A new report provides a comprehensive overview of the many aspects of public sector hybrid retirement plan designs. The report finds that some shifts to hybrid designs were made without a proper evaluation of the long-term implications of the plan changes. In contrast, other hybrids are well-thought-out and more likely to provide retirement security to employees, enabling public employers to recruit and retain a qualified workforce.
A hybrid is not one particular plan design, but instead is an umbrella term capturing a wide range of different plan designs. Some hybrids are defined benefit (DB) pensions with risk-sharing provisions, while others blend attributes of DB and defined contribution (DC) plans. Each of these plan designs offers tradeoffs in terms of retirement benefits, risks, and costs.
Author(s): Dan Doonan, Elizabeth Wiley
Publication Date: 10 May 2021
Publication Site: National Institute on Retirement Security
The GOP-run Kentucky state legislature has overridden Democratic Gov. Andy Beshear’s veto of a pension reform bill that will place new teachers in a hybrid pension plan that incorporates aspects of a defined contribution (DC) and a defined benefit (DB) plan.
Under House Bill 258, new teachers are required to contribute more to their retirement plans than current teachers do, and they will have to work for 30 years instead of 27 to earn their maximum benefits. The new rules will become effective at the beginning of 2022.
The bill had been passed by large majority of both chambers of the legislature earlier this year, with the House passing it by a vote of 68 to 28 and the Senate passing it by a count of 63 to 34. Because the state’s Republicans have a supermajority in both the House and Senate, they didn’t have much difficulty in overriding the veto, which was one of 24 vetoes passed down by Beshear, a Democrat, that were overridden in one day.
Legislation to change the pension plan for future teachers in Kentucky moves to the full Senate in the final days of the 2021 session.
House Bill 258, sponsored by Rep. Ed Massey, would create a new tier in the Kentucky Teachers’ Retirement System (KTRS) for any newly hired teachers in the state that would be partially defined benefit plan like the existing pension plan and part defined contribution plan, more like a 401(k).
The bill serves as a retirement plan as well as social security replacement plan, as teachers in Kentucky do not pay into social security and do not receive the benefit in retirement. The new system would provide a supplemental plan with two percent paid in by both the employee and the state, which is portable to allow an employee to take those benefits with them should they leave the teaching profession, unlike the existing KTRS pension plan.
The Kentucky House recently passed a state bill that would place newly-hired Kentucky teachers into a new “hybrid” retirement plan design. The new hybrid plan would blend a “foundational” defined benefit pension plan with a “supplemental” defined contribution plan as a means of de-risking the Kentucky Teachers’ Retirement System, which is only 58.4 percent funded today.
The legislation, which is now before the Senate’s State and Local Government Committee, ultimately seeks to control future employee, retiree and taxpayer costs. The Teachers’ Retirement System of Kentucky already has nearly $15 billion in unfunded liabilities.
An actuarial analysis of the bill, House Bill 258, projects that it would save Kentucky $3.57 billion over 30 years. While the legislation is not a panacea, if enacted, it would be a positive step in the right direction for Kentucky’s overall public pension challenges, which rank among the most difficult in the nation.
A bill creating a new pension tier for future teachers that will require them to pay more toward their retirement and work longer before they can earn full benefits passed the House Thursday.
House Bill 258, sponsored by Rep. C. Ed Massey, moved to the House floor on a 14-4 vote and cleared the lower chamber hours later on a 68-28 vote. The measure, if passed, would put teachers and others covered by the Kentucky Teachers Retirement System hired after Jan. 1, 2022, into a new hybrid pension plan that includes foundational and supplemental benefits.
Massey, R-Hebron, said the proposal would keep future hires from joining “an already burdened and overtaxed” defined-benefit pension system at KTRS, which actuaries expect will have unfunded pension liabilities totaling $14.8 billion and have 58.4% of the money needed to cover pension costs for current retirees and workers by fiscal year 2023.
Now, generally speaking, when an employer switches from a traditional pension to a defined contribution plan, this means a significant drop in plan benefits for employees. In Florida, that’s not the case — at least nominally not so: the employer contribution rate is the same for either type of plan, and varies only by employment class. (Of course, this doesn’t take into account any additional contributions needed to remedy funded status.) In addition, regular readers will know that I insist whenever the opportunity arises that state and local employees should participate in Social Security just as much as the rest of us do; as it happens, that is already the case for public employees in Florida. In addition, unlike the 8 year vesting of the traditional pension plan, the employer contributions to the defined contribution plan vest after only a year of service.