Bill Huff: Vermont Needs Defined Contribution Plan For Retirees | Columns

Vermont Pension Plan members are upset, and rightly so! The unfunded liability of the pension plan has been increasing for years and now stands at nearly $ 6 billion and the expected contribution determined by the actuarial profession, or CEDA, is out of control.

This is the amount that the legislator should commit each year to pension funds. The annual increase in contribution alone is nearly $ 100 million, bringing the total expected contribution next year to $ 316 million. In an effort to lower the ADEC to a more reasonable figure and to attempt to reverse the unfunded liability, the Vermont House Government Ops Committee has been tasked with finding a solution.

The committee’s deputies met with party leaders behind closed doors and put in place a package of reforms that clearly weigh on the backs of teachers, state employees, judges and soldiers covered by the plan. They are being asked to contribute more and work longer for lower retirement benefits. Some groups may see a 45% increase in the amount of required contributions, while all will see vesting schedules double to 10 years. Retired COLAs above a threshold of $ 24,000 will be virtually eliminated although the proposal allows them to resume IF pension funds one day reach 85% full funding. Under ideal circumstances, estimates suggest this could happen for government employees in 12 years and 20 years for teachers.

Plan members received promises when they were hired. Over the years, they have fervently retained the specific elements of their pension plan during contract negotiations, often to the detriment of other benefits or additional salary. The defined benefit plan provides two things that are of paramount importance to members. First, pensions provide a source of guaranteed retirement income and second, there is no investment risk for participants. The amount of the pension is of course dictated by the rules agreed upon upon hiring. The risk of making the right investment decisions is the responsibility of the plan sponsor, in this case the government.

The proposed changes to the state pension plan, however, make it clear that things are different here in Vermont. Poor return on investments and lower than required pension payments over the past few years are largely responsible for the snowballing CEDA and the huge unfunded liability. The current proposals aim to consolidate pension plans and reduce annual contributions to plans by going back on promises made. The drastic changes suggested for participants would have a cumulative impact on CEDA of just over $ 80 million and possibly reduce unfunded liability by just over $ 500 million. These “savings” are coming out of the pockets of plan members. Indeed, the supposed advantages of a defined benefit plan disappear. For one group, the judges, it is proposed to reduce the guarantee of a secure retirement income by 40%. Obviously, participants are also required to compensate for poor past investment performance in order to reduce unfunded liability, but a proposed provision actually goes so far as to require additional contribution from participants if investment performance continue to fall short of targets! Participants are forced to accept the risk of investing in a defined benefit plan which is simply unfathomable.

I mentioned above that under the proposal, the CEDA would be reduced by $ 80 million, yes reduced! Let it sink in for a moment. In order to consolidate pension plans, the proposal would actually allow the state to contribute LESS money to the plan! How can this be? This is the OPEB, or “Other post-employment benefits”. It is basically a health insurance benefit for retirees. The state currently uses a “pay-go” system to pay retiree contributions. Generally accepted accounting principles allow only a low interest rate assumption on account balances, resulting in a higher actuarial estimate payment. If the state switches to a pre-financing system, the accounting rules allow a much higher “assumed interest rate” which decreases the amount to be contributed! Essentially, and over time, the proposal is to accumulate funds and turn the OPEB into another pension-like system since it has gone so well for the state so far.

In order to solve this problem for both plan members and taxpayers, every conceivable solution must be considered, yet the Democratic Party leadership has repeatedly refused to seriously consider alternative plans. Even if all the draconian proposals are adopted, we still lack $ 10 million to achieve the increase in CEDA for next year. This is not a solution. It’s a recipe for huge, ongoing retirement problems that will result in higher taxes for residents and another haircut for plan members later on. These issues are already having an impact on retaining key employees and hiring new candidates to fill many statewide vacancies that already exist. It’s time for something different and daring.

I believe there is a solution that will deliver on the promises made to plan members, reduce plan costs over time, and eliminate the unfunded liability we face today. Annual employer contributions would become viable and predictable.

First, and most importantly, implement a plan freeze. This means that there are no more new participants in the defined benefit plan. Existing members would be allowed to continue in the existing DB plan under the current rules, no change. The benefit paid at retirement would be all that has been earned up to the time of the freeze. Promises made would be promises kept. In addition, plan members should have the option of remaining in the current DB plan or opting for a swap of the present value of their estimated benefits for a new defined contribution plan. New hires and participants who opted for the exchange would be enrolled in the new DC scheme with simple state correspondence. If the new hires contributed at a rate consistent with the new proposals, could earn as much as the state suggests it is prudent now, and the state matches 4 and a half percent, a participant could earn enough money. to prudently pay a lifetime income that matches the benefits of the current pension plan.

The second part is obviously the start of a new defined contribution scheme. This hybrid approach would be used until such time as the last retiree enrolled in the DB plan dies, thereby terminating the DB plan. This plan will take years, but will treat current plan members fairly, provide a good retirement for everyone, eliminate unfunded liabilities over time, eliminate the huge overhead costs currently required to run the defined benefit plan, and provide relief. taxpayers.

I know there is a lot of resistance to even considering a defined contribution plan, but consider the advantages over the current DB plan. The assets you contribute under the DC plan are yours forever. The state match would be yours to keep after implementing the vesting schedule. The advantage is yours, not just the advantage. You could accumulate hundreds of thousands of dollars over the course of a typical career, possibly over a million, and it’s up to you to use it at the rate you determine. If there are any assets left after your death and that of a spouse, this money creates an estate for the heirs, which is not the case under the current DB plan, unless a certain period payment. Is selected and then for a limited time only. Worried about being tempted to spend it all soon after you retire? Include an annuity in the new DC plan as an investment choice. You basically create your own personal DB plan and pay your pension after retirement with payments that can last your life and the life of a beneficiary. These days, safe-haven investments are often an option in a DC plan, so if you don’t feel ready to invest on your own, you can put it on autopilot and age-appropriate investment decisions are made to. you.

Plan members and union representatives must decide whether the continuation of the defined benefit plan is worth all the additional requirements that will be placed on them. Guaranteed income is only as good as the entity that makes the promise. Do you think the state keeps its promises? Do you think the DB Plan provides retirement income with no investment risk? You are asked to pay for the fact that the pension is not funded. Whether you like it or not, you have been subject to investment risk. For those who disagree, the plan freeze I suggested would allow you to continue, as is, until you are no longer a plan member. The government wins by eliminating the unfunded liability. Taxpayers gain by reducing the plan’s liabilities and expenses, and therefore taxes. More importantly, plan members earn with a plan that can create family wealth, can grow enough to support a comfortable retirement, and eliminate another “forced haircut” in the future.

Bill Huff, of Thetford, is a former candidate for the Orange County Senate, a former certified financial planner and a former employee of two major airlines that went bankrupt and terminated pension plans.

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