Retirement Plans Benchmarking May 12, 2016
Overview Purpose • Compare across jurisdictions the benefit value of the employer and employee funded benefits for newly hired employees who are expected to retire under the benefit plan provisions currently in place • Assess where the FCPS retirement benefits rank relative to comparator plans, and the average of those plans excluding FCPS • Review income replacement rates to determine adequacy of benefits at retirement under various age and service assumptions 1
Comparators Comparator Employers • Alexandria City Public Schools (ALXPS) • Arlington Public Schools (APS) • District of Columbia Public Schools (DCPS) • Loudoun County Public Schools (LCPS) • Montgomery County Public Schools (MCPS) • Prince George’s County Public Schools (PGCPS) • Prince William County Public Schools (PWCPS) • Fairfax County Government (FCGV) • Federal Government (FERS/TSP/Federal) 2
Hypothetical Retirees Final pay Retiree Age at Service at Hypothetical Retiree from # Retirement Retirement schedule * Eligible for unreduced VRS (Rule of 90) 1 60 30 $97,791 Recent FCPS average retiree 2 62 22 $89,790 3 FCPS age at hire (35), retire at age 65 65 30 $97,791 Two years later than retiree #3 (SSNRA will 4 67 32 $97,791 be age 67 for employees hired in 2016) 5 Rule of 90, retire at age 65 65 25 $94,218 Two years later than retiree #5 (SSNRA will 6 67 27 $95,986 be age 67 for employees hired in 2016) * Based on “FY 2016 TEACHER SALARY SCALE 194-day – MA column” SSNRA = Social Security Normal Retirement Age, the age at which a person can commence their Social Security benefits on an unreduced basis. 3
Value of Defined Benefit and Defined Contributions Assumptions: • Hypothetical retirees assumed to have retired today under the current benefit plans. • Employees assumed to have received pay increases under the current pay schedule. • ERFC actuarial valuation assumptions were used. • Assumed investment return of 7.25% for defined benefit plan. • Defined contribution plan funds are assumed to grow at 7% annually. • Employees assumed to make voluntary employee contributions: • minimum amount, amount to maximize employer match 4
Value of Defined Benefit and Defined Contributions Method used to determine the value: • For Defined Contribution plans – amount of employee contributions made during the working career, accumulated with investment earnings. Separate calculation for employee and employer contributions. • For Defined Benefit plans – value is the amount the retirement system will need to hold as a reserve at retirement to fund the lifetime monthly benefit, including allowance for COLA where applicable. • Employer funded portion determined as the total less the value of employee contributions made during career, accumulated at the valuation interest rate. 5
Hypothetical Retiree #1 – Age 60 with 30 Years of Service Defined Defined Defined Defined Total Combined Benefit Benefit Benefit Contribution Value VRS ERFC 2001 Total VRS Final pay at retirement $97,791 $97,791 Final averaging period 5 3 Final average salary $91,607 $94,970 Benefit multiplier 1.00% 0.80% Annual benefit based on $7,297 - $57,572 - $27,482 $22,793 $50,275 30 years of service $31,011 $81,286 Total value of benefits with mandatory/minimum DC contributions (Employee Contributions = 8%): Value of benefits $374,974 $322,666 $697,640 $80,140 $777,780 Accumulated value of $166,421 $124,816 $291,237 $40,070 $331,307 employee contributions Employer provided value $208,553 $197,850 $406,403 $40,070 $446,473 Total value of benefits with optional/maximum DC contributions (Employee Contributions = 12%): Value of benefits $374,974 $322,666 $697,640 $340,593 $1,038,233 Accumulated value of $166,421 $124,816 $291,237 $200,349 $491,586 employee contributions Employer provided value $208,553 $197,850 $406,403 $140,244 $546,647 VRS DC funds assumed to earn 7% per year. 6
Value of Defined Benefit (DB) Plans Assumes final salary of $97,791 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line. 7
Accumulated Value of Defined Contributions APS-Arlington Public Schools PWCPS-Prince William County Public Schools 8
Combined Value DB & DC with Minimum Contributions Assumes final salary of $97,791 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line. 9
Combined Value DB & DC with Minimum Contributions ← Employee | Employer → Assumes final salary of $97,791 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line. 10
Combined Value DB & DC with Maximum Contributions Assumes final salary of $97,791 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line. 11
Combined Value DB & DC with Maximum Contributions ← Employee | Employer → Assumes final salary of $97,791 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line. 12
Combined Value DB & DC with Maximum Contributions Assumes final salary of $89,790 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line. 13
Combined Value DB & DC with Maximum Contributions ← Employee | Employer → Assumes final salary of $89,790 for all jurisdictions. *Since FCGV has two different benefit plans (C&D), an equal 50/50 split between the plans was assumed before averaging with all other comparators, excluding FCPS, in order to obtain the average line. 14
Observations Defined Benefit—FCPS Plans Compared with Fairfax County Plans for General Employees At all age and service combinations examined, the County’s Plan C defined benefit plan provides greater income and lower participant contribution levels than required under the ERFC 2001 / VRS Hybrid defined benefit plans Factors contributing to the difference include: (1) Rule of 85, and (2) Pre Social Security Feature. * The annual benefit excludes cost-of-living-adjustment increases 15
How Much Retirement Income Is Enough? Table IV-1 Replacement Income Needed by Source Income Before From Private and Replacement Retirement Social Security Employer Plan Needed $30,000 59% 31% 90% $40,000 54% 31% 85% $50,000 51% 30% 81% $60,000 46% 32% 78% $70,000 42% 35% 77% $80,000 39% 38% 77% $90,000 36% 42% 78% $150,000 23% 61% 84% Source: Aon Hewitt Replacement Ratio Study Final pay for retiree examples ranges from $89,790 to $97,791 16
How Much Retirement Income Is Enough? Table IV-4 – FCPS Retiree #1 Age 60 with 30 Years of Service From From From Total Defined Defined Social Total Entity Employee Benefit Contribution Security Contribution Plans Plan 51% 7% 0% 58% 8% FCPS Mandatory Contributions Only 84% 0% 0% 84% 4% FCGV Plan C 51% 32% 0% 83% 12% FCPS Maximizing Matching Contributions 84% 0% 0% 84% 4% FCGV Plan C Assumed need at retirement—78% At age 62 retirees can begin drawing Social Security Benefits. Social Security benefits starting at age 62 will replace an additional 24% of final pay, sufficient to meet the replacement of income need under either scenario (mandatory contributions only or the retiree has maximized matching contributions). 17
How Much Retirement Income Is Enough? Table IV-5 – FCPS Retiree #2 Age 62 with 22 Years of Service From From From Total Defined Defined Social Total Entity Employee Benefit Contribution Security Contribution Plans Plan 30% 5% 24% 59% 8% FCPS Mandatory Contributions Only 31% 0% 24% 55% 4% FCGV Plan C 30% 20% 24% 75% 12% FCPS Maximizing Matching Contributions 31% 0% 24% 55% 4% FCGV Plan C Assumed need at retirement—78%. The retiree in this example does not meet the “Rule of 90” under the VRS Hybrid Plan and thus has a significant reduction in benefits for early retirement. With three years of additional service (age 65 and 25 years of service) the retiree reaches the Rule of 90 and unreduced benefits are then 77% of final pay with mandatory contributions only, and 96% of final pay if matching contributions are maximized. 18
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