In 2020, FPPA convened a Task Force to study potential issues with one of our retirement plans, the Statewide Hybrid Plan. The Task Force’s charge was to evaluate the current and future health of the Hybrid Plan, and if necessary, make recommendations to the Board on how to maintain the stability of the Plan going forward.
In April 2021, the Task Force delivered a recommendation to merge the assets and liabilities of the Statewide Hybrid Plan with those of the Statewide Defined Benefit Plan, creating the new Statewide Retirement Plan. This action, along with other measures in the proposal, will ensure the long-term stability of all affected Plans.
Based upon the Task Force’s recommendation, the FPPA Board directed staff to pursue legislation to enact the changes prescribed in House Bill 22-1034. In addition, the Board directed staff to seek state assistance in shoring up FPPA’s Death & Disability Plan through a one-time cash infusion. This proposal is outlined in Senate Bill 22-36.
Combines the assets and liabilities of two existing plans; the Statewide Defined Benefit Plan (SWDB) and the Statewide Hybrid Plan (SWH); to form a new plan, the Statewide Retirement Plan. Also expands the Money Purchase Component to allow for excess contributions from all other components
Reduces existing 129.4% funding level to equal the funding level of the Statewide Defined Benefit Plan, which is 100% as of January 1, 2022, by awarding a one-time benefit adjustment on all service accrued prior to the date of merger to current retirees, deferred vested, and active members who are enrolled in the Plan
Increases minimum required contributions into the Hybrid Defined Benefit and Money Purchase Components (Formerly the Statewide Hybrid Plan) by a combined 2% over 8 years for a total of 18% (9% member / 9% employer). No additional action will be required of departments who already meet this requirement
Provides for Normal Retirement as early as age 50, if a member's combined years of service and age equals 80 or more
Seeks additional state funding for unfunded benefit costs for members hired prior to 1997
This action will combine the assets and liabilities of two plans, the Statewide Hybrid Plan and the Statewide Defined Benefit Plan, making them individual components of a new plan, the Statewide Retirement Plan. This provision will take two separate plans with multiple components and combine them into one plan with four components, as shown below:
Once merged, the individual components will function mostly the same as they do now. Benefits will remain the same, features like DROP and Deferred Retirement will still be available, and the Hybrid Defined Benefit component will even see the addition of the Rule of 80, a popular feature of the Defined Benefit Component (formerly the Statewide Defined Benefit Plan)
In order to ensure the Plans are merged equitably, the funding status of the Statewide Hybrid Plan will be intentionally reduced to match the funding of the Statewide Defined Benefit Plan, with the excess funding allocated to existing Hybrid Plan members using a modified benefit multiplier.
Additionally, this action will create a new investment option for Defined Benefit Component members. Under the current Statewide Defined Benefit Plan, contributions for each member are capped at the required contribution, without any option to deposit additional contributions to the plan. This provision will give Defined Benefit and Social Security Component members access to the Money Purchase Component of the Statewide Retirement Plan, in the same way that Hybrid members already have access. If desired, members and employers in either the Defined Benefit or Social Security Components will be able to contribute additional funds with each paycheck into the Statewide Retirement Plan (just as many workers elect to contribute to a 457 account). These excess contributions will be deposited into the Money Purchase Component of the Plan in the member’s name, where they will be deposited in a self-directed investment account.
Let’s first look at some basic facts for the plans to be merged, the current Statewide Hybrid Plan and the Statewide Defined Benefit Plan:
Statewide Hybrid Plan
Active Members: 403*
Total fire and police departments: 42*
Funded Status: 129.4%†
Assets: ~$84 Million‡
Liabilities: ~$83 Million‡
Statewide Defined Benefit Plan
Active Members: 10,266*
Total fire and police departments: 221*
Funded Status: 100.0%†
Assets: ~$3 Billion‡
Liabilities: ~$3 Billion‡
The idea to merge two FPPA plans came about in response to concerns regarding the Statewide Hybrid Plan. As shown above, the Statewide Hybrid Plan currently serves approximately 403 members in 42 Colorado fire and police departments. However, only three departments in the Hybrid Plan are actively enrolling new members. This lack of new membership, and by extension, new contributions into the Plan on behalf of those new members, means the Hybrid Plan looks more like a ‘closed’ plan; that is, one that is no longer taking in new membership and only paying retirement benefits until the last member’s benefit ends.
There’s nothing bad about a closed plan, but these plans do need to operate differently from those that are regularly adding new members. Typically, this means closed plans will employ more conservative actuarial assumptions and investment strategies, both of which would make it difficult to support new membership in any meaningful capacity. For the Statewide Hybrid Plan, this might eventually translate to lowered expected returns, funding, and by extension, benefit adjustments.
The good news is that the Statewide Hybrid Plan is not currently facing any of these potential hardships. As of its last valuation, it is a very strong plan at 129.4% funded. This also makes now an excellent time to take preemptive action to avoid potential problems in the future.
In contrast to the Statewide Hybrid Plan, the Statewide Defined Benefit Plan has upwards of 10,266 members and 221 departments, most of which are currently adding new members into the Plan, including new members who are replacing many of the members in the Statewide Hybrid Plan as they retire. The Plan is similarly well-funded and in good position to take action to maintain its long-term stability.
After merging the assets and liabilities of the two plans, both will come out the other end stronger and better prepared for the future. Since both Plans will enter the merger at similar funding levels and collect contributions at a proportional rate to fund their respective benefits, the plans will both pull their own weight, so to speak, and neither will be required to subsidize the other.
* 2020 Annual Report
† 2021 Annual Rates Report
‡ 1/1/2020 Actuarial Valuation
As of 1/1/2021, the funded status of the Statewide Hybrid Plan was 129.4%. In order to merge the Statewide Hybrid Plan and the Statewide Defined Benefit Plan in a way that treats all members fairly, FPPA will take action to reduce the funded status of the Hybrid Plan to approximately 100%, to match the Defined Benefit Plan’s funded status at the time of the merger.
To do this, FPPA will apply a one-time multiplier adjustment to current retirement benefits, and benefits for active and deferred vested members accrued at the time of the merger.
As laid out in the Plan brochure, benefits in the Statewide Hybrid Plan are accrued at 1.5% per year, meaning a member retiring at 55 years of age with 25 years of service would receive a monthly retirement benefit of 37.5% of their Highest Average Salary:
25 years of service x 1.5% per year = 37.5% benefit
This action would apply a one-time multiplier adjustment to that benefit percentage, increasing the established multiplier by a rate equal to the funded status at the time of the merger, currently expected to be around 129.4%. This means the normal 1.5% multiplier will become approximately 1.9% for all years of service prior to the merger:
1.5 x 129.4% = ~1.9
In the example above, this translates to a member at 55 years of age and 25 years of service receiving a 47.5% benefit
25 years of service x 1.9% per year = 47.5% benefit
Put another way, current and future retirees will receive a one-time benefit increase of 29% for benefits earned before the merger’s effective date.
Current retirees who have received past benefit adjustments will see the one-time multiplier adjustment applied to their existing benefit at the time of the merger. Active and deferred vested members will receive this adjustment of ~1.9% for all service accrued before the merger’s effective date, with benefits for service after the merger calculated at the normal rate of 1.5%.
This action ensures that components of the new Statewide Retirement Plan will be merged equitably. By reducing the funded status of the Statewide Hybrid Plan to match the Statewide Defined Benefit Plan at the time of the merger, both plans will enter the merger on an even playing field, without the need for one Plan to support the other.
This action will raise the required minimum contributions into the Hybrid Defined Benefit and Money Purchase Components of the Statewide Retirement Plan, formerly the Statewide Hybrid Plan. Currently the required minimum contribution into the Plan is 16%, with a member/employer split of 8% and 8%. This proposal will increase the required minimum contribution to 18%, maintaining an equal split between member and employer of 9% each. The increase will take effect over 8 years at a rate of 1/8%, or 0.125%, per year.
It is important to note that many departments already meet the 18% contribution required under this proposal. For these departments, no contribution increase will be required. However, if a department does not meet the 9% member/9% employer split required by the proposal (for example if a department pays 18%, with a 8% member/10% employer split), then contributions will be required to increase so both member and employer pay at least 9%.
This provision will help protect the health and longevity of the Hybrid Defined Benefit and Money Purchase Components, and provide additional retirement security for their members. Experience studies from recent years have led FPPA to change assumptions about things like retiree life expectancy and expected investment returns. Essentially, we’ve found that retirees are living longer and adopted a more conservative actuarial rate of return assumption of 7%.
These new assumptions mean that the expected cost to provide promised benefits has increased over time.
Also, consider the ‘hybrid’ plan as it was designed: that is, where Plan contributions are first used to pay for a member’s lifetime defined benefit, with any excess funds deposited in the member’s Money Purchase account for them to invest as they wish. On the Plan’s current trajectory, the cost of the benefit may soon become more expensive, which means virtually none of the minimum required contributions will end up in the Money Purchase component. Increasing contributions, however, increases the likelihood that the Money Purchase Component will continue receive funding for the foreseeable future.
To put it simply, in order to maintain the hybrid nature of the Plan, where at least some portion of the minimum required contributions are deposited in the Money Purchase Component, we need to increase the required minimum contribution.
Additionally, this increased funding does two other important things: increases the likelihood of significant future benefit adjustments for retirees, and funds for the Rule of 80 in the Hybrid Defined Benefit Component.
This provision creates a so-called Rule of 80, a new definition of Normal Retirement for members of the Hybrid Defined Benefit Component. This allows members to claim a full, unreduced pension benefit if their combined age and years of service equal at least 80, beginning at age 50.
Under the Rule of 80, members would be eligible to begin receiving a Normal Retirement at the following combinations of retirement age and years of service:
Benefit percentage charts for eligible retirees will vary based upon individual circumstances. Here's one example of what the chart could look like:
This action will be funded by the proposed increase in required minimum contributions described previously on this page.
In order to qualify for an unreduced benefit under the Rule of 80, a firefighter or police officer would most likely need to begin working at an FPPA department in their early 20s, and then work their entire career as a first responder in Colorado. In many cases, working as a first responder for so long takes an enormous physical and mental toll, and often these members must consider taking a reduced, early retirement if they cannot wait to retire until age 55. This rule will help to reduce such instances and recognize these members’ service.
A nearly identical proposal for Rule of 80 in the Statewide Defined Benefit Plan was approved by the Legislature in 2020 and implemented in 2021. Since going into effect, the Rule of 80 has become a popular feature of the Statewide Defined Benefit Plan, and has been widely requested by Hybrid Plan members. Implementing the Rule of 80 for the Hybrid Defined Benefit Component will also increase consistency between the components of the new Statewide Retirement Plan.
Due to the requirements, not all of our members will be eligible to claim a Rule of 80 retirement, but those that do will be among the longest serving public safety officers in Colorado. The goal of the Rule of 80 is to allow members to end their career on their own terms with an unreduced pension benefit.
This action provides approximately $35 Million in State assistance toward funding the unfunded liabilities for Statewide Death & Disability Plan members hired prior to 1997. In turn, this funding will help to shore up the Plan for all members by reducing the amount of time required for the Plan to regain fully funded status.
The Statewide Death & Disability Plan provides benefits to over 14,000 Colorado firefighters, police officers, and their families in the event that the member is seriously injured or killed. Members are covered 24/7, both on- and off-duty, until they are eligible for normal retirement, retire or otherwise terminate employment. The Plan, and its benefits, are greatly appreciated by the members and their families, knowing they have a safety net should the unthinkable occur. As of 1/1/2021, the Plan is 76.5% funded.
The State of Colorado was responsible for funding the benefits for all members hired prior to January 1, 1997. Funding for members hired on or after January 1, 1997 is the responsibility of the member and their employer, with the contribution split decided at the local level.
When the funding mechanism changed, the State made a one-time payment to cover the anticipated benefits for all members hired prior to January 1, 1997. However, the actual cost of those benefits is greater than what was anticipated, and FPPA covered the difference using funds meant to pay benefits to members hired after the state's one-time payment. The funds requested by this legislation will help make up for that shortfall, and help the Plan regain fully funded status in a shorter period of time. Without an adequate cash infusion from the State, the path toward full funding is longer and potentially problematic.
Legislation passed in 2020, HB20-1044, gave FPPA’s Board greater control over contribution rates into the Plan. This increased the likelihood that the Plan would eventually regain fully funded status. Local employers and members supported the legislation in 2020 increasing their contributions. However, further action is necessary to ensure that the Plan regains full funding in a timely manner. This legislation provides for the State to participate with employers and members in bridging the gap.
Forward with FPPA provides information and resources for FPPA Members, stakeholders and the public regarding the future of the Fire & Police Pension Association of Colorado.GET IN TOUCH
© Fire & Police Pension Association of Colorado | All Rights Reserved