disability 8 29 37
Long Term Disability 2 2 4
EAP 0 1 1
457 Matching 30 0 30
Tuition/Technology
Reimbursement
0 24 24
Increase in
Employee’s Pension
Contribution
0 1 1
Retiree Medical 227 252 479
Retiree Medical - City
Pay 50%
0 0 0
PERS Survivor
Benefit
14 3 17
Retirement Health
Savings Account
2 0 2
RETIREMENT FORMULAS & BENEFIT FACTORS
Understanding Your Retirement Formula
Your benefit &'ctor is the percentage of pay to which you are entitled for each
year of service. It is determined by your age at retirement and the retirement
formula that your employer(s) has contracred for you. This guide explains the
followiog Local Miscellaneous retiremem formulas:
You can refer to your CalPERS Annual Member Statement to verilY your
retirement fonnula.
Starting on the following page you'll find two charts for each of the Local
Miscellaneous formulas. The first charr shows how the benefit factor increases
for each quarter year of age. The second chart for each formula shows the
percentage of final compensation you will receive. There is no cap and it can
.;:xceed 100 percent. Not all benefit factors increase to age 63.
If your retirement fomlula has changed after you began employment, be aware
that some retirement formula changes contracted by your employer may not
enhance retirement benefits for all members. To take full advantage of your
retirement benefits, carefully review your benefit information and request an
estimate of your retirement allowance.
8S8 CalPERS !er 888-225·73:;77) ; www.ca!pers.ca.gcv
BENEFIT FACTORS
The chart below shows how the benefit mctor increases for each quarter year of
age from 50 to 63. .
51 1.576 r
52 1.686
53
2.014
2.066 2.092
57 2.104 2.118 2.130 2.144
58 2.156 2.170 2.182 2.196
2.210 2.222 2.236 2.248
60 2.262 2.274 2.288 2.300
61 2.314 2.326
62 2.366 2.378
63 or older 2.418
CalPERS Member Publication I Loea: Miscellaneou·s
PERCENTAGE OF FINAL COMPENSATION
-I 5 7.13 : 7.61 8.14 18.71 9.33 I 10:00 110.26 IO.52 [ 1078: 11.05. 11.3111.57 11.83 i 12.()9
I 6 i 8.56 9.13 9.77 i 10.45 11.20112.00112.31 I 12.62 1 12.94 13.26' 13.57 13.88114.20' 1451
I 7 ! 9.98 10.65 11.40 1~.l9 13.06 i 14.00 i 14.36 , 14.73 , 15.0: . 15.47 : 15.83 16.:0 116.56 16.93 I
: 8 ! 11041 12.18 I 13.02113.94 ,14.93 16.00 16.42! 16.83 ! 17.2) 17.68· 18.10 ! 18.)1 • 18.93 19.34 I
9 12.83 I 13.70 ! 14.65 15.68: 16.79 18.00 18.47' 18.94 19.40 19.89 20.36, 20.83 i 21.29 , 21.76 .
16 22.82 I 24.35 26.05 1:27.87 29.86132.()0 32.83 i :)3.66 134.50 • 35.36 36.19 37.0237.86! 38.69
I 17 • 24.24: 25.87 27.68! 29.61 31.72! 34.00 I 34.88 35.77 i 36.65 : 37.57 38045 39.34 40.22 4!.ll i
i 18 : 25.67 27.40 29.30 i 31.36 33.59 I 36.00 I 36.94 37.87 38.81! 39.78 i 40.72 41.65 42.59 43.52 '
! 19 ·27.09 28.92, 30.93 33.10 I 35.45 I 38.00 '38.99 39.98 40.96' 41.99 ' 42.98 i 43.97 1 44.95 45.94
20 28.52 30.44 32.56 34.84 I 37.32 40.00 41.04 I 42.08 43.12 44.20' 45.24 I 46.28 1 47.32 L 48.36·
21 29.95 1 31.96 134.19' 36.58 ~ 3919 42.00 43.09 144,18.45.28 46.41 47.50! 48.59: 49.69 I 50.78 •
22 31.37 '33.48 I 35.82 I 38.32 1 41.05 . 44,00 45.14: 46.29 47.43 I 48.62 49.76150.91 52.05! 53.20 :
~ 23 32.80 ! 35.01 , 37.44 i 40.07 42.92 I 46.00 i 47.20 48.39' 49.59 I 50.83 52.03 53.22 54.42 55,61'
1 24 '34.22 36.53.39.07! 41.81 44.78 i 48,00 I 49.25 50.50! 51.741 53.04 I 54.29 55.54 56.78 58.03'
1 25 135.65 38.05 40.70 43.55 i 46.65 150.001 51.30 52.60, 53.90 . 55.25 I 56.55 • 57.85 ! 59.15 60.45
26 . 37.08 39.57 4233 45.29 I 48.52 52.00 53.35 I 54.70 56.06 57.46 i 58.81 60.16 I 61.52 I 62.87
27 38.50 i 41.09 143.96 47.03 I 50.38 54.00 55,40 I 56.8158.21 1 59,67 . 61.07 . 62.48 :63.88 I 65.29 ,
28 39.93 1 42.62 I 45.58 1 48.78 52.25 56.00 57AGei 58.91 60.37! 61.88 63.34 64.791 66.25 . 67.70 :
, 29 . 41.35 ! 44.14 ' 47.21 I 50.52 . 54.11 i 58.00 : 59.51 61.02 62.52! 64.09 65.60 G7.1I 68.61 70.12-'
1 30 '42.78 . 45.66 48.84. 52.26 55.98: 60.00 I 61.56 63.12. 64.68 66.30 1 67.86 69.42 70.98 72.54'
31 ,44.21 47.18 50.47i 54.00 57.85 I 62,00 1 63.61 [65.22 66.84 68.51 i 70.12 ~ 71.73 73.35 74.96
32 45.63 48.70 52.10 55.74 I 59.71 i 64.00 65.66 j 67.33 . 68.99 70.72' 71.38 1 74:05 ' 75.71 ~ 77.38
33 47.06 I 50,23 1 53.72 57.49 61.5866.00 67.72 , 69.43 ! 71.15 72.93 74.65 1 76.36 ! 78.08 I 79.79
34 -I 51.75 I 55.35 59.23 I 63.44 68.00 69.77' 71.54 . 73.30 75.14 76.91 78.6880.441 82.21 I
: 35 -I -'56.98 60.97 1 65.31 • 70.00 : 71.82 73.64 75.46. 77.35 79.17 80.99 82.81 84.63 1
36 I -I 62.71 1 67.18 noD i 73.87 75.74. 77.621 79.56 I 81.43183.30 . 85.18 . 87.05 .
37 - ! -69.04 I 74.00 I 75.92 77.85 79.77' 81.77 83.69, 85.62 1 87.54 I 89.47
38 -i - -i 76.00 77.98 i 79.95 . 81.93 83.98' 85,96 1 87.93 1 89,91 : 91.88
I 39 - -.-:.'.:..-80.03 182.06 • 84.08 I 86.19 . 88.22 . 90.25 ! 92,27 i 94.30 .
! 40 - -I - - -I 84.16 86.24 188.40 '90.48 92,56 94.64 96.72 1
888 CalPERS (or 888·225·7377) 1 www.calpers.ca.gov 23
BENEFIT FACTORS
The chart below shows how the benefit factor increases for each quarter year of
age from 50 to 63.
51 1.156 1.172 1.190 1.206
52 1.224 1.260 1.278
53 1.296 1.316 1.336 1.356
54 1.376 1.396 1.418 1.438
55 1.460 1.482 1.506 1.528
56 1.552 1.576 1.600 1.626
57 1.650 1.678 1.704 1.730
58 1.758 1.786 1.816 1.846
59 1.874 1.906 1.938 1.970
60 2.000 2.034 2.100
61 2.134 2.168 2.238
62 2.272 2.308 2.382
63 or older 2.418
CalPERS Menber PL.:olicatior !. Lecal Miscellaneous
PERCENTAGE OF FINAL COMPENSATION
888 CalPERS (or 888-225-73771 I www.calpers.ca.gov 25
BENEFIT FACTORS
The chatt below shows how the benefit factor increases for each quarter year of
age from 50 to 55.
50 2.000 2.025 2.050 2.075
51 2.100 2.125 2.150 2.175
52 2.200 2.225 2.250 2.275
53 2.300 2.325 2.350 2.375
2.400 2.425 2.450 2.475
2.500
CalFERS Member Publication I Local Miscellareous
PERCENTAGE OF FINAL COMPENSATION
Age I 50 I 5] I 52 I 53 54, 55-
Bendi, Factor 2.000 • 2.100 2.200 I 2.100 . 2.400 2.'iOO
• Years of Seryice Percentage of Fioal Compensation t=1
6
" ... ~-+I,~ .. ~I~:OO -r1O.5o 1 11.00 L~_1-1-:..5=O==--+~~12.00 T~-12~50~--,
~_ , 12.00 ... 12.60.. I 13.20 13.80 I' 14.40 , 15.00 '
, 7 ' 14.00 . 14.70 15.40 16.10 16.S0 17.50
;--~_8~ ]6.00. 16.S0 ,u-:60 i -1-8-.40--'1-19.2020:00
r-" 9=:518.00 ' , . IS.90X 19.80 '=r" 20.70 .. 1 21.60 22.50 l ~ -i --;,: ± -;;-;: I ~:: -, --;;: ~ J--~{:~
12 24.00 I 25.20 2.6.40 .. , .. 27'~._i-. 2
3
8
1
'.2800 .1' __ 3
32
° .. :°,,°
0
'j.'
I 13 +-26 00 27.30 28.60. 29.90 .... ... _
1-' --14--, -28:00 1 29.40 I 30:;;;;---~-3·-2-.2-0~+-"3·-3.-60-35.00
LIS I 30.00 i 31.50 I 33.00 I 34.50 '36.00 37.50_-1
i-16 I 32.00 1 33.60 ~ 35.20 I 36:8E __ L 38.40 40.00
l...~:: ..... -j-..... _ ::.~~--+-1~::~-t :r::~ : ::~{-+ :;:~6~ ~;:~~~ .. ~_19==+= 38.00 1 __ 39.90 .. ; -41.80--I"~70=+=~~4750-
r--~~~--1 :~.~~ , ::~~:=::~: I~{-±=~~-.. :~:~~ ! t "-i «00 I "'" '""" M> i '2"'_ -t-"."" . -~--t_:;~_1 ::~ +-;~::: .... -L-.~~:~:-_+ i~:;'_L-_~~~~l
L-~_ j.. __ 50.001. __ S2.50 ',' 55.0os=, . 57.50 60.00 "'1-' _--"2.50 __ 1
, I I I c--__ 26_ ' 52.00 ' 54.60 I.. 57.20 ... 59.80 62.40 65.00
f
l-2287 54.00 56.70 J' _59.40 , ... ~_62.10 64.80 I 6750_j
I
' 56.00 58.80 61.60, 64.40 . 67.20 , 70.00 I
29 58.00 60.90 I 63.80 I 66.7~ 69.60 ;~-n.50 --1 Dol 60.00 63.00 66.00: 69.00 72.00 ---t-75.00 --I
L __ J.l __ .. -t .. _62.:.?~0~ .. 1 65.:.!.0_ 68.20. 1_ :L30~ _-''"0 -t_77.5~
i __ ~2 i.. 64.00 i 67.20 70.4°3.60. 76.80 .... 80.00~ ~ __ 66.~_O ~ .. I 69.30 72.60 .. 1~.90L........z2:20~_ ..... ~_82.50_j'
~_~ 71.40 74.80 I 78.20 I 81.60 ! 85.00 'I-=~-=-I' ... ',-'" 77.70 "~I,' -----SO:;O~-r 84.00~ I ... 87.50 .. ! '~I ~ ~=r= ---r 82.80 "-=1-'" 86.4O......t~90.00===
I :: t __ _ 1 88.80-+ :~:~~ ~
aaa CalPERS (or a88-225-73771 I www.calpers.ca.gov 27
BENEFIT FACTORS
The chart below shows how the benefit factor increases for each quarter year of
age from 50 to 55.
2.035 2.070 2.105
51 2.140 2.175 2.210 2.245
52 2.280 2.315 2.350 2.385
53 2.455 2.490 2.525
54 2.595 2.630 1.665
55+
CalPERS Member Publication I Local MiscelialiBous
PERCENTAGE OF FINAL COMPENSATION 27~5
5 10.00 10.70 11.40 12.1 0 12.80 13.50
6 12.00 12.84 13.68 1452 15.36 16.20
7 14.00 14.98 15.96 16.94 17.92 18.90
8 16.00 17.12 18.24 19.36 20.48 21.60
9 18.00 19.26 20.52 21.78 23.04 24.30
10 20.00 21.40 22.80 24.20 25.60 27.00
11 22.00 23.54 25.08 26.62 28.16 29.70
12 24.00 25.68 27.36 29.04 30.72 32.40
13 26.00 29.64 31.46 35.10
14 37.80
15
16
17 38.76
18 41.04
19 43.32
20 45.60
21 47.88
50.16
52.44
60.50
26 55.64 62.92 66.56
27 65.34 69.12 72.90
28 75.60
29
30
31
32
75.24 84.48 ~"-77.52 87.04 91.80
79.80 89.60 94.50
92.16 97,20
37 94.72 99.90
38
888 CalPERS (or 888·225·73771 I www.calpers.ca.gov 29
BENEFIT FACTORS
The chart below shows how the benefit factor increases for each quarter year of
age from 50 to 60.
51 2.100 2.125 2.150
52 2.200 2.225 2.250
53 2.300 2.325 2.350
54 2.400 2.425 2.450 2.475
55 2.500 2.525 2.550 2.575
56 2.600 2.625 2.650 2.675
2.700 2.725 2.750 2.775
2.800 2.825 2.850 2.875
2.900 2.925
3.000
CalPERS Merrber Publication I Local Miscellaneous
1
I
I
!
•
PERCENTAGE OF FINAL COMPENSATION 3~O
~ I 5 10.00 10.50 I 11.00 11.50 12.00 12.50: 13.00 I 13.50 14.00 14.50 I 15.00 , , ! ,
i 6
7
8
9
I 10
i 11
12
13
14
1
15
16
! 17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
35
36
37
38
39
40
12.00 12.60 i 13.20 13.80 14.40 15.00 15.60 16.20 16.80 17.40! 18.00
I 'I' 14.00 14.70 15.40 i 16.10 ' 16.80 ! 17.50 18.20 18.90 19.60 20.30 21.00
I 16.00 I 16.80 17.60! 18.40 ,19.20 20.00 20.80! 21.60 i 22040 23.20 24.00
i 18.00 18.90 19.80 20.70 21.60 I 22.50 : 23.40 i 24.30 i 25.20 26.10 27.00 I
20.00 21.00 i 22.00 23.00 24.00 25.00 26.00 I 27.00 28.00 29.00 1 30.00 '
22.00 23.10 i 24.20 25.30 26AO 27.50 i 28.60 29.70 30.80 31.90 i 33.00
24.00 25.20 I 26AO 27.60: 28.80 30.00 i 31.20 32.40 33.60: 34.80 I 36.00
26.00 I 27.30 i 28.6'0 29.90 I 31.20 32.50! 33.80 35.10 36.40 37.70, 39.00
i 28.00 29AO i 30.80 32.20 33.60 i 35.00 36040 37.80 39.20 40.60 42.00
I 30.00 31.50 33.00: 34.50 i 36.00 37.50 39.00 40.50: 42.00 I 43.50 45.00 i
32.00 ! 33.60 35.20 i 36.80 38.40 i 40.00 41.60 43.20 44.80 46.40 48.00
; 34.00 • 35.70 37AO 39.10 40.80 42.50 44.20 45.90! 47.60 i 49.30 5l.00
36.00 37.80 39.60 41.40 43.20 45.00 46.80! 48.60 50040 I 52.20 i 54.00
38.00
40.00
39.90 41.80
42.00 I 44.00
43.70 45.60 i 47.50 1 49.40 51.30 53.20 i 55.1 0 i 57.00
46.00 : 48.00 50.00 i 52.00 54.00 56.00 I 58.00 ' 60.00 !
i 42.00 44.10 i 46.20 48.30 i 50040 52.50 I 54.60 56.70 i 58.80 60.90 63.00 i
! 44.00 46.20 I 48.40
I 46.00 I 48.30 50.60
i 50.60 52.80 i 55.00 57.20 59.40 i 61.60 63.80 66.00
52.90 55.20 i 57.50 59.80 I 62.10 64040 66.70 .. 1 69.00 :
, 55.20 : 57.60 ! 60.00 62040 i 64.80 67.20 69.60 i 72.00 i I 48.00 i 50040 I 52.80
• 50.00 ! 52.50 55.00
, 52.00 I 54.60 57.20 i 59.80 62.40 65.00 67.60 70.20 , i
72.80 i 75.40 i 78.00
54.00 56.70 59.40 I 62.10 64.80
56.00 58.80 I 6L60 64.40 I 67.20
: 58.00 60.90 I 63.80 66.70 :.69.60
67.50 • 70.20 i 72.90 75.60 i 78.30 ! 81.00
70.00 ! 72.80 i 75.60 78.40 81.20 84.00
78.30 i. 81.20 72. So I 75.40 87.00 ! 84.10
. 90.00 I 78.00 81.00
80.60 83.70
84.00
86.80
87.00
89.90 I 93.00 I
i 64.00 i 67.20 i 70AO I 73.60 ! 76.80 I 80.00 83.20 96.00 i 89.60 92.80 86.40
I 99.00 I 89.10 92AO 95.70
-~ : 71.40 74.80 i 78.20 81.60 85.00 88040 91.80, 95.20 98.60 102.00
77.00 ! 80.50 84.00 87.50 • 91.00 i 94.50 105.00
82.80 i 86.40
98.00 i 101.50 i
! 90.00 i 93.60 97.20 100.80 104040 108.00 I
88.80 92.50 96.20 I 99.90 i 103.60 107.30 111.00 j
i-I • 95.00 98.80 102.60! 106AO 110.20 114.00 I
i -: --- i -101.40 105.30 109.20 113.10 i 117.00 :
-i ---I -_ -: 108.00 112.00! 116.00 120.00 I
888 CalPERS (or 8B8-225~73771 www.calpe-rs.ca.gov 31
RETIREMENT FORMULAS AND BENEFIT FACTORS
Understanding Your Retirement Formula
Your benefit £actor is the percentage of pay to which you are entitled for each
year of service. It is determined by your age at retirement and the retirement
formula that your employer(s) has contracted for you. This guide explains the
following Local Safety retirement formulas:
2~O
You can refer to your CalPERS Annual Member Statement to verilY your
retirement formula. If you have safety service with multiple employers and
under different safety formulas, ,here could be more than one maximum
benefit cap applied to your retirement allowance. You should contact CalPERS
for more information.
Starting on rhe following page, we have provided two charts for each of the
Local Safety formulas. The first chart shows how the benefit factor increases for
each quarter year of age from 50 to 55, as well as showing the required years of
service to reach your maximum percentage allowed by Jaw. The second chart
shows the percentage of final compensation you will receive.
888 CalPERS lor 888-225-7377: I www.calpers.ca.go"
BENEFIT FACTORS
The chart below shows how the benefit factor increases for each quarter year
of age from 50 to 55, as well as showing the required years of service to reach
your maximum percentage allowed by law.
50 2.000% 45.000
50 \4 2.035% 44.226
50 ¥" 2.070% 43.478
50% 2.105% 42.775
51 2.140% 42.056
5114 2.175% 41.379
51V. 2.210% 40.724
510/4 2.245% 40.090
52 2.280% 39.474
52 \4 2.315% 38.877
52 ¥" 2.350% 38.298
52% 2.385% 37.736
53 2.420% 37.191
53 V4 2.455% 36.660
---·········i
53 ¥" 2.490% 36.145 ........ .~~ .....
5H:i 2.525% 35.644
54 2.560% 35.157
5414 2.595% 34.683
54'1. 2.630% 34.221
540/. 2.665% 33.772
55 or older 2.700% ..~ ..... 33.334
CalPERS Mel'iiber Publication I Local Safety
PERCENTAGE OF FINAL COMPENSATION
Years of Service I of Final Compensation I
I 5 10.00 10.70 11.40 12.10 12.80 13.50
6 12.00 12.84 13.68 14.52 15.36 16.20 !
7 14.00 14.98 15.96 16.94 17.92 18.90
8 16.00 17.12 18.24 \9.36 20.48 21.60
9 18.00 19.26 20.52 21.78 23.04 24.30
IQ 20.00 21.40 22.80 24.20 '25.60 27.00
11 22.00 23.54 25.08 26.62 28.16 29.70
12 24.00 25.68 27.36 30.72 32.40
13 26.00 27.82 29. .46 I 33.28 35.10
14 . 28.00 29.96 31.92 33.88 35.84 37.80
15 30.00 32.10 34.20 36.30 38.40 40.50
16 32.00 34.24 36.48 38.72 40.96 43.20
\7 34.00 36.38 38.76 41.14 43.52 45.90 .
18 36.00 , 38.52 41.04 43.56 46.08 48.60
19 38.00 I 40.66 43.32 45.98 48.64 51.30
20 40.00 . 42.80 45.60 48.40 51.20 54.00
21 I 42.00 44.94 47.88 50.82 53.76 56.70
22 44.00 47.08 50.\6 53.24 56.32 59.40
23 46.00 49.22 52.44 55.66 58.88 62.10
24 48.00 51.36 54.72 58.08 61.44 64.80
25 50.00 53.50 57.00 60.50 64.00 67.50
26 52.00 55.64 59.28 62.92 , 66.56 70.20
27 54.00 57.78 61.56 65.34 69.12 72.90
28 . 56.00 59.92 63.84 67.76······ 71.68 75.60
29 58.00 62.06 66.12 70.18 74.24 78.30
30 60.00 64.20 68.40 72.60 76.80 81.00
3\ 62.00 66.34 70.68 75.02 7936 83.70
32 64.00 68.48 72.96 77.44 81.92 86.40
33 70.62 75.24 79.86 84.48 89.10
34 -..... i -77.52 82.28 . 87.04 90.00 max
35 --84.70 89.60 90.00 max
36 ---90.00 max I 90.00 max
37 -----90.00 max
B88 CalPERS lor 888-225-7377) I www.calpers.ca.goY 27
BENEFIT FACTORS
The chart below shows how the benefit factor increases for each quarter year
of age from 50 to 55, as well as showing the required years of service to reach
your maximum percentage allowed by law.
50'" 1.450% 62.069
50 1.474% 61.059
50 '.4 1.498% 60.080
51 1.522% 59.133
51 V4 1.550% 58.065
51 Y, 1.576% 57.107
51 % 1.602% 56.180
52 1.628% 55.283
52 'A 1.656% 54.348
52V2 1.686% 53.381
52'" 1.714% 52.509
53 1.742% 51.665
53',4 1.772% 50.790
53V2 1.804% 49.890
5H'. 1.834% 49.074
54 48.232
1.900% 47.369
1.932% 46.584
45.779
2.000% 45.000
Ca'PEflS MeMber Publication I Locai Safe'y
PERCENTAGE OF FINAL COMPENSATION 2'55
Age ')0 ,}1: 52
Bendlt FactoJ 1426 1.522 1.628
Years of Service of Final
5 7.13 7.61 8.14 8.71 9.33 10.00
6 8.56 9.13 9.77 10.45 11.20 12.00
7 9.98 10.65 11.40 12.19 13.06 14.00
8 11.41 12.18 13.02 13.94 14.93 16.00
9 12.83 13.70 14.65 15.68 16.79 18.00
10 14.26 15.22 16.28 17.42 18.66 20.00
11 15.69 16.74 17.91 19.16 20.53 22.00
12 17.11 18.26 19.54 20.90 22.39 24.00
13 18.54 19.79 21.16 22.65 24.26 26.00
14 19.96 21.31 22.79 24.39 26.12 28.00
15 21.39 22.83 24.42 26.13 27.99 30.00
16 22.82 24.35 26.05 27.87 29.86 32.00
17 24.24 25.87 27.68 29.61 31.72 34.00
18 25.67 27.40 29.30 31.36 33.59 36.00
19 27.09 28.92 30.93 33.10 35.45 38.00
20 28.52 30.44 32.56 34.84 37.32 40.00
21 29.95 31.96 34.19 36.58 39.19 42.00
22 31.37 33.48 35.82 38.32 41.05 44.00
23 32.80 35.01 37.44 40.07 42.92 46.00
24 34.22 36.53 39.07 41.81 44.78 48.00
25 35.65 38.05 40.70 43.55 46.65 50.00
26 37.08 ·39.57 41.33 45.29 48.52 52.00
27 38.50 41.09 43.96 47.03 50.38 54.00
28 39.93 42.62 45.58 48.78 52.25 56.00
29 41.35 44.14 47.21 54.11 58.00
30 42.78 45.66 48.84 52.26 55.98 60.00
31 44.21 47.18 50.47 54.00 57.85 62.00
32 45.63 48.70 52.10 55.74 59.71 64.00
33 50.23 53.72 57.49 61.58 66.00
34 55.35 59.23 63.44 68.00
35 60.97 65.31 70.00
36 67.18 72.00
37 74.00
38 76.00
39 78.00
40 80.00
888 CalPERS (or 888-225-73771 I www.calpers.ca.goy 29
BENEFIT FACTORS
The chart below shows how the benefit factor increases for each quarter year
of age ITom 50 to 55, as well as showing the required years of service to reach
your maximum percentage allowed by law.
SOy, 2.050"", 43.903
50% 2.075% 43.375
51 2.100% 42.858
51 '4 2.125% 42.353
2.175% 41.380
2.200% 40.910
2.225% 40.450
40.000
52 'i4 2.275% 39.561
53 2.300% 39.131
53 '4 2.325% 38.710
531/,
53 'A 37.895
54 37.500
54'4 2.425% 37.114
54 'h 2.450%
54',4 2.475%
55 or older 2.500%
Ca!PERS Member Publicaflon ! Local Safety
PERCENTAGE OF FINAL COMPENSATION
7 I 14.00 I 14.70 15.40 16.10 16.80' 17.50
8 16.00 16.80 17.60 18.40 19.20 20.00
9 18.00 18.90 19.80 20.70 21.60 22.50
10 20.00 21.00 22.00 23.00 24.00 25.00
11 22.00 23.10 24.20 15.30 26.40 27.50
12 24.00 25.20 26.40 27.60 28.80 30.00
13 26.00 27.30 28.60 29.90 31.20 32.50
14 28.00 29.40 30.80 32.20 33.60 35.00
15 30.00 31.50 33.00 34.50 36.00 37.50
16 32.00 33.60 35.20 : 36.80 38.40 40.00
17 34.00 35.70 37.40 ! 39.10 40.80 42.50 . 18 36.00 37.80 39.60 41.40 43.20 45.00
19 38.00 39.90 41.80 43.70 45.60 i 47.50
20 40.00 42.00 44.00 46.00 48.00 50.00
21 i 42.00 44.10 46.20 48.30 50.40 52.50
22 44.00 46.20 48.40 50.60 52.80 55.00
23 46.00 i 48.30 50.60 52.90 55.20 57.50
24 48.00 50.40 52.80 55.20 5;.60 60.00
25 50.00 52.50 55.00 57.50 60.00 62.50
26 52.00 54.60 57.20 59.80 62.40 65.00
27 54.00 56.70 59.40 62.10 64.80 67.50
28 56.00 58.80 61.60 64.40 67.20 70.00
58.00 60.90 63.80 72.50 29
60.00 63.00 66.00 75.00 i 30
66.70
69.00
i 69.60 ! """.----
72.00
31 62.00 65.10 68.20 71.30 74.40 77.50
32 64.00 67.20 70.40 73.60 76.80 80.00 i
: 33 : 69.30 72.60 75.90 79.20 82.50
34 74.80 78.20 81.60 85.00
35 -80.50 84.00 87.50
36 : ---86.40 90.00 max
37 -: 90.00 max
888 CalPEAS (or 888-225-7377) I www.ca1pers.ca.gov 31
BENEFIT FACTORS
The chart below shov." how the benefir factor increases for each quarter year
of age from 50 to 55, as well as showing rhe tequired years of service to reach
your maximum percentage allowed by law .
• i\gc at Rctiremen Years Nee(lcd to Attain 90%
50 30.000
50 'At 3.000% 30.000
50 'h 3.000% 30.000
50% 3.000% 30.000
51 3.000% 30.000
51 '.4 3.000% 30.000
51 'h 3.000% 30.000
51% 3.000% 30.000
52 3.000% 30.000
52 \4 3.000% 30.000
52\1, 3.000% 30.000
52'4 3.000% 30.000
53 3.000% 30.000
53 'Ai 3.000% 30.000
53 II:! 3.000% 30.000
53% 3.000% 30.000
54 3.000% 30.000
54 14 3.000% 30.000
54\12 3.000% 30.000
54';. 3.000% 30.000
55 or older 3.000% 30.000
CatPERS Merr,oe' PJbl,cation I Local Safety
PERCENTAGE OF FINAL COMPENSATION
Age
I
')0 51 52 53 54 55+
Benefit Factor 3.aOO 3.000 3.000 3.000 .?OOO 3.000
Years of Service Percentage of Final Compensation
5 15,00 15.00 I 15,00 15,00 15.00 15.00
I 6 18.00 18.00 18,00 18.00 18,00 18.00 ........ -~
7 21.00 21.00 21.00 21.00 21.00 21.00 ........ ~-...
8 24.00 24.00 I 24.00 24.00 24,00 24,00 ....... ~-..
9 , 27.00 27.00 27.00 27,00 27.00 27.00
10 I 30.00 30.00 30.00 30.00 30.00 30,00
11 33.00 33,00 33.00 33.00 33.00 33,00 .. ~ ..
12 36,00 36,00 36,00 36.00 36,00 36.00
13 39.00 39.00 39,00 39,00 39.00 39.00 ........ ~
14 42.00 42,00 42,00 42,00 42,00 42,00
15 45,00 45,00 45.00 45.00 45.00 45.00
........ -
16 48,00 48.00 48,00 48.00 48,00 48.00
-~ ..
: 17 51.00 51.00 51.00 51.00 51.00 51.00
18 54.00 54,00 54,00 54.00 54.00 54.00
19 57.00 57.00 57.00 57,00 57,00 57.00
20 60.00 60.00 60,00 60,00 60,00 60.00
: 21 63,00 63.00 63.00 63.00 63.00 63,00
22 66.00 66.00 66,00 66,00 66,00 66.00
23 69.00 69.00 69.00 69.00 69.00 69.00 .. ~. I 24 72.00 nOD 72.00 72.00 noD 72.00 .. ~.
25 75.00 75.00 75.00 75.00 75.00 : 75.00 ....... ~--... ....... -
26 . 7B.00 78.00 78.00 78.00 78.00 78.00
27 81.00 81.00 81.00 81.00 81.00 81.00
"----...
28 84.00 84.00 84.00 84,00 84.00 84.00
-~.
29 87.00 87,00 87,00 87,00 87,00 87.00 ....... _.
30 90.00 max 90,00 max 90.00 max 90.00 max 90.00 max 90.00 max
~ ....... ~. ....... '----..
888 CalPERS lor 8BB·225·7377} I www.calpers.ca.gov 33
~-.. ~~~-------~
BENEFIT FACTORS
The chart below shows how the benefit factor increases for each quarter year
of age from 50 to 55, as well as showing the required years of service to reach
your maximum percentage allowed by law.
ge at Retiremen Years Ne~dcd to Attain 900{1
50 37.500
50 14 2.430% 37.037
SOliz 2.460% 36.586
50'4 2.490% 36.145
51 2.520% 35.715
51 '4 2.550% 35.295
51 liz 2.580% 34.884
51 '/4 2.610% 34.483
52 2.640% 34.091
52 '4 2.670% 33.708
52 liz 2.700% 33.334
52 '4 2.730% 32.967
53 2.760% 32.609
53 14 2.790% 32.258
53 112 2.820% 31.915
53¥4 2.850% 31.579
54 2.880% 31.250
54 V. 2.910% 30.928
54 liz 2.940% 30.613
543f4 2.970% . 30.303
55 3.000% 30.000
CalPERS Member Publication I Local Safety
PERCENTAGE OF FINAL COMPENSATION 3~5
Age 50 51 52 53 54 55+
Beneht Factor 2AOO 1.520 2.640 2.760 2.880 },OOO
Years of Service i Percentage of Final Compensation
12.60 I I I 14.40
,
15.00 5 12.00 13.20 13,80
6 14.40 15.12 15.84 16.56 17.28 18.00 I
7 16,80 17,64 18.48 19.32
,
20.16 21.00
8 19.20 20.16 21.12 22.08 23.04 24.00 .. -...
9 21.60 22,68 i 23.76 24,84 25.92 27.00
: 10 I 24.00 25.20 26.40 27,60 28,80 30.00 ,
11 : 26.40 27,72 29.04 30.36 31.68 33,00
12 28.80 30.24 31.68 33.12 34.56 36.00 ... -...
13 31.20 32.76 34.32 35.88 37.44 39,00
14 33,60 35.28 36.96 38,64 40.32 42.00
15 36,00 37,80 39.60 41.40 43,20 45.00
16 38.40 40.32 41,24 44.16 I 46,08 48,00
17 40,80 42,84 44.88 46,92 48,96 51.00
,~-----
18 43,20 45.36 47.52 49.68 51.84 54,00 r-----... -..
! 19 45,60 47.88 50,16 52.44 54.72 57,00
~ 20 48,00 50.40 52,80 55,20 57,60 60,00 ........... _ ...
55.44 57,96 60.48 21 50.40 52,92 63,00
22 52,80 55.44 58.08 60,72 63,36 66,00
23 55,20 57,96 60,72 63.48 66.24 69,00
24 57,60 60.48 63.36 66.24 69,12 72.00 ,
15 60,00 63,00 66,00 69,00 71.00 75,00
26 I 62.40 65,52 68,64 71.76 74,88 78,00
f--: 27 64.80 68.04 71.28 7452 77.76 81.00
28 67,20 70,56 73,92 77.28 80.64 84,00
29 69,60 73.08 76.56 80,04 83.52 87.00
30 i 72.00 75.60 79,20 82.80 86.40 90,00 max
31 I 74.40 78,12 81.84 85.56 89,28 90,00 max
32 76,80 80,64 84,48 88.32 90,00 max 90.00 max .............. ~ .....
33 -83.16 87,12 90,00 max 90,00 max 90,00 max ... _-
34 --89.76 90,00 max 90,00 max 90,00 max
35 --..... -90,00 max 90,00 max 90,00 max
666 Cal PEAS lor 888-225-73771 I www.calpers.ca.gov 35
! // California Public Employees' Retirement System
P.O. Box 942709
Sacramento, CA 94229-2709
(888) CalPERS (or 888-225-7377)
TTY: (877) 249-7442
www.calpers.ca.gov
Circular Letter
TO: ALL CALPERS EMPLOYERS
Reference No.:
Circular Letter No.: 200-055-12
Distribution: IV, V, VI, X, XII, XVI
Special:
December 3,2012
SUBJECT: IMPLEMENTATION OF PUBLIC EMPLOYEES' PENSION REFORM
ACT OF 2013
The purpose of this Circular Letter is to confirm CalPERS current interpretation of the
Public Employees' Pension Reform Act of 2013 (PEPRA) and related Public
Employees' Retirement Law (PERL) amendments in Assembly Bill (AB) 340, passed by
the California Legislature on August 31,2012, and signed by the Governor on
September 12, 2012.
Recent news about the enactment of pension reform has generated increased attention
and questions from our employers, members, and stakeholders. We created this
Circular Letter to provide a summary of the provisions outlined in the bill as they apply
to CalPERS retirement and health benefits. We also include information on
mylCalPERS system modifications and explain what actions employers need to take to
comply with the new provisions that change how they do business with CaIPERS.
This Circular Letter is not intended to provide a comprehensive summary of PEPRA and
related law changes. The current interpretations discussed below address the key areas
of the bill that may directly affect CalPERS interactions with our members and
employers. Our pension reform team continues to analyze PEPRA provisions and the
resulting impacts. As CalPERS moves ahead with implementing PEPRA and related
amendments to the PERL, our interpretations may be revised. CalPERS strongly
recommends that all employers review AB 340 in its entirety to understand how the
changes in law will affect their organization and employees.
MEMBERSHIP AND BENEFIT FORMULAS
Definition of a New Member
A new member is defined in PEPRA as any of the following:
• A new hire who is brought into CalPERS membership for the first time on or after
January 1, 2013, and who has no prior membership in any California public
retirement system.
• A new hire who is brought into CalPERS membership for the first time on or after
January 1,2013, and who is not eligible for reciprocity with another California
public retirement system.
Circular Letter No.; 200-055-12
December 3,2012
Page 2
• A member who first established CalPERS membership prior to January 1, 2013,
and who is rehired by a different CalPERS employer after a break in service of
greater than six months.
Effective January 1, 2013, every new enrollment will be tested against this definition of
"new member", regardless of whether the enrollment is for a first-time CalPERS
member or an existing CalPERS member.
It is important to note that if a member has a break in service of more than six months
but returns to service with the same employer, the member would not be considered a
new member under PEPRA. All State agencies, including CSU, are treated as a single
employer under PEPRA, as are all school employers.
CalPERS refers to all members that do not fit within the definition of a new member as
"classic members". All existing CalPERS members as of December 31,2012, will retain
the existing benefit levels for future service with the same employer. Because the new
member determination is made on an appointment-by-appointment basis, classic
members will be tested against the "new member" definition upon each new
appointment and, in some cases, may become "new members" for services under a
new appointment. PEPRA does not require retroactive reductions to benefits earned for
prior service, even where a member separates from service and is later re-hired as a
new member by a new employer and becomes subject to the applicable PEPRA
formula. In these cases, the member's "classic member" service wlll be calculated
separately from his or her service as a "new member".
CalPERS will develop a form for employers to use when a member hired by a CalPERS
agency is considered a classic member as a result of membership with a previous
reciprocal retirement system. Employers must complete the form and retain it in the
individual's employment records for auditability purposes.
mylCalPERS will be updated to include fields on the enrollment page where employers
will identify if the new hire is coming from a reciprocal agency and prompt the employer
for the necessary data elements which subject them to reciprocity. It will be extremely
important for employers to properly identify the status of members at the time of hire.
Based on the information provided by the employer, mylCalPERS will automatically
determine the proper benefit group for each member. In addition, CalPERS will create
for each employer a report identifying their recent enrollments and the correct
corresponding formula based on the information provided at enrollment. If an employer
believes the enrollment is incorrect, they may contact CalPERS to review and correct
the data as necessary. Employers must store, in their own databases, the partiCipant
details necessary to categorize individuals as new members or classic members.
Important! These system enhancements are not yet available. All member enrollments
with an effective date of January 1,2013, or later should be held until employers receive
notification that the transaction may be processed.
·',
I / Circular Leiter No.: 200-055-12
December 3,2012
Page 3
Throughout the upcoming months, CalPERS will create and/or update forms and
publications to assist employers with enrollment transactions for new members. A
Circular Letter will be sent to employers as those resouroes become available.
Benefit Formulas
The reduced benefit formulas and increased retirement age provisions under PEPRA
create new defined benefit formulas for all new miscellaneous (non-safety) and safety
members.
For new safety members, the law provides for three possible retirement formulas and
requires that new safety members be provided with the new formula that is closest to
the formula offered to classic members of the same classification and that provides a
lower benefit at 55 years of age than the formula offered to classic members. The three
new defined benefit formulas for new safety members include a normal retirement age
of 50 and a maximum benefit at age 57.
For all new miscellaneous members, with the exception of State Tier II, the new defined
benefit formula is 2% at age 62, with an early retirement age of 52 and a maximum
benefit factor of 2.5% at age 67. For State Tier II members, the new formula is 1.25% at
age 67.
Please refer to the tables below to see how the reduced benefit formulas compare to
current formulas.
Current Miscellaneous Formula New Miscellaneous Formula
i1.5%@ 65 1.5'7'0@65 (retain existing formula)
1.25%:§L65 1.25%@67
All others 2'7'0@62
I Current Safety Formula New Safety Formula
·3%@50,3%@55,2%@50 2.7% 57
• 2.5'7'0@55 2.5% 57
I 2'7'0@55, 2.5%@60, %@55 .2'7'0@57
The new formulas will be implemented in mylCalPERS to take effect on January 1,
2013. The legislatively mandated formulas and provisions will be merged with the
employer's existing optional provisions, with some exceptions, effective on December
31 , 2012, to create the new benefit groups.
No formal contract amendments are necessary to implement the new mandated benefit
groups. CalPERS will work with employers to update the employer's contract(s) either at
the time of a future amendment or as soon as practicable. CalPERS estimates that it
will take approximately two years to complete this update process for all employers.
Circular Letter No.: 200-055-12
December 3,2012
Page 4
EMPLOYER AND MEMBER CONTRIBUTIONS
Normal Cost Contributions
For public agencies, school employers, CSU, and the judicial branch, a new member's
initial contribution rate will be at least 50% of the total normal cost rate for their defined
benefit plan or "the current contribution rate of similarly situated employees, whichever
is greater", except where it would cause an existing Memorandum of Understanding
(MOU) to be impaired. If an employer determines that an existing MOU is impaired, and
communicates that decision to CalPERS using the required certification form, then any
otherwise impaired contribution rate agreement will apply to new members through the
duration of the MOU. Once the impaired MOU is amended, extended, renewed, or
expires, the new requirements will apply.
CalPERS interprets "similarly situated members" to mean those employees that are in
the same benefit group (meaning those employees with the same benefit formula). The
member contribution rate is not required to change for classic members of a public
agency or school district.
State employees, including both classic and new members (excluding new CSU
members and new judicial branch members), will pay the statutory rates determined
through bargaining and provided for by statute. See Proposed Changes in Member
Contribution Rates for State Employees for changes that PEPRA imposes on State
member contributions available on CalPERS On-Line.
CalPERS will be sending a letter to each employer this month outlining the benefit
formula applicable to new members, as well as the employer and member contribution
rates that will be effective January 1, 2013, for new members. For classic members,
employers should refer to the June 30, 2011 actuarial valuation report that was mailed
in November 2012 to determine what amount reflects 50% of the total normal cost for
classic members. In addition, a new report will be added in mylCalPERS that will
identify member and corresponding member rates by group and plan. The Appointment
Details and Events page in mylCalPERS will also display the appropriate contribution
rates for members.
Beginning January 1,2018, public agencies that have collectively bargained in good
faith and completed impasse procedures (including mediation and fact-finding) will be
able to unilaterally require classic members to pay up to 50% of the total normal cost of
their pension benefit. It is important to note that the employee contribution may only be
increased up to an 8% contribution rate for miscellaneous members, a 12% contribution
rate for local police officers, local firefighters, and county peace officers, or an 11 %
contribution rate for all other local safety members.
Cost Sharing of Employer Contributions
Some public agencies have amended their CarPERS contract to have their members
pay a portion of the employer's contribution. These contributions are paid in addition to
the member contribution rate. Under existing law, such employer cost sharing contract
amendments were required to be tied to a benefit improvement. This requirement will be
eliminated as of January 1, 2013, when the new amendments to the PERL go into
;t
Circular Letter No.: 200-055-12
December 3, 2012
Page 5
effect. In addition, under the new law, cost sharing agreements may differ by bargaining
unit or for classifications of employees subject to different benefit levels as agreed to in
an MOU. The new law also permits cost sharing of the employer costs for non
represented employees as approved in a resolution passed by the public agency.
Employer Paid Member Contributions (EPMC)
PEPRA prohibits EPMC for new members, employed by public agencies, school
employers, the judicial branch, or CSU, unless an employer's existing MOU would be
impaired by this restriction. It is up to each employer to determine if an MOU would be
impaired by this restriction on EPMC for new members. The impaired MOU must have
an effective date of January 1,2013, or earlier.
If the employer determines that an existing MOU is impaired, then any stated EPMC
agreements will apply to new members through the duration of the MOU. CalPERS
must receive the full required member contributions, regardless of the amounts paid by
the member or the employer. Once the impaired MOU is amended, extended, renewed,
or expires, EPMC will no longer be pennitted for new members. CalPERS will
implement a manual validation procedure to ensure EPMC is not being reported on
payroll for new members.
Employers must notify CalPERS in writing if they determine that their MOU is impaired
and provide a certification to CaIPERS, signed by the agency's presiding officer,
confirming that application of Section 7S22.30(c) of PEPRA would cause an existing
MOU to be impaired. CalPERS will provide a form to employers for this certification.
More information on the certification and the fonn will be sent to employers in a future
Circular Letter.
EPMC may continue to be reported for classic members pursuant to existing PERL
provisions. Employers who wish to eliminate or reduce EPMC for classic members are
able to do so under existing law through collective bargaining and contract
. amendments. Existing PERL statutes allow employers to periodically increase, reduce
or eliminate employer paid member contributions.
Pension Holiday
The combined employer and member contributions required, in any fiscal year, cannot
be lower than the total year's normal cost.
Some employers currently have a surplus in their plan and presently pay less than the
total normal cost. CalPERS will review each employer in this category and detennine
whether this prOVision must be implemented at the start of the next fiscal year. A letter
will be sent to affected employers notifying them of their required contribution amounts.
PENSIONABLE COMPENSATION
Compensation Caps
This provision caps the annual pensionable compensation that can be used to calculate
final compensation for new members.
Circular Letter No,: 200-055-12
December 3,2012
Page 6
Presently, there is a compensation cap in place for first-time members hired after
January 1, 1996, The compensation cap is set by the Internal Revenue Service and is
referred to as the 401 (a)(17) limit. CalPERS will continue to cap contributions for
affected classic members at the 401 (a)(17) limil,
New member contribution caps are effective January 1, 2013. The new member cap for
2013 will be $113,700 (100% of the 2013 Social Security contribution and benefit base)
for members that participate in Social Security or $136,440 (120% of the 2013
contribution and benefit base) for those employees that do not participate in Social
Security, Adjustments to the caps are permitted annually based on changes to the
Consumer Price Index for All Urban Consumers.
Employers will report full pay rate and actual earnings for all members in mylCalPERS
and the system will flag and notify the employer when the contribution limit has been
reached for that calendar year. Member contributions must stop when the member's
actual earnings reach the contribution limits outlined above.
Note that this does not necessitate a change to your file formatting structure; rather it is
related to how employers track and report payroll. Reporting up to the compensation
cap for new members will occur in the same manner it does currently for classic
members subject to the 401 (a)(17) limit.
Currently, CalPERS does not cap employer contributions at the 401(a)(17) limit and we
do not intend to cap employer contributions at the PEPRA limits for at least the next two
years. We are conducting further analysis to determine if employer contributions will be
capped beginning with the 2015/2016 fiscal year. We will share the new information with
you in ,a future Circular Letter once a final decision has been made.
Three-Year Final Compensation
PEPRA requires that a three-year final compensation period be used to calculate the
average final compensation for a retirement calculation for all new members. Some
employers, including the State, already provide for a three-year final compensation
period,
Public employers are also prohibited from adopting a final compensation period of less
than three years for classic members who are currently subject to three-year final
compensation.
Pensionable Compensation
PEPRA introduces a new term "pensionable compensation" for the purposes of
determining reportable compensation for new members. PEPRA broadly defines
pensionable compensation, and while it specifically excludes some forms of
compensation, it does not clearly identify which forms of pay fall within the scope of
pensionable compensation. CalPERS is evaluating what forms of compensation are
considered as pensionable compensation and how they should be reported. We will
update employers on this issue in a future Circular Letter that we anticipate will be sent
later this month.
;
I
Circular Letter No.: 200-055-12
December 3,2012
Page 7
Excessive Compensation
This new PERL provision requires the CalPERS Board to "define a significant increase
in actuarial liability due to increased compensation paid to a non-represented
employee". The Board is further directed to implement program changes to ensure that
a public agency that creates a significant increase in actuarial liability bears the
increased cost associated with that liability.
CalPERS will develop the program changes necessary to assess the cost of excessive
compensation to the employer that paid the excessive compensation. This provision will
apply to any significant increase in actuarial liability that is determined after January 1,
2013, regardless of when excessive compensation was paid.
CalPERS is working to develop the program changes and definitions necessary to
administer these provisions and anticipates promulgating regulations to address these
new requirements. Updates on this issue will be provided to employers in a future
Circular Letter.
WORKING AFTER RETIREMENT
PEPRA includes two provisions applicable to working after retirement. These provisions
include restrictions, including, but not limited to:
• All employees who retire from public service will be prohibited from working more
than 960 hours per calendar or fiscal year for any public employer in the same
public retirement system that .the individual is retired from without reinstating from
retirement.
• A 180-day waiting period is required for all employees who retire from a public
employer before a retiree can return to work without reinstating from retirement,
except under certain specified circumstances. The 180-day waiting period starts
from the date of retirement. .
• Any public retiree appointed to a full-time position on a State board or
commission will be required to suspend their retirement allowance and become
an active member of CaIPERS, unless the appointment is non-salaried.
As currently required, employers must continue to report in mylCalPERS all the hours
worked by any CalPERS retired annuitant in order to monitor the 960-hour cap per fiscal
year. CalPERS retirees who are hired as independent contractors or consultants with a
direct relationship, for purposes of this section, are considered retired annuitants and
must also be reported and tracked in myICaIPERS.
The 180-day waiting period provision applies without exception to retirees who receive
either a golden handshake or some other employer incentive to retire. Retired
annuitants who started working before January 1, 2013, are not impacted by the 180-
day waiting period.
mylCalPERS plans to validate the 180-day waiting period for all new enrollments and
will flag any potential violations of this waiting period for additional review. Potential
violations will not prohibit the online mylCalPERS enrollment; however, when enrolling a
retiree under the certification-resolution exception to the 180-day waiting period, the
Circular Letter No.: 200-055-12
December 3,2012
Page 8
employer must submit a copy of the certification-resolution to CaIPERS. The rest of the
enrollment process will remain the same as today.
PENSION AND HEALTH BENEFIT CHANGES
Industrial Disability Retirement (lOR) Benefits
In addition to the current calculation options of the IDR benefit for a member, this
provision adds a calculation for a safety member who qualifies for an IDR that may
result in a higher benefit than 50% of salary. An actuarial reduced retirement formula, as
determined by the actuary for each quarter year of service age less than 50, will be
used to determine if the IDR benefit is greater for the safety member who qualifies for
IDR. These provisions remain in effect only until January 1,2018. After that date, the
new IDR provisions will not apply unless the date is extended by statute.
Retroactive Pension Benefit Enhancements
Public employers will be prohibited from granting retroactive pension benefit
enhancements that would apply to service performed prior to the operative date of the
enhancement. An increase to a retiree's annual cost-of-living adjustment within existing
statutory limits is not considered to be an enhancement to a retirement benefit.
CalPERS will develop a list of those existing optional benefits that are considered to be
retirement benefit enhancements and therefore subject to this restriction. CalPERS also
plans to promUlgate a regulation interpreting and clarifying this provision. Additional
information will be sent to employers in a future Circular Letter.
Replacement Benefit Plans
PEPRA prohibits public employers from providing new employees a plan of replacement
benefits to supplement retirement benefits that are limited by Internal Revenue Code
Section 415(b). This provision also prohibits public employers from offering a
replacement benefit plan to any employee group that was not provided this benefit prior
to January 1, 2013.
CalPERS will continue to offer replacement benefit plans for classic members not
impacted by this provision.
Health Benefit Vesting Schedule
This provision generally prohibits employers from providing a more advantageous
health benefit vesting schedule to certain individuals (namely a public employee who is
elected or appointed, a trustee, excluded from collective bargaining, exempt from civil
service, or a manager) than it does for other public employees, including represented
employees, of the same public employer who are in related retirement membership
classifications. In the event that bargaining groups under one employer have
established different vesting schedules, the non-represented employees must align with
the least advantageous of the groups in related membership classifications, such as
State miscellaneous.
Circular Leiter No,: 200-055-12
December 3, 2012
Page 9
If an employer has established tiered vesting schedules based upon date of hire, then
all non-represented employees must be subject to the same tiered vesting schedules as
represented employees of the same membership classifications.
Additional Retirement Service Credit (ARSC)
The ability to purchase non-qualified service, or "airtime", will be eliminated on January
1, 2013. An official application must be submitted and stamped as received by
CalPERS on or before December 31,2012, Only applications from individuals who
qualify to purchase ARSC on or before December 31,2012, will be accepted. CalPERS
is reviewing whether other types of nonqualified service credit may be impacted by this
prohibition.
The prohibition on future "airtime" service credit purchases does not prohibit purchases
of qualified service credit. For example, service credit purchases for qualified military
service will still be allowed.
Felony Forfeiture of Pension Benefits
Any current or future public official or employee convicted of a felony while carrying out
his or her official duties, in seeking an elected office or appointment, and/or in
connection with obtaining salary or pension benefits, will be required to forfeit any
pension or related benefit earned from the date of the commission of the felony.
OTHER RETIREMENT PROGRAMS
Alternate Retirement Program (ARP)
ARP, a retirement savings program that certain State employees are automatically
enrolled in for two years from their initial hire date, will be eliminated. The bill provides
that all new members hired on or after July 1,2013, will no longer be enrolled in the
program. An urgency legislative amendment was introduced to change the ARP
elimination date from July 1, 2013 to January 1, 2013, CalPERS will continue to monitor
the bill and work with the State Controller's Office and the California Department of
Human Resources to determine how to enroll new State miscellaneous and industrial
members beginning January 1,2013. Once a process has been identified, we will notify
State employers.
Members currently enrolled in ARP will continue to participate in ARP pursuant to
existing 'statutory requirements.
CalPERS does not administer ARP, For program details on the ARP savings plan,
contact the California Department of Human Resources at www.calhr.ca.gov.
Legislative Retirement System (LRS)
These provisions prohibit new members, including constitutional, statutory elected
officers and the Insurance Commissioner, who assume office for the first time on or
after January 1,2013, from enrolling in LRS, Members already enrolled in LRS prior to
January 1, 2013, will continue to participate in the plan until they separate or retire.
Circular Letter No.: 200-055-12
December 3, 2012
Page 10
mylCalPERS will be modified to remove LRS enrollment as an option for new members.
The current process that allows new members to elect optional membership into
CalPERS will not change.
ADDITIONAL INFORMATION
CalPERS On-Line
For more information on PEPRA and how it impacts current and future CalPERS
members, visit the Pension Reform Impacts page on CalPERS On-Line at
www.calpers.ca.gov.This page features the latest updates regarding PEPRA including
a question and answer section and links to additional resources. In addition, the video
"Pension Reform: A Discussion with CalPERS Experts" highlights how pension reform
impacts employers.
Teleconferences
CalPERS will conduct a series of teleconferences to address questions you may have
relating to the information in this Circular Letter. Please register online via the Pension
Reform Impacts page.
I Date Time i Agency Type
I !
! Dec 10 I 9:30 to 11 :30 am Public A~ency
I Dec 10 1 :30 to 3:30 pm School !
• Dec 11 9:30 to 11 :30 am State
I Dec 12 9:30 to 11 :30 am : Public Agency
! Dec 13 9:30 to 11 :30 am School
• Dec 14 i 9:30 to 11 :30 am State
mYlCalPERS Changes
CalPERS will provide more detailed information regarding mylCalPERS changes in the
coming weeks.
Contact Us
Please share this information with your employees to help answer their questions and
provide additional information on the changes. If you have any questions, please call
the CalPERS Customer Contact Center at 888 CalPERS (or 888-225-7377).
KAREN DeFRANK, Chief
Customer Account Services Division
1
Attachment E
Are Defined Benefits Plans Dead?
Society of Human Resources Management’s HR Magazine, Vol. 57 No. 7
Reports of the demise of the defined benefit pension plan may be exaggerated.
7
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2
0
2
By Joanne Sammer
Defined benefit pension plans have had a string of bad luck. Since their peak
in the mid-1980s, they have been on the decline as more employers close or
freeze their plans each year. Is there a chance for a comeback?
In the 1990s, the robust stock market kept defined benefit plans well-funded,
without the need for hefty contributions from the organizations sponsoring
them. When things were going well, "these plans were out of sight, out of
mind," says Bart Pushaw, a principal and consulting actuary with Milliman
Inc. in Dallas. "Finance people did not need to pay much attention until
suddenly pension plans became the squeaky wheel."
Then the dot-com bust and the accompanying stock market decline caused
plan assets to take a hit. That was followed by years of low interest rates,
which increased plan funding obligations.
At the same time, the federal government tightened pension plan funding
requirements and established new accounting rules for calculating plan assets
and liabilities. The net result: Plan sponsors have less leeway when it comes to
smoothing out the ups and downs in a plan's funded status. This increased
volatility. If there is anything corporate leaders hate, it is unpredictable
expenses. So, more sponsors opted to freeze or close their plans altogether.
Funding requirements and accounting rules aside, the decline in defined
benefit plans is basically about who should shoulder the risks associated with
ensuring that employees have enough assets to retire. With the rise of 401(k)
2
plans, employers clearly prefer the risk to be employees'. Has this shift gone
too far?
Risks and Worries
When 401(k) plans gained popularity during the 1990s and began replacing
defined benefit plans, the soaring stock market helped to ease the transition. It
is ironic that the stock market meltdown in 2008 and 2009 and the Great
Recession may have done more to educate employees about the value of
defined benefit plans than any effort by employers. Employees also got a full
appreciation of the investment risks associated with self-directed 401(k) plans,
and they did not like it.
Employers have responded by improving 401(k) plan designs with automatic
enrollment, target-date funds and professional investment advice for
participants. However, the risk of these investments and of creating a stream
of retirement income to last a lifetime still resides with individual employees.
As a result, more workers are concerned about their retirement security,
especially young employees. In fact, 55 percent of employees are willing to
trade some of their pay for a guaranteed retirement. That is a significant
increase from 46 percent in 2009, according to a July 2011 survey of 9,218
full-time U.S. employees at nongovernmental organizations with 1,000 or
more employees conducted by Towers Watson.
Employees younger than age 40 who are now participating in a traditional
defined benefit pension plan are particularly concerned. Among this group,
the number willing to pay for a guaranteed retirement benefit increased from
39 percent in 2009 to 66 percent in 2011.
This attitude is being driven by concerns that employers will continue to pull
back on the retirement benefits they provide. Indeed, 44 percent
of the respondents were concerned about reductions in their retirement
benefits over the next two years. Among employees under age 40 who
participate in a defined benefit pension plan, this worry was particularly
widespread, with 63 percent concerned about benefit cuts.
Defined Benefit vs. Cash Balance Plans
Because they provide a guaranteed monthly benefit from retirement for the
lifetime of the participant and, potentially, a surviving spouse, defined
benefit pension plans require a large pool of assets, with associated
investment risks, to cover the long-term liabilities.
A key criticism of these plans is that they no longer fit today's workforce.
To accumulate a significant monthly benefit, participants must work for a
3
single company for many years. Moreover, some defined benefit plans
backload benefit accruals to the years just before retirement and base
benefits on average pay during the final five years before retirement.
Recognizing this lack of fit with today's workforce, some employers have
implemented cash balance plans. These defined benefit plans incorporate the
best elements of 401(k) plans, including transparency achieved by
expressing benefits as an account balance and portability that allows
participants to roll over those benefits when they leave the company.
However, as with traditional defined benefit plans, the financial risk of cash
balance plans resides with the plan sponsor and not the employee.
Participants receive credits per year of service and credits based on a
specific interest rate chosen by the plan, usually a government bond rate.
Pay Attention
Since employers offer benefits to meet employee needs and to attract and
retain talent, this survey data is something that employers should keep in
mind. The data suggest that "workers are increasingly focused on things that
are less available in the employment market," says Alan Glickstein, senior
retirement consultant with Towers Watson in Dallas. "Plan sponsors would be
wise to pay attention to this data because ultimately there will be growing
competition for talent, particularly as Baby Boomers retire."
As employers look for ways to differentiate themselves in the war for talent, a
defined benefit plan may be more of a selling point than corporate leaders
realize. Twenty years ago, having a defined benefit pension plan was not
much of a differentiator because so many other companies offered them. Now,
an employer that offers some sort of guaranteed retirement benefit could
really stand out from the competition.
Houston-based CenterPoint Energy, an energy distributor with about 8,800
employees, sponsors a cash balance plan with an annual company contribution
equal to 5 percent of an employee's salary and a 401(k) plan with a dollar-for-
dollar match on employee contributions up to 6 percent of pay.
Company leaders maintain dual retirement plans for two reasons: "We
appreciate the need to have both a defined benefit and a defined contribution
plan in order to maintain a stable, high-quality workforce and to stay
competitive in our industry," says Ira Winsten, the company's director of
compensation and benefits. Winsten notes that prospective employees tend to
be "pleasantly surprised that we have both a defined benefit and a defined
contribution plan."
A survey of 424 mid-size and large employers with defined benefit plans
4
found that
36 percent offer the plans to new employees;
68 percent of those employers said they remain committed to offering the
plans to new hires over the next two to three years. The top reasons for
providing a defined benefit plan to new hires? Seventy-one percent said they
want to attract and retain new employees, and 50 percent do it to maintain
employee morale, according to the Towers Watson survey report, Pensions in
Transition: Retirement Plan Changes and Employer Motivations, which was
released in May.
Ongoing Decline
The story of traditional defined benefit pension plans is one of slow but
steady decline. According to data from the U.S. Pension Benefit Guaranty
Corp., defined benefit pension plans peaked in number at more than 112,000
in 1985. That number of plans had declined to more than 47,000 in 1996.
The most recent numbers show 25,607 plans operating in 2011 and covering
about 33.39 million participants.
Other surveys tell a similar story. Just 22 percent of the companies
represented in the Society for Human Resource Management's 2011
Employee Benefits research report offered a defined benefit plan to all
employees, while 12 percent had a plan that is closed and 8 percent offered a
cash balance plan.
Finally, data from Mercer reveals a significant change in active plans in just
five years and what happens to many of those formerly active plans. In
2006, 54 percent of the Fortune 200 companies had active defined benefit
pension plans. By 2011, that number declined to just
35 percent. The remainder had no plan at all (27 percent), a plan frozen for
all employees (19 percent), a plan frozen for just new employees (15
percent) and a plan frozen for just some employees (4 percent). Inevitably,
many of the plans frozen only for new employees are likely to freeze
completely.
Coming Back?
Is it possible that defined benefit plans could come full circle? Yes, it is
possible but by no means certain. The problems associated with traditional
defined benefit pension plans—including lack of portability, onerous
regulatory requirements and fluctuating funding commitments—have not
changed.
"Defined benefit pension plans were designed to provide retirement benefits
for employees, but they also served as a long-term incentive," says Randi
Miller, HR and benefits analyst with Allied Container Systems Inc., a Walnut
Creek, Calif.-based company with about 100 employees that designs and
5
installs modular buildings. But today, "it is becoming much more common to
see people working for a company for only two or three years, then moving
on."
Given defined benefit plans' lack of portability, expecting companies to
unfreeze existing plans or establish new ones could be a nonstarter. "I do not
see defined benefit plans as viable in today's industry," Miller says.
Miller is not alone. "I don't see a comeback in the cards for traditional defined
benefit plans, given the current business and regulatory environment,"
Winsten says. "It is difficult to see who would champion that type of benefit
in the future because it does not fit the mold of today's employment
experience in which you can expect to work for several employers during your
career."
"Employers are convinced that the risks of maintaining a defined benefit plan
are not sustainable," agrees Jim McHale, a principal with
PricewaterhouseCoopers LLP in New York City.
New Designs
If any sort of defined benefit plan is to take hold, it will require new thinking
and plan designs. "Right now, we are stuck between two models for
retirement plans—one that puts all the risk on the employer and the other that
places all of the risk on the individual employee," says Richard Shea, a partner
with law firm Covington & Burling in Washington, D.C. "To build a
sustainable retirement plan, you need to have some risk sharing" among both
the employer and its employees.
"Defined contribution approaches have gone too far to one side and left risks
with the workers that they are unlikely to be able to manage on their own,"
McHale says. "A solution somewhere in the middle is going to be much
healthier for the system."
At a recent standing-room-only conference called Re-Imagining Pensions:
Using Innovative Pension Plan Design to Reduce Risk and Increase
Retirement Income, sponsored by the Pension Rights Center, The Urban
Institute and Covington & Burling, participants discussed how defined
benefit plans could once again play an important part in the retirement
landscape.
"There is recognition that we may see a different type of pension plan that
combines some of the best features of defined benefit plans, such as employer
contributions, pooled and professional investments, and annuities, with the
best parts of 401(k) plans, including employee contributions and portability,"
said Karen Ferguson, director of the Pension Rights Center in Washington,
6
D.C.
New plan designs represent potential solutions for employers that want to
offer a more secure retirement benefit without the costs and regulatory
complexity of traditional defined benefit pension plans. However, it is
important for employers to keep in mind that these designs may require
regulatory clarification.
Government action or inaction could be a major roadblock for any kind of
pension plan renaissance. "The federal government has to encourage
innovation and get out of the way," Glickstein says. "While there is a need to
protect the interests of workers and plan sponsors, it cannot be overly slow
and cumbersome in writing rules that inhibit where plan sponsors and
employees want to go."
Still, the conversation about a new approach to retirement plan design has
started. If plans that offer some sort of guaranteed retirement benefit are to
make a comeback, Pushaw predicts that it will be small or mid-size companies
that lead the way.
"Executives and entrepreneurs in these companies are more likely to have an
open mind about these plans and are less burdened by the political risk of
changing direction than their peers in large companies," he says. "There is a
lot of risk for an executive who tries to reanimate defined benefit plans when
many companies considered these plans happily dead and buried for the last
five or ten years."
The author is a New Jersey-based business and financial writer.