Provision: Hybrid Components: Contribution Increase

Increases required minimum 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)

What Does This Provision Do?

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%.

Why is this action necessary?

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.

BOTTOM LINE: In order to stabilize and maintain the hybrid nature of the Plan long-term, we need to increase the minimum required contributions by 2%.

Note: The legislative provisions are concepts and are discussed herein are proposed for the 2022 Legislative session. A draft bill has not been prepared at this time and is not available. These provisions are based on recommendations made by the Statewide Hybrid Plan Task Force after careful review and analysis. The Task Force is made up of members and employers from across the state. The FPPA Board seeks your feedback on these proposals prior to proceeding to bill drafting and legislative hearings scheduled for summer 2021.

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