HomeMy WebLinkAbout2000 05 15 Regular Item B
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MEMORANDUM
DATE: May 1,2000
TO: Board of Trustees
FROM: Ronald McLemore, City Manager
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SUBJECT: Possible Changes to Employee Pension Plan
Please consider the following during your meeting of May 2, 2000:
BACKGROUND
During the past two years, city employees - particularly employees of
the Police and Fire Departments - have expressed dissatisfaction with
benefit levels of the current pension plan. They have surveyed benefit
levels in other jurisdictions and. have found that cities and counties in
the surrounding area generally provide higher benefit levels, with the
costs usually paid totally by the employee.
CURRENT PLAN
The city's current plan provides that employees contribute 20/0 of
their compensation, with the city contributing 801<., to a combined
defined benefit/defined contribution plan. The city's contribution is
split evenly, with 40/0 going to each side of the plan.
When an employee becomes eligible for retirement, an average of the
three highest years of earnings is calculated, and the employees pension
is then determined by multiplying 2% times the number of years of
service times the average compensation. The result is the employees
annual benefit entitlement, paid on a monthly basis.
As a rough example, if an employee worked for the city for 20 years
and retired with an average compensation of $30,000, his/her yearly
entitlement would be 20/0 times 20 years (4001<.) times $30,000, or
$12,000 per year ($1,000 per month).
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The defined contribution funds are used as an "offset" whereby the
employee may elect to increase the monthly benefit by using those
funds, or he/she may take those funds in cash.
CONSIDERA TIONS
The attached spreadsheet was prepared by our plan actuary, and
explains the available options to increase the 20/0 per year of service
credit to 30/0, and the cost impact of each.
Current Plan
A. The current plan requires the satisfaction of an initial unfunded.,
liability, which is a cost of plan administration. The next three
percentage columns explain the breakdown of employee and
employer contributions as explained above.
Options Under the Current Plan
B. Raising the benefit to 30tlo beginning on 101/01/2000 and going
forward would continue the unfunded liability, and require an
increase of 2.30/0 of compensation contribution to the defined
benefit plan.
C. A 30/0 benefit applied to an employee's total years of service would
require. an increase of 6.10/0..
Proposed Plan Design
(Note: Under the following two options, the defined contribution
plan would be discontinued, and the account balances would be rolled
into the defined benefit plan pool of funds, satisfying the unfunded
liability.)
D. Under this option - and considering the contents of the above note
- employees would get a 30tlo benefit starting 10/01/2000 and going
forward. The increase in payroll costs would be 10/0.
E. A 30/0 benefit for all y~ars of service would require a 4.90/0
increase in payroll costs.
Other considerations are contained in a supplemental piece of
correspondence from our actuary, which is attached.
RECOMMENDA TION
It appears that the best option to recommend to the City Commission
would be Option "D" which satisfies requests for an increased benefit
level at the least amount of cost.
cc: Gene DeMarie, Dir. of General Services
CITY OF WINTER SPRINGS DEFINED BENEFIT PENSION PLAN
COSTS OF BENEFIT INCREASE
A Current Plan $
Proposed Plans
B 2% per year of service to 10/01/00
plus 3% up to 30 years total
C 3% up to 30 years total
Proposed Plan Design- DB Only
No Money Purchase Plan
0 2% per year of service to 10/01/00
plus 3% up to 30 years total
E 3% up to 30 years total
Initial Unfunded
% of Current
Payroll to DB Plan
% of Payroll to
Money Purchase
% of Payroll for *Increase in %
Both Plans of Payroll
1,343,893.46
4.0%
6.0%
10.0% 0.0%
$1,343,893.46
6.3%
6.0%
12.3% 2.3%
$1,343,893.46
10.1%
6.0%
16.1% 6.1%
$0.00
0.0%
10.7% 1.0%
10.7%
$0.00
14.9%
0.0%
14.9% 4.9%
* This percentage could be contributed by the City of Winter Springs or the employee or a combination of both.
Under the current plan design, the City of Winter Springs is contributing 4% to the Money Purchase Plan and 4% to the Defined Benefit Plan:
the Employee is contributing a mandatory 2% of compensation to the Money Purchase Plan
If the employer chooses items D or E. it is possible to design the plan to allow the employee contribution to buy an employee
accrued benefit which is 100% vested. This will enhance the program for employees who are concerned about losing their contributions
to the money purchase pension plan.
...
-. .- "'.
~ Retireuum.t PJ&n Speci&Jists, IID.C.
Employee Benefits Administrators & Consultants
2 Lawn Street
P.O. Box 621582
Oviedo, Florida 32762-1582
407-365-3490 (office)
407-366-5154 (fax)
1-800-618-1813 (tollfree)
Visit us at wwwsrturner.com
April 20, 2000
Gene DeMarie
City of Winter Springs
1126 East State Road 434
Winter Springs, FL 32708
RE: Winter Springs Plan Proformas
Dear Gene:
Attached is the revised schedule, per our meeting with Ron McLemore. As we discussed at
the meeting, I have provided some issues to consider between the various plans:
A. One plan costs less to maintain than two plans:
1. One set of plan documents
2. One set of administrative forms, for example, terminees/retirees will only need to
execute one set of distribution forms (when applicable), one set of participation forms,
beneficiary forms, etc.
3. Assets combined into one trust (creating a larger pool of money) should reduce or
eliminate trust asset and asset manager costs. (As you know, the larger amount of
money under investment, the higher level of respect and services you can expect.)
3. Administration fees would be substantially reduced.
4. One plan is easier to explain to the employees. .Currently, the offset plan is difficult to
communicate; though your employee group has done a good job at studying the two
plan arrangement.
B. Two plan design offers more options:
1. Under the floor offset design, the participant can:
a. Take the money purchase plan account balance in a lump sum distribution and
elect to receive a reduced monttily benefit at retirement, or
b. Transfer the money purchase plan to the defined benefrt plan and receive the full
monthly benefit at retirement.
2. Participant gets the greater benefit. If the market performs well over a long period of
time, the participant's retirement benefit could be greater than the floor benefit under
the defined benefit plan. (This effect is reduced if the floor benefit is increased from
2% per year to 3% per year). (see C (2) below.)
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C. Effect of increasing the benefit from 2% to 3% per year (either retro or just going forward)
1. Enhances program for employees, especially fire and police.
2. Reduces the reasons for having two plans. The money purchase plan account
balance was projected to surpass 60% of compensation floor benefit under the defined benefit
plan for the younger employees (at some point in their future), but it is not as effective in
surpassing 90% of compensation. This means the defined benefit plan will be "picking up"
more of the responsibility in funding employees' future benefits. Under the current plan design,
it was anticipated the defined benefit plan would eventually be unneeded. This would not be
the case with a 3% per year formula (retro or going forward). Consequently, using just the
defined benefrt plan would probably meet the needs of the employees and employer more
effectively.
D. Handling of employee contributions and 100% vested employee account balance. Opti~ns
are:
1. Employee accounts and contributions "forfeited" upon conversion and placed on the
same vesting schedule as employer contributions. No payouts until retirement permitted.
2. Convert the current 100% vested employee account balance to a "paid up benefit" (Le.
employee accrued benefit) due at retirement. This will always be theirs. If you are feeling
really generous, you can allow for distribution of this account if under $5,000.00.
3. Convert current 100% vested employee account balance to paid up benefrt at
retirement and add to it the amount purchased with employee contributions (only) each year.
This would eliminate the fear of them "losing" their 2% contribution to the plan. Payouts of
amounts under $5,000.00 also can be added here.
I hope this helps with this part of the discussion. If you need assistance or have any
questions, please give me a call.
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Sandra R. Turner, CPC QPA
cc: Ron McLemore, City Manager
Enclosures