HomeMy WebLinkAbout2011 02 08 Regular 601 Gabriel Roeder Smith & Co. Actuarial Study Phase I Date: February 8, 2011
The attached document was provided to the Winter
Springs Board of Trustees and was discussed during
Regular Agenda Item "601" at the February 8, 2011
Regular Meeting.
Gabriel Roeder Smith & Company
Consultants & Actuaries
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY — PHASE I
December 16, 2010
Gabriel Roeder Smith & Company
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL S'T'UDY - PHASE I
TABLE OF CONTENTS
Page
1. Executive Summary ...................................................................... ..............................1
11. Benchmark Provisions for Florida General Employee Plans ....... ..............................2
III. Benchmark Provisions for Florida Firefighter and Police Officer Plans ....................7
1V. Alternate Approaches ................................................................... .............................12
V. Appendices ................................................................................... .............................21
Gabriel Roeder Smith & Company
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
EXECUTIVE SUMMARY
At the request of the City of Winter Springs, we have compared key provisions of the City of
Winter Springs Defined Benefit Plan (Plan) to those of General Employee plans and Firefighter
and Police Officer plans throughout the State. This information is gleaned from a database
maintained by the State.
We have also compared the Plan to the Florida Retirement System (FRS) based upon the
information included in the July 1, 2010 Actuarial Valuation Report for FRS.
Additionally, we have compared the Plan to the Chapter 185 benefits for Police Officers
participating in the State program.
The provisions compared are as follows:
➢ Eligibility requirements for normal retirement
➢ Eligibility requirements for early retirement
➢ Benefit accrual rate
➢ Final average compensation period.
➢ Member contributions
Finally, we have prepared a discussion of alternate approaches to reducing City pension costs.
GRS Gabriel Roeder Smith & Company - 1
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
BENCHMARK PROVISIONS FOR GENERAL EMPLOYEE PLANS
The following Exhibits provide an overview of benefit provisions of public pension plans for
General Employees in the State of Florida. The source of this information is the website of
the Department of Management Services of the State of Florida. The Department of
Management Services has data on 147 General Employee plans which have reported
information for some or all of the categories below. We have also included the benefits
available to regular class members under the Florida Retirement System (FRS) based upon
inforration contained in the July 1, 2010 Actuarial Valuation Report for FRS.
A_ Normal Retirement Eligibility
The Plan's normal retirement eligibility for General Employees is attainment of age 65 or
completion of 30 years of service if determined to be disabled under the City's long term
disability insurance policy. The Plan also has unreduced early retirement eligibility for
General Employees upon attainment of age 55 with 10 years of service. Some inay
believe this is comparable to normal retirement.
Normal retirement eligibility for regular class members of the FRS is attainment of age
62 with 6 years of service or completion of 30 years of service.
The following is a summary of the normal retirement eligibility requirements by age and
service reported for 127 public pension plans for General Employees in the State of
Florida.
The most common normal retirement eligibility is completion of 30 years of service
regardless of age, which is a provision of 23 of the plans for which this information is
available.
The earliest age -based normal retirement eligibility provided is age 50 with 5 years of
service.
The Most restrictive normal retirement eligibility requirement is generally the earlier of
(1) age attainment of 65 or (2) completion of 30 years of service.
Gabriel Roeder Smith & Company -2-
50
51
52
53
55
56
Age
57
60
62
65
70
An
2
-
1
3
4
5
1
4
1
9
13
15
6
4
1
6
2
-
7
1
2
1
1
2
-
9
I
-
10
I
12
2
7
6
1.0
-
1
15
-
I
-
-
-
20
2
1
6
1
2
-
-
10
25
2
1
4
1.
-
-
15
28
-
-
-
-
-
1
30
1
1
2
1.
-
1
-
24
35
-
-
-
-
-
-
-
-
2
Any
I
--
-
6
12
10
1
-
The most common normal retirement eligibility is completion of 30 years of service
regardless of age, which is a provision of 23 of the plans for which this information is
available.
The earliest age -based normal retirement eligibility provided is age 50 with 5 years of
service.
The Most restrictive normal retirement eligibility requirement is generally the earlier of
(1) age attainment of 65 or (2) completion of 30 years of service.
Gabriel Roeder Smith & Company -2-
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY . P1.1ASE
B. Early Retirement Eligibility
The Plan's early retirement eligibility for General Employees is the earlier of (a)
attainment of age 55 with 10 years of service (unreduced) or (b) completion of 25 years
of service (actuarially reduced for each year prior to age 55).
Early retirement eligibility for regular class members of FRS is completion of 6 years of
service (reduced by five twelfths of a percent (5/12 %) for each month early retirement
precedes the age -based nonnal retirement date - age 62 for regular class members).
The following is a summary of the early retirement eligibility requirements by age and
service reported for 138 public pension plans for General Employees in the Mate of
Florida.
The most common early retirement eligibility is attainment of age 55 with 10 years of
service, which is a provision of 30 of the plans for which this information is available.
The earliest age -based early retirement eligibility provided is age 42 with 5 years of
service.
GRS Gabriel Roeder Smith & Company -3-
None 42 45
Age
47 48 50
52
53 55
60 An
None
15 - -
- - -
-
- -
- -
5
- 1 -
- - 3
1
- 13
4 -
6
- - -
- - 1
-
- 2
7
7
- - -
- 2
1
- 4
-
8
4
-
10
- 1
1 1 13
4
I 30
I 3
14
-
- - -
-
- -
- 1
15
- -
- - 5
-
- I2
1 -
20
- - -
- - 3
-
M 2
1 10
25
- -
_ - -
1
- -
- 6
30
- - -
_ - _
-
-
- 2
35
- - -
- - -
-
- -
- I
An -
- -
-
- 4
- -
The most common early retirement eligibility is attainment of age 55 with 10 years of
service, which is a provision of 30 of the plans for which this information is available.
The earliest age -based early retirement eligibility provided is age 42 with 5 years of
service.
GRS Gabriel Roeder Smith & Company -3-
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PRASE I
C. Benefit Accrual Rates / Multiplier
The Plan's benefit accrual rate for General Employees is 3 %.
The benefit accrual rate for regular class members of FRS ranges from 1.60% to 1.68%
depending on age and service at retirement.
The following is a summary of benefit accrual rates reported by 81 public pension plans
for General Employees in the State of Florida.
Number Percentage
Benefit Accrual Rate of Plans of Plans
Exactly 1%
1
1%
1.01% to 1.99%
7
9%
Exactly 2%
10
12%
2.01 % to 2.49%
8
10%
Exactly 2.5%
19
24%
2.51% to 2.99%
9
11%
Exactly 3.00%
26
32%
3.01 % to 3.49%
1
1%
Total Plans Reporting
81
100%
Mean: 2.51%
Median: 2.50%
Most Common: 3.00%
GRS Gabriel Roeder Smith & Company -4-
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE
D. Final Average Compensation Period
The Plan's final average compensation (FAQ for General Employees is average
compensation for the three (3) highest consecutive years of service.
FAC for regular class members of FRS is average compensation for the five (5) highest
years of service.
The following is a summary of the number of pay periods used in determining Average
Final Earnings reported by 138 public pension plans for General Employees in the State
of Florida.
Final Average
Number
Percentage
Corn ensation Period
of Plans
of Plans
I Year
1
1%
2 Years
9
6%
3 Years
43
31%
5 Years
84
61%
Career Average
1
I %
Total flans Reporting
138
100%
Mean:
4.1 years
Median:
5.0 years
Most Common:
5.0 years
EAC Period - General Employees
f arapr Avarana 1 Year 2 Years
3 Years
31%
5 Years
61%
GRS Gabriel Roeder Smith & Company -5-
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
E. Member Contributions
For General Employees in the Plan, member contributions are three percent (3 %) of
compensation.
There are no member contributions for regular class members of FRS.
The following is a summary of member contributions reported by 148 public pension
plans for General Employees in the State of Florida.
Member Contributions - General Employees
in nm _ 1 n C§Qo/ 11.00% and above
9.00 % - 9.99
3%
8.00% - 8.99%
7%
7.00% - 7-99%
8%
6.00 % - 6.99%
13%
-0.99%
L%
99%
.99%
Gabriel Roeder Smith & Company -6-
5.009/6- 5.99% 9%
16%
Number
Percentage
Employee Contribution Rate
of Plans
of Plans
No Employee Contributions
39
26%
0.01% - 0.99%
1
1%
1.00% - 1.99%
6
4%
2.00% - 2.99%
4
3%
3.00% - 3.99%
6
4%
4.00% - 4.99%
13
9%
5.00% - 5.99%
23
16%
6.00% - 6.99%
19
13%
7.00% - 7.99%
12
8%
8.00% - 8.99%
11
7%
9.00% - 9.99%
5
3%
1 0.00% -10.99%
5
3%
11.00% and above
4
3%
Total Plans Reporting
148
100%
Mean:
4.58%
Median:
5.00% - 5.99%
Most Common:
No Contributions
Member Contributions - General Employees
in nm _ 1 n C§Qo/ 11.00% and above
9.00 % - 9.99
3%
8.00% - 8.99%
7%
7.00% - 7-99%
8%
6.00 % - 6.99%
13%
-0.99%
L%
99%
.99%
Gabriel Roeder Smith & Company -6-
5.009/6- 5.99% 9%
16%
CITY OF WIN"T"ER. SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
BENCHMARK PROVISIONS FOR
FIREFIGHTER AND POLICE OFFICER PLANS
The following Exhibits provide an overview of benefit provisions of public pension plans for
Firefighters and Police Officers in the State of Florida. The source of this information is the
website of the Department of Management Services of the State of Florida. The Department
of Management Services has data on 320 Firefighter and Police Officer plans which have
reported information for some or all of the categories below. We have also included the
benefits available to special risk class members under the FRS based upon information
contained in the July 1, 2010 Actuarial Valuation Report for FRS along with Chapter 185
benefits for Police Officers for participating cities..
A. Normal Retirement Eligibility
The Plan's normal retirement eligibility for Firefighters and Police Officers is attainment
of age 65 or completion of 30 years of service if detennined to be disabled under the
City's long term disability insurance policy. The Plan also has unreduced early
retirement eligibility for Firefighters and Police Officers upon attainment of age 55 with
10 years of service. Some may believe this is comparable to normal retirement.
Normal retirement eligibility for special risk class members of the FRS is attainment of
age 55 with 6 years of service or completion of 25 years of service. Chapter 185
minimum is age 55 with 10 years of service or age 52 with 25 years of service.
The following is a summary of the normal retirement eligibility requirements by age and
service reported by 308 public pension plans for Firefighters and Police Officers in the
State of Florida,
The most common normal retirement eligibility is age 55 with 10 years of service, which
is a provision of 186 of the plans for which this information is available.
The earliest age -based normal retirement eligibility provided is age 40 with 20 years of
service.
Gabriel Raeder Smith & Company -7-
<50
50
52
Age
53 54 55 56 57 58
60 62 65 A:x
3
-
- 1
- - -
5
-
-
1
- Is 1
3 1 -
6
2
-
- 23 -
- - -
S
-
10
5
23
12
1 1 186 -
4 - 1
15
_
3
_
_ 1 _ _
-
20
7
10
2
- 1 -
- 71
22
-
-
-
- - - -
- - 3
23
-
- - - - - -
- - 3
25
5
82
1 - - - - -
- - 115
26
-
-
- - - - - -
- - - 1
28
_
_
_ _ _ _
_ 2
30
_
_
_ - _
_ 8
Any
1
7
3
- - 16 - - 1
17 3 1 -
The most common normal retirement eligibility is age 55 with 10 years of service, which
is a provision of 186 of the plans for which this information is available.
The earliest age -based normal retirement eligibility provided is age 40 with 20 years of
service.
Gabriel Raeder Smith & Company -7-
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
B. Early
The Plan's early retirement eligibility for Firefighters and Police Officers is the earlier of
(a) attainment of age 55 with 10 years of service (unreduced) or (b) completion of 25
years of service (reduced using actuarial equivalence for each year prior to age 55).
Early retirement eligibility for special risk members of FRS is completion of 6 years of
service (reduced by five twelfths of a percent (5112 %) for each month early retirement
precedes the age -based normal retirement date (age 55 for special risk members)).
Chapter 185 minimum is age 50 with 10 years of service.
The following is a summary of the early retirement eligibility requirements by age and
service reported by 31.6 public pension plans for Firefighters and Police Officers in the
State of Florida.
The most common early retirement eligibility is attainment of age 50 with 1.0 years of
service, which is a provision of 183 of the plans for which this information is available.
The earliest age -based early retirement eligibility provided is age 40 with 10 years of
service.
GRS Gabriel Roeder Smith & Company -8-
None 40
44 45
Age
47 48
50
55 An
None
30 -
- -
- -
-
- -
5
_ -
- 1
- -
7
- -
6
- -
- 1
- 1
13
- 9
7
- -
- -
- -
1
- 1
8
- -
- -
- -
2
- -
10
- 6
- 30
5 -
183
1 9
V)
14
- -
- -
- -
-
- 1
15
- 1
- 6
- -
2
2 1
20
- -
- 2
- -
-
- 20
25
- -
1 1
- _
-
- 3
Any
2
1 -
3
- -
The most common early retirement eligibility is attainment of age 50 with 1.0 years of
service, which is a provision of 183 of the plans for which this information is available.
The earliest age -based early retirement eligibility provided is age 40 with 10 years of
service.
GRS Gabriel Roeder Smith & Company -8-
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
C. Benefit Accrual. Rates / Multiplier
The Plan's benefit accrual rate for Firefighters and Police Officers is 3 %.
The benefit accrual rate for regular class members of FRS is 3 %. Chapter 185 minimum
is 2 %.
The following is a summary of benefit accrual rates reported by 234 public pension plans
for Firefighters and Police Officers in the State of Florida.
Number Percentage
Benefit Accrual Rate of Plans of Plans
1.01 % to 1.99%
3
1%
Exactly 2%
12
5%
Exactly 2.5%
9
4%
2.51 % to 2.99%
13
6%
Exactly 3.00%
11.1
47%
3.01 % to 3.49%
39
17%
Exactly 3.50%
33
14%
3.51% to 3.99%
10
4%
Exactly 4.00%
4
2%
Total Plans Reporting
234
100%
Mean: 3.06%
Median: 3.00%
Most Common: 3.00%
"JN Gabriel Raeder Smith & Company -9-
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
D. Final Average Compensation Period
The Plan's final average compensation (FAC) for Firefighters and Police Officers is
average compensation for the highest three (3) years of service.
FAC for special risk members of FRS is average compensation for the five (5) highest
years of service. Chapter 1.85 minimum is 5 years.
The following is a summary of the number of pay periods used in determining Average
Final Earnings reported by 307 public pension plans for Firefighters and Police Officers
in the State of Florida.
Final Average
Number
Percentage
Compensation Period
of Plans
of Plans
1 Year
3
1%
2 Years
18
6%
3 Years
84
28%
4 Years
3
1 %
5 Years
197
64%
7 Years
1
0%
Career Average
1
0%
Total Plans Reporting
307
100%
Mean:
4.2 years
Median:
5.0 years
Most Common:
5.0 years
Gabriel Roeder Smith 8c Company -10-
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
E. Member Contributions
For Police Officers in the Plan, member contributions are three percent (3 %) of
compensation. The remaining Firefighter members no longer contribute to the Plan.
There are no member contributions for special risk members of FRS. Chapter 185
minimum is five percent (5 %).
The following is a summary of member contributions reported by 321 public pension
plans for Firefighters and Police Officers in the State of Florida.
Gabriel Roeder Smith & Company
Number
Percentage
Employee Contribution Rate
of Plans
of Plants
No Employee Contributions
13
4%
0.01% - 0.99%
10
3%
1.00% -1,99%
26
8%
2.00% - 2.99%
7
2%
3.00% - 3.99%
12
4%
4.00% - 4.99%
1.2
4%
5,00% - 5.99%
74
23%
6.00% - 6.99%
39
12%
7.00% - 7.99%
41
13%
8.00% - 8.99%
35
11%
9.00% - 9.99%
20
6%
10.00% -10,99%
16
5%
11.00% -11-99%
9
3%
12.00% and above
7
2%
Total Plans Reporting
321
100%
Mean:
6.1%
Median:
6.00% - 6.99%
Most Common:
5.00% -5-99%
Gabriel Roeder Smith & Company
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAIL, STUDY - PRASE I
ALTERNATE APPROACHES
There are three distinct approaches to cost reduction:
• Approach I - changing the benefit provisions of the existing Plan. This approach can bring
an immediate and long term reduction in cost if Plan changes apply to current members as
well as new hires.
• Approach II - changing the type of plan. This approach can result in a long term reduction,
but often the short term cost is 'increased.
• Approach III - changing the methods and/or assumptions used to value the Plan. This
approach does not actually change the long term cost of the Plan but can change the
incidence of cost.
It may be that a combination of approaches will provide the best solution.
Approach L• Chanmin,- the Benefit Provisions of the Existing Plan
The preceding section compares selected existing Plan provisions to those of other public
pension plans in the State of Florida.
In addition to comparing provisions to other public pension plans, another consideration with
regard to Plan provisions for Police Officers is the minimum requirements of Chapter 185.
Appendix A compares the current Plan provisions for Police Officers with the Chapter 185
provisions for participating sponsors. For Police Officers, any of the following provisions can be
changed in order to reduce pension cost. Winter Park has chosen not to comply with Chapter
185 requirements — no State funds are received.
The City has an agreement with the County for Firefighters. We recommend you review your
contract to detennine any restrictions on changing your Plan benefits.
1. The current benefit rate of 3% can be lowered.
2. The period for calculating average final compensation can be changed from 3 years to 5
years.
3. The amount of overtime pay included in pensionable earnings can be limited or
eliminated.
4. The 3% member contribution rate can be increased.
5. Provide for sharing of costs above a certain level with members.
There are three (3) basic ways changes can be made to Plan provisions. One is to apply the
change(s) to new members only That approach is discussed below under Creating a Two Tier
System. Another approach is to apply the change(s) to all members for future accruals only (A.
+ B.) - it may make sense to reduce future member contributions at the same time. The third
approach is to apply the changes to benefits for all service but not allow benefits to be less than
Gabriel Roeder Smith & Company - 12 -
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
the amount accrued up to the date of change (Greater of A. or B.). This can put some members
in the position of not accruing benefits until the new formula catches up with the former accrual,
and could provide the greatest cost reduction, but also probably cause the greatest backlash_
Under current legal interpretation, the Plan may be restricted from reducing future accruals for
members who are currently eligible for normal retirement. You will want to check with the Plan
attorney on this issue.
You may also wish to consider compliance with Chapter 185 to receive State funds.
Approach 1. Changing the Type afPlan for New and/or All Members
Creating a Two Tier System
Under this benefit structure, the benefits for current members (Tier 1) would not change. The
benefit for new members (Tier 2) would be reduced. The reduced benefits for Tier 2 could be as
follows:
• Reduce the benefit multiplier from 3%
• Increase the period for calculating the average final compensation from 3 years to 5 years
Unlike the other options, creating a two tier system will not require a change in the funding
method or the method used to amortize the unfunded accrued liability since the Plan would still
be expected to exist in perpetuity. However, the savings generated from a Tier 2 design will be
slow to materialize since cost reductions will be recognized only as new employees are hired.
Furthermore, experience has shown that over time the Tier 2 members tend to bargain (whether
formally or informally) for the Tier 1 benefits. If the Tier 2 members are eventually granted the
Tier I benefit structure, any savings will be eliminated.
A number of cities have implemented a two tier structure for general employees — less for
firefighters and police officers.
Appendix B includes some advantages and disadvantages of a two tier system.
Gabriel Roesler Smith & Company - 13 -
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
Florida Retirement System
FRS is the retirement system that covers State, county and public school employees as well as
employees of many other entities including some Florida municipalities. There are
approximately 600,000 employees covered by the system and another 300,000 receiving
benefits. Assets are in the area of $110 billion.
The portability of FRS benefits and service to other FRS covered employers is generally
attractive to plan members. For example, a Winter Springs Police Officer could leave and work
for a different FRS member city with no interruption or effect on his /her retirement benefits.
Although this is a benefit to employees - it could result in higher turnover for the City.
Probably the most important consideration other than cost is a matter of philosophy. If members
join the FRS, the City will relinquish control over this valuable part of the employees' benefit
package. A decision to join FRS is irrevocable - once a city joins FRS it may never withdraw.
There would still be an ongoing cost to fund the benefits already accrued under the current Plan.
In fact the cost could increase in the near term due to the method and assumption changes that
may be necessary to properly fund a closed plan.
Upon joining FRS:
• The City would simply send money to FRS each payday.
• Pension issues would not be part of the collective bargaining process.
• All plan provision decisions and investment decisions would be handled
by FRS.
• All pension questions would be directed to FRS.
* There would be no Board of Trustees and related meetings, minutes, etc.
after the current plan goes away (which may not be possible for some
time).
On the other hand, the City would have no control over the mandates of the State and would not
be able to use the local retirement plan to accomplish management goals and objectives. A case
in point is the so- called rate stabilization reserve that FRS established a few years ago. The use
of this reserve has been very successful in keeping the FRS cost stable over the past few years
while nearly all other plans have had dramatic drops followed by cost increases. There has been
pressure at times from employee groups who feel that employers have benefited from the reserve
at the expense of employees. These groups have pushed to raise benefits. The City of Winter
Springs would have virtually no say in this battle. Since the July 1, 200$ Actuarial Valuation
Report, FRS has not reported a surplus position.
Appendix C includes a comparison between FRS benefits and the City of Winter Springs
Defined Benefit Plan benefits.
Appendix D includes some advantages and disadvantages of joining FRS.
Gabriel Roeder Smith & Company - 14 -
CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
Options for Transitioning to FRS
Employees entering FRS are treated as new entrants under that system. Past service with the
City is not counted for FRS purposes unless this past service is purchased. Once members enter
FRS, the City must pay a percentage of payroll (10.77% for regular class members and 23.25%
for special risk. members for the fiscal year ending June 30, 2011). These rates are less than the
actuarially determined costs. Members entering FRS must be covered by Social Security. We
understand City currently participates in Social Security.
Under one option, only new hires would enter FRS and current members would continue to
accrue benefits under the existing Plan. Under another option all current and future members
would be transferred into FRS. Accrued benefits for existing participants would be frozen and
going forward the City would pay the required FRS contribution.
It would take 6 years to vest in FRS. Members expecting to work fewer than 6 more years would
not do well under this scenario, so a third approach might be to allow those with service above a
certain level to remain in the Plan.
Under all of these options, the initial cost for the existing Plan — whether closed or frozen — will
likely increase as the future funding period is shortened and the investment return is lowered due
to cash flow requirements and asset allocation considerations.
If the existing Plan is closed but not frozen, the short term required contribution by the City may
be greater as the more expensive, longer service employees continue in the current Plan while the
less expensive new hires are moved into FRS.
Implementing a Defined Contribution (DC) Plan
One way to implement this plan design is for current members to continue accruing benefits
under the existing plan provisions while providing new participants with a defined contribution
plan in lieu of the existing pension plan. Under another option, accrued benefits for current
members under the existing plan would be frozen. New hires and current members would both
enter the defined contribution plan.
Although this design can provide long term cost savings to the City (depending on the design of
the DC plan), initially the required contribution by the City may increase, as described above.
A significant drawback from the employee perspective is the investment risk is transferred from
the City to the employees. If investment direction is extended to the employees , experience has
shown reduced investment return. This would not only be an issue to the employees but also to
the City as they would get lesser bang for their buck — the City would have to increase their
contribution to provide the current level of Plan benefits.
In addition, more of the funds would go to terminating members and less to retiring members.
Appendix E includes some advantages and disadvantages of DC plans.
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CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
Approach III: Changing the Methods and/or Assumptions
Under this scenario, the Plan is maintained with the current provisions but the funding method or
actuarial assumptions are changed.
The current funding method, the Entry Age Normal funding method is the most stable and most
commonly used funding method for Florida plans.
We do not believe a change in methods or assumptions is necessary or appropriate at this time.
Other considerations
Income Replacement in Retirement
One factor to be aware of when considering plan changes is the adequacy of total retirement
benefits for your employees. It has generally been held that a retiree needs to replace at least
60% of preretirement income to maintain his / her standard of living. Currently, an employee
retiring at age 55 with 20 years of service would have 60% of final 3 year average earnings
(slightly less than 60% of preretirement income) replaced by the Plan.
Employees' Morale
It is very important to consider how the changes in the pension plan may impact the morale of
employees. For example if the plan were changed to a defined contribution plan and we
experience another market decline similar to what occurred over the past few years it could
impact morale and performance for employees who are close to retirement. Only a defined
benefit plan places the investment risk on the employer rather than the employee.
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CITY OF WINTER. SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
APPENDIX A — CHAPTER 185 MINIMUM POLICE OFFICER BENEFITS
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City of Winter Springs
Chapter 185
Benefit Provision
Defined Benefit Plan
Minimum Benefits
Averaging; Period for FAC
3 Years
5 Years
Compensation
Wages, salaries and other
Total cash remuneration
amounts received (whether or
including up to 300 hours of
not paid in cash) for personal
overtime paid by the primary
services actually rendered in the
employer.
course of employment. Includes
commissions, overtime pay and
bonuses.
Normal Retirement Date
Age 65
Age 55 with 10 years of service
(Unreduced Early Retirement
or
available at Age 55 with 10
age 52 with 25 years of service
years of service)
Early Retirement Date
Age 55 with 10 years of service
Age 50 with 10 years of service
(unreduced) or
(reduced by 3% per year Early
completion of 25 years of
Retirement Date precedes
service (actuarially reduced)
Normal Retirement Date)
Normal Retirement Benefit
3% of FAC per year of service
2% of FAC per year of service
Normal Form of Payment
Life Annuity
10 Year Certain and Life
Duty Disability Benefit
Provided under City's long term
Greater of accrued benefit and
disability policy. Eligible for
42% of FAC
Normal Retirement Benefit after
30 years of service.
Non -Duty Disability Benefit
Provided under City's long term
Greater of accrued benefit and
disability policy. Eligible for
25% of FAC
Normal Retirement Benefit after
30 years of service.
Member Contributions
3% of compensation
5% of compensation
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CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
APPENDIX B — TWO TIER SYSTEM
Advantages
Disadvantages
Reduced cost over time
Savings may take many years to be realized I
Current employees keep current benefits
New employees receive lower level of benefits
May limit availability to participate in Chapter
185
City stays in the pension business
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CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
APPENDIX C — FRS BENEFITS
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City of Winter Springs
Florida Retirement System
Benefit Provision
Defined Benefit Plan
Regular Class Special Risk
Averaging Period for FAC
3 Years
5 Years
5 Years
Normal Retirement Date
Age 65
Age 62 with 6 years of
Age 55 with 6 years of
(Unreduced Early
service or
service or
Retirement available at
30 years of service
25 years of service
age 55 with 10 years of
service)
Normal Retirement Benefit
3% of FAC per year of
1.60% to 1.68% of FAC
3% of FAC per year of
service
per year of service
service
(depending on age and
service at retirement)
Early Retirement Date
Age 55 with 10 years of
Completion of 6 years of
Completion of 6 years of
service (unreduced) or
service (benefit reduced
service (benefit reduced
completion. of 25 years
by 5% per year Early
by 5% per year Early
of service (actuarially
Retirement Date precedes
Retirement Date precedes
reduced)
age 62)
age 55)
COLA
None
3% per year
3% per year
Duty Disability Benefit
Provided under City's
Greater of accrued benefit
Greater of accrued benefit
long term disability
or 42% of FAC
or 65% of FAC
policy. Eligible for
Normal Retirement
Benefit after 30 years of
service.
Non -Duty Disability
Provided under City's
Greater of accrued benefit
Greater of accrued benefit
Benefit
long term disability
or 25% of FAC
or 25% of FAC
policy. Eligible for
Normal Retirement
Benefit after 30 years of
i
service.
Member Contributions
3 of compensation
None
None
i
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CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
APPENDIX D — FRS BENEFITS (CONTINUED)
Advantages
Disadvantages
Benefits are standardized
May result in cost increases in the short and
possibly long term
Currently no employee contributions
City still has to pay off liabilities of the current
Plan
Benefits are portable, which makes it easier for
Benefits are portable, which makes it easier for
the City to attract employees from other FRS
employees to leave the City for another FRS
agencies
agency and take their benefits with them
City eventually exits the pension business
City has no control over benefit levels and
contributions (set by State legislature)
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CITY OF WINTER SPRINGS DEFINED BENEFIT PLAN
ACTUARIAL STUDY - PHASE I
APPENDIX E — DEFINED CONTRIBUTION PLANS
Advantages
Disadvantages
Employer costs are predictable
No protection against inflation (COLAs)
i
No investment risk for City
Employees bear investment risk
Appeals to younger, mobile employees
Income is not guaranteed for employee's
lifetime — may run out
Increased portability ---- account balance can be
Increased portability — easier for employees to
rolled over to an IRA or other retirement plan
change employer and take their DC balance
with them
Investments may be directed by members
Member direction of investments has resulted
in lower investment return — less bang for your
buck J
t
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