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Senate Bill 621 will require new employees covered by Illinois'
five state-funded pension systems to participate in a defined
contribution (self-managed) plan, similar to the pension systems
more public and private sector employers are using. Current public
employees would also be given the option to switch from the defined
benefit (traditional) plan. Brady says the changes will give
employees more control over their pensions, saving taxpayers money
long-term, and protect the pension systems from fund raids and
political influence.
"Illinois' state pension systems have been chronically
under-funded, but the current Administration has added insult to
injury in recent years. Gov. Rod Blagojevich seems to view the
public pension systems as his personal piggy bank and his raids on
these systems will cost taxpayers billions of extra dollars in years
to come," Brady said. "This Governor is not only robbing Peter to
pay Paul, he is robbing Peter's children and grandchildren!"
Senate Bill 621 states that the Board of Trustees for each
retirement system will review proposals and select between two and
seven companies to provide investment services for the defined
contribution plan. Each system also may offer its own investment
fund directly managed by the system. Employees can move their
account balances between these funds as they wish. Under the current
defined benefit plan, all money is invested by the system, with no
choices given to employees.
"This legislation will allow public employees to be more active
participants in the decisions affecting their pensions, but the
long-term financial benefits associated with the defined
contribution plan also make it incredibly appealing," explained
Cronin. "Our ultimate goal was to save the taxpayers money in a way
that is advantageous to public employees and protects the state
retirement systems."
Cronin noted that the Blagojevich Administration's ongoing raids
on the state's pension systems have put the state's finances in
jeopardy.
"The state has an obligation to fund the employees' pensions, but
unfortunately that responsibility has taken a back seat to financing
the new and expanded programs introduced by the Governor," Cronin
said. "This legislation will ensure that the integrity of the
state's pension systems isn't further jeopardized by future
diversions."
Cronin said the defined contribution plan would put much more
pressure on the state to pay its share into the system so that the
employees would know the money is actually there, unlike the current
system where the Governor and some members of the General Assembly
have taken the employees' money but failed to make the state's
contributions.
Senate Bill 621 applies to members of the Teachers Retirement
System, State Universities Retirement System, State Employees
Retirement System, General Assembly Retirement System, and Judges
Retirement System. The new defined contribution plan must be in
place by Jan. 1, 2009.
All defined contribution members are immediately 100% vested in
their own contributions and would be vested in employer
contributions after five years.
In spring 2005, Blagojevich and his legislative allies pushed
through a massive raid on the state's pension systems; as a result,
$1.2 billion was diverted from the state retirement systems in
Fiscal Year 2006. The Governor's Fiscal Year 2007 budget will divert
another $1.1 billion, for a total two-year raid of $2.3 billion.
Brady noted that over five years, more than $4.8 billion will have
been diverted from state retirement funding because of changes
Blagojevich made to the 1995 pension funding formula law.
"Fiscal irresponsibility has been the hallmark of this
Administration since day one. The Governor robs the pensions of
teachers, prison guards and road crews to pay for pork projects,"
Brady said. "It's time we stood up for the employees and the
taxpayers of our state."
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Details of Defined Contribution Pension Legislation
Participation: All newly-hired employees in all state-funded
systems would be required to be in the new defined contribution
plan, which must be in place by January 1, 2009. Current members of
the systems would have the option to choose between the defined
benefit (traditional) and defined contribution (self-managed) plan.
The current members' option to switch would have a five-year window.
If a current member terminates employment, but later is rehired,
that member may choose either plan. The legislation applies to
current and new members in these state-funded systems:
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Teachers Retirement
System (all teachers outside Chicago);
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State Universities
Retirement System (faculty and staff at all colleges);
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State Employees
Retirement System;
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General Assembly
Retirement System; and
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Judges Retirement
System.
Investments:
The Board of Trustees for each retirement system shall review
proposals and select between two and seven companies to provide
investment services for the DC plan. The member can move their
account balance between these funds as they wish. Each system also
may offer its own investment fund directly managed by the system.
(Under the current defined benefit plan, all money is invested by
the system, with no choices given to employees.)
Employee and Employer DC Contribution Amounts:
The legislation requires that employee contribution rates remain
the same percentage of the employee's salaries as in the current
defined benefit plans. The state/employer contributions would be the
"normal cost" rate each year that, combined with a projected 8.5%
investment return, would yield approximately the same level of
retirement benefits for a retiree under the defined contribution
plan as under the defined benefit plan. State savings could increase
with a modification in these contribution rates. (Note: the state
may be able to negotiate with the Social Security Administration to
allow full Social Security benefits to TRS and SURS participants,
upon payment of the Social Security rates; if this is negotiated,
these employee and state contribution rates would need to be
changed. The "windfall" reduction in benefits for teacher retirees
is set by federal law and could not be avoided unless teachers fully
joined the Social Security system.)
Portability Options:
All DC members are immediately 100% vested in their own
contributions and would be vested in employer contributions after
five years. Invested funds (including interest) would be available
to beneficiaries as a refund upon termination of employment. Under
federal law, the refund could also be directly rolled into a new
public or private employer's plan or an IRA. (In contrast, defined
benefit plan participants are entitled only to a refund of their own
contributions, not the state's contributions, prior to retirement,
if they terminate employment; and are not vested in any retirement
benefits until eight years of employment.)
Inheritability:
Under the defined contribution plan, survivors would receive an
annuity based on defined contribution invested funds managed by the
retirement system.
Budget Impact:
Long-term savings to the state should be substantial with the
switch to a defined contribution plan. The legislation does not
address financing of the cost of transition from the defined benefit
plan to the defined contribution plan. Definitive costs would have
to be estimated and addressed in the overall budget framework.
[to top of second column] |
 BENEFITS OF A DEFINED CONTRIBUTION PLAN:
Current National Pension Plan Trends:
Both public and
private sector employers are considering switching to a defined
contribution system, if they haven't done so already. The
workforce in Illinois and across the country is becoming
increasingly mobile with individuals changing jobs an average of
at least 7 times in their lifetime. Additionally, more federal
regulations have been placed on defined benefit plans for
private companies. The federal Protection Act of 2006 requires
employers who sponsor defined benefit plans for their employees
to have 100% funding by 2012.
Private sector
changes : In 1983, approximately 41% of private employers
offered employees a defined benefit pension plan, and only 15%
offered a defined contribution plan. By 2003, only 20% of
private employers offered a defined benefit plan, while over 55%
offered some form of a defined contribution plan.
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More states are
considering a defined contribution plan to prevent future
funding problems . Due to the high costs of a defined benefit
plan, and large demographic changes (the baby boom generation
entering retirement), there will soon be a larger number of
retirees in state pension systems. This will significantly
increase the costs of providing benefits. Michigan in 1996 and
Alaska in 2005 implemented defined contribution plans for all
state employees. Other states such as Oregon, Colorado, Ohio,
Georgia, Montana, North Dakota, South Carolina, Utah and Florida
have introduced a defined contribution plan as an option for
some employees.
DC/ 401(k) Plan:
. Once a member is vested, both employee and
employer contributions are completely portable. In defined
benefit plans, members who leave employment often are only
refunded employee contributions with interest. All employer
contributions are left in the system to help fund full benefits
for members who stay until retirement. In a defined contribution
plan, members can rollover their account balance (both employer
and employee contributions plus interest) into a private 401(k)
with their new employer or an individual retirement account
(IRA). When employees with a defined contribution plan leave a
job or stop employment altogether, they can continue to earn on
their investment. If employees with a defined benefit change
jobs, their benefits are frozen and employer contributions
cannot be transferred to an IRA or another 401(k).
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Vesting periods
are shorter. The vesting period for defined benefit plans
generally are longer than vesting periods for defined
contribution plans. This means employees would have a shorter
time before they "own" their retirement benefits.
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Pension funding
levels would not change based on changing demographics.
Under the defined contribution system, pensions are 100% funded.
In a defined benefit system, current active member contributions
pay for the current retirees. When there are a significantly
higher number of retirees, and the number of active workers
remains the same or decreases, then there will be a higher
unfunded liability for taxpayers. Longer life spans will also
contribute to the increase in funding required and the pension
debt will grow. With a defined contribution plan this debt would
be eliminated and the budget would be more precise.
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Political
influence is reduced for DC plans. Boards can advise, but
not make final investment decisions. Like other 401(k) plans,
the board for each system would choose several investment
options, but the final decision on where to invest would remain
with the individual. This would decrease board members' or the
Administration's ability to use the system for political
purposes. The recent actions of a former Teachers Retirement
System board member, who allegedly accepted kickbacks in
exchange for business with TRS, should highlight the need for
reform. Allowing constituents to make investment decisions would
take authority from board members and the systems and place it
with employees.
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Contributions go
directly to a worker's personal account and not into a
collective account. Members are more active in their pension
accounts and retirement planning.
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Wealth accrues
steadily over time in a defined contribution plan, but accrues
primarily later in employment for a defined benefit plan.
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Defined benefit
plans primarily benefit long-term workers and those planning to
be in a state pension system when they retire, whereas a defined
contribution plan benefits all members. Defined contribution
is not based on a formula and therefore is not altered based on
years of service or peak salary. This is better for members who
do not plan to stay in the system until retirement. Due to
formula, even those vested may have lower benefit levels if they
work less than 20 years in the system.
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Workforce
recruitment : Many of the public university retirement
systems and private university pension plans already offer
401(k) options to employees. These institutions understand that
to recruit the best faculty, they needed to provide a pension
plan that would allow flexibility for employees. When Illinois
implemented an optional self-managed plan for university
employees the bill stated, "The General Assembly finds that it
is important for colleges and universities to be able to attract
and retain the most qualified employees and that in order to
attract and retain these employees, colleges and universities
should have the flexibility to provide a defined contribution
plan…"
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Women are more
likely to see greater returns with a defined contribution plan.
Because defined benefit payments are based on years of service
and final salary, women who interrupt work for family
responsibilities tend to have low monthly pension payments upon
retirement. Among public employees, the average length of
service is 10.3 years for men and 8.9 years for women, and
women's final salaries are typically lower than men's. If a
defined contribution plan were available, women could still be
earning returns on their current contributions when taking time
away from work, and would not be restricted by a formula based
on years of service and salary.
(Text copied from news release sent on behalf of
Sen. Bill Brady
and received from Illinois
Senate Republican staff) |
