SB1428: PSPRS Pension Reform Update. Public Safety Personnel Retirement System January 10, 2017

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1 SB1428: PSPRS Pension Reform Update Public Safety Personnel Retirement System January 10, 2017

2 Today s Agenda Overview of what brought us to pension reform. Refresher on SB1428 Plan Provisions. Provide upcoming timeline of important dates associated with SB1428 implementation. Review some Frequently Asked Questions related to SB

3 Roots of pension reform High pension investment returns and high funding levels Until Dot Com crash PSPRS loses $1 billion 20 percent of $5 billion trust Heavy losses during housing market crash Similar experiences across public pensions Private pensions becoming endangered species 3

4 Roots of pension reform (cont.) PSPRS response Lesson learned: 70/30 and 60/40 plans are not stable Legislative approval for highly diverse portfolio needed Authority granted in 2008 state law PSPRS begins transitioning portfolio into 10+ asset classes Eggs NOT in one basket Pension/investment stability is key 4

5 Roots of pension reform (cont.) Creation of Tier 2 employee classification in 2011 Object was to save system $, stop the further reduction of funding levels Greater employee financial contributions Pension and DROP More requirements to retire Some changes to law overturned in court Fields and Hall lawsuit 5

6 Senate Bill 1428 Pension reform bill which affects PSPRS Plan employers, local boards and members. Creates new tier of benefits for newly hired employees covered under the plan Establishes a defined contribution plan as a benefit option Modifies how the Plan provides for Permanent Benefit Increases Requires study to be performed for possible risk-pooling and local board consolidation Our discussion today will be about the changes to the law and to provide an update on 1428 implementation. 6

7 SB1428: Plan Study Study conducted by Cortex and addressed the following: Determining various feasible methods, if any, of risk-pooling for the System Analyzing potential methods, if any, for Local Board consolidation Results and recommendations of this study have been presented in draft form to stakeholders and the BOT. Final report due on or before Jan. 15, Recommendations adopted by the BOT that would require legislative action must be reported to the President of Senate, Speaker of the House and Governor on or before Feb. 15,

8 SB1428: Tier 3 Benefits Establishes Tier 3 benefits for new hires on or after July 1, Creates new DB structure Establishes DC Plan with a disability benefit component The member will choose within 90 days of the hire date either the DB plan or the DC plan. The decision to participate in the DB Vs. DC plan will be irrevocable. Limits the annual compensation to contribute at $110,000. BOT shall adjust compensation limit every 3 years, beginning FY21 using the Public Safety Wage Index established by this Bill 8

9 SB1428: Defined Benefit Plan Defined Benefit Plan structure: Normal Retirement requires at least 15 years of credited service and member to be age 55 Member has ability to take an Early Retirement Must be age 52.5 with 15 years of credited service Member would receive actuarially reduced benefit Contribution rate into the DB Plan for employer and employee is split 50/50 9

10 SB1428: Defined Benefit Plan Pension benefit is calculated utilizing: The average of the member s highest 5 consecutive years of compensation within the last 15 years of service (Average Monthly Compensation). Benefit multiplier based on a percentage of average compensation in relation to member s actual years of credited service Maximum benefit is 80% of AMC Years of Credited Service 15 but less than 17 years Multiplier 1.50% of AMC (32 years of credited service) 17 but less than 19 years 1.75% of AMC 19 but less than 22 years 2.00% of AMC 22 but less than % of AMC 25+ years 2.50% of AMC 10

11 Defined Contribution Plan PSPRS Defined Contribution Committee will determine who will handle the DC plan Timeframe January 2017: Selection of DC Plan Advisor and initiation of RFP for DC third party administrator Selection of DC Administrator completed early May 2017 More information on plan administrator will be provided in May/June timeframe. 11

12 SB1428: Defined Contribution Plan Bill establishes a Defined Contribution plan as an option for employees hired after July 1, Employee can elect to participate solely in the DC. Employee who elects to participate in the DB, will also participate in the DC if not covered under OASI. Employee contribution rates: For those who elect exclusively DC plan coverage, 9% of compensation. For DB members required to participate, 3% of compensation Employee can make a one-time election, at initial enrollment, to increase percentage. This amount can not be changed and remains throughout entire PSPRS participation. Employer makes equal contribution into the DC plan based on the employees participation status. Employer contribution does not include employee voluntary increased percentage. 12

13 SB1428: Defined Contribution Disability Program Individuals who participate exclusively in the DC plan are covered under the disability program. Employee & Employer contribution rate into the program is split 50/50 Eligibility requirements and calculation of benefit for any disability payable under this program mirror those for Tier 3 DB members. Actuarial offset based on participants assets in DC plan, will reduce calculated benefit amount. 13

14 SB1428: Defined Contribution Plan Provisions for Tier 2 PSPRS Members Employees who are considered Tier 2 PSPRS members will participate in DC under the following conditions: The member did not make election to opt-out of the Plan. The member is not covered under OASI. Employee contribution rate: 3% of compensation Employer contribution rate: Two step process Begins with 4% of employee compensation for a limited time, based on employee s hire date. Reduces down to 3% of employee compensation once required time period has passed. This new DC program is separate from the already established Supplemental DC Plan PSPRS offers. 14

15 Overview Tier 2 Member opt-out process Encourage members to sign up for the members only account Listings to go out to LB on those tier 2 members with no on record. How will this be handled by you the employer? Partnership to get the word out on opt-out process Tier 2 opt out process webinar will be January 25, 2017 (Phoenix, AZ) Discussion and more information on logistics, education to membership, reporting, etc. 15

16 SB1428: Cost of Living Adjustments (COLA) Members Hired On Or Before June 30, 2017 CPI-based utilizing metro Phoenix-Mesa data published by BLS Increase added to individual base benefit 2% Cap No waiting period No funding requirement Members Hired On Or After July 1, 2017 CPI-based utilizing metro Phoenix-Mesa data published by BLS Increase added to individual base benefit. Increase applied the first calendar year following 7 years of retirement or attainment of 60 years of age. Percentage applied based on Plan s funding status, with a cap of 2% 16

17 SB 1428 Frequently Asked Question Q: If an employee transfers between PSPRS employers, how will an employer know what tier and election(s) were made by the employee? A. PSPRS is currently developing a member Look-up feature within the Employer Payroll Portal and Local Board Portal Q: If a Tier 3 employee terminates and refunds funds (either DB or DC), will they be able to make new elections if rehired into a PSPRS position? A. No, the irrevocable decision is a one time decision that maintains throughout the individual s PSPRS covered career. This maintains even if they refund assets as this decision has IRS qualified status implications. 17

18 SB 1428 Frequently Asked Question Q: When does the 90-day decision period begin for a Tier 3 employee? A. The 90-day period would begin on the date that the employer group s local board would traditionally consider the employee a member in the plan. Contributions into the DC or DB depending on their election would begin in the pay period that includes the 91 st day. Q: If a Tier 3 employee chooses to be a DC exclusive participant, are they eligible for other benefits (i.e. Survivor benefits, COLA, premium subsidy)? A. No, because they are not considered members of the DB plan. However, they will have coverage under the Public Safety Cancer Insurance Policy Program, and would be able to enroll in state retirement health insurance. 18

19 SB 1428 Frequently Asked Question Q: Have the Employee & Employer rates been determined for Tier 3 DB plan and DC Disability fund? A. The preliminary rates for Tier 3 as published in your actuarial valuation were based on the same modeling and assumptions used in SB1428 projections. However, due to our 5-year experience study being completed by the end January, we anticipate some necessary adjustments prior to July 1, 2017 in order to provide the most accurate rates. 19

20 What s Next? PSPRS updating/upgrading internal & external systems in order to implement new plan provisions Employer s Payroll Portal Member s Only Local Board Portal PSPRS conducting additional training throughout the next several months to further communicate any further operational changes. 20

21 Future Training Events Understanding Tier 3 Plan Provisions (three locations in Arizona) March 30, 2017 Pima Community College 1255 North Stone Avenue Tucson, AZ (10am till noon) April 6, 2017 Flagstaff Council Chambers 211 W Aspen Flagstaff, AZ (10 am till noon) April 13, 2017 Burton Barr Library Pulliam meeting room (1st floor located near gallery) 9:00a -11:00p and 1:00p 3:00p May 16, 2017 Employer Seminar (new enrollment process, new payment/transmittal process) 21

22 Future Training Material coming your way On our website DB vs DC video Tier 3 member benefit video Plan Provisions for Tier 3 Newsletters with updated info New member information packet 22

23 Questions? 23