Making Sense of Pension Reform Legislation

Yesterday, the state Senate passed pension reform legislation—Senate Bill 1—which begins to transform the state’s pension systems into a sustainable model for public employees and taxpayers.

We have already written about why pension reform is important and how SB 1 represents an improvement over the status quo. But how exactly does the legislation impact the current system?

The latest version of the legislation creates three pension options for new public employees:

  • a defined contribution & defined benefit hybrid plan with a 1.0 percent accrual rate
  • a defined contribution & defined benefit hybrid plan with a 1.25 percent accrual rate
  • a defined contribution-only plan

New employees will have the option of choosing from one of the plans above. If they fail to do so, they will automatically be enrolled in the plan with the 1.25 percent multiplier. Law enforcement officers (state police, corrections officers, etc.) are exempt from the new plan requirements.

The plans would take effect in January 2019 for SERS members and July 2019 for PSERS members. Current employees (including legislators) would be able to opt into one of the new plan options in the first 90 days. 

SB 1 would also provide for shared risk and shared gain provisions. Risk is shared by requiring new employees to increase their contribution rate by 0.75 percent if actual investment returns are 1 percent or more below the assumed rate of return. However, employees can also share in investment gains if they exceed the assumed rate of return by 1 percent or more a year. If returns meet or exceed this threshold, the employee contribution rate will drop by 0.75 percent.

Other provisions include the following:

  • a cap on voluntary overtime as a component of final average salary
  • the option for employees to make voluntary contributions to DC plans above the minimum required by SB 1
  • allowing current employees to opt-in to a DC plan
  • a cost neutral option 4 lump sum withdrawal
  • a commission tasked with reducing fees and system cost structures

Overall, the proposal would allow for greater portability for public employees and reduce the risk borne by taxpayers by at least 60 percent. And although the plan doesn’t tackle the unfunded liability or provide immediate relief, it does limit the accumulation of additional debt relative to the current pension systems.

That’s certainly a step forward on the long road to a sustainable pension system.