Town of Bristol, RI

Proposed Police Pension Plan Changes

August 6, 2012 Rebecca A. Sielman, FSA

Current Pension Plans for Police

Officers hired prior to March 22, 1998 are covered by Bristols private pension plan.
As of July 1, 2011: 7 active employees plus 44 retirees

Officers hired after March 22, 1998 are covered by the Rhode Island Municipal Employees Retirement System (RI MERS).
As of July 1, 2011: 32 active employees plus 1 retiree

Goals of Study Project

Provide a reasonable benefits package that will attract and retain the employees that the Town needs. Develop a framework for delivering benefits with an acceptable price tag for the Town, both short-term and long-term. Ensure that the private pension plan emerges from critical status within a sufficiently short timeframe. Strengthen the Towns ability to control costs and benefits at the local level.

Proposed Changes
Active officers who are currently in the MERS plan will transfer to Bristols private plan.
Any current MERS retirees will stay in MERS Approximately $2.5 million will be transferred from MERS to Bristols private plan Benefits from Bristols private plan will be based on each officers entire period of service in Bristol

Future officers will be covered by Bristols private plan. Benefits provided to the MERS / future officers will not be as generous as benefits provided to current members of the Bristol private plan. Other wage / OPEB concessions are proposed.
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Key Provisions of Pension Plans

Member contributions how much of the cost of the benefits do members pay while they are working? Retirement eligibility at what age and/or years of service can a member retire with full benefits? Benefit multiplier what is the formula for determining benefits at retirement?
ex. pension = 2.5% x [average earnings] x [years of service]

Cost of living adjustment (COLA) how will the benefit increase after retirement to keep up with inflation?

Comparison of Key Provisions

Provision Member contributions Retirement eligibility Benefit multiplier COLA Current Bristol Private Plan
9% - 13%, depending on funded status Any age with 20 years of service 3% for the first 20 years + 1% for the next 10 years 3% (compounded)

RI MERS (eff. 2012)

8% plus 3% to new DC plan; employer will also contribute 3% to DC plan Later of age 55 and completion of 25 years of service1 2% for the first 37.5 years 2

Proposed Bristol Private Plan

13%

Any age with 25 years of service 2.1% for the first 25 years + 1.5% for the next 5 years 2% non-compounded

0-4% depending on investment returns; suspended if plan is less than 80% funded; applies only to first $25,000 of benefits; starts 3 years after retirement

1 2

Members close to retirement may be grandfathered at age 52 Members close to retirement may be grandfathered at 2.5% for pre-2012 service

Other Concessions
Contributions to fund retiree medical benefits (OPEB) will increase from 1.5% of pay to 6% / 6.5% / 7% Increased co-pays for office visits. Changes to prescription drug coverage. Healthcare premium cost-sharing will increase based on date of hire:
Current $25 per pay period Proposed 10% of premium

10% of medical premium 15% of medical + dental premium 20% of medical premium 20% of medical + dental premium

Long Term Projections

Current Private Plan, No Changes
Amortization Payment disappears as the plan becomes fully funded

Normal Cost disappears as the last active members retire

Exceeds 60% funded threshold (critical status) in 2019

Long Term Projections

Private Plan With MERS Officers Added1

Projections are for a plan design very similar to the final proposal

Amortization Payment disappears as the plan becomes fully funded

Normal Cost goes up over time with salary growth

Assets include approx. $2.5m transfer from MERS

Exceeds 60% funded threshold (critical status) in 2017

Long Term Projections

Overall Cost Savings

Note: long-term costs for pension and medical benefits are difficult to determine and depend on many external factors such as investment returns and medical inflation.

Pension: the costs for the current private plan plus MERS versus the proposed private plan changes. OPEB: reflects the increase in employee contributions to prefund OPEB benefits during officers working lifetimes. Medical / dental: reflects the changes in employee premium-sharing, co-pays, and prescription drug coverage.

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Cost Impact Key Results

Based on long term projections, the Town should save roughly $250,000 per year for the next approximately 8 years. Beyond that point the cost to the Town may be higher than with the current program. The revised pension plan is projected to exit critical status (less than 60% funded) a few years sooner than is projected to happen with the current program.

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Caveats
Projection assumptions, private plan: The number of active members is constant for the proposed plan design, but declines to zero for the current plan design. Individual pay increases and patterns of turnover, retirement, disability, and mortality are per the valuation assumptions developed by the 2011 Experience Study. Terminating and retiring officers are replaced by new officers with the same age / service / gender characteristics as officers who were hired during the past few years. The Town always pays the Annual Required Contribution. The investments earn the assumed annual rate of return each year in the future. There are no future plan changes, assumption changes, funding method changes, or actuarial gains / losses. With the proposed plan design, the amortization period is reset to 25 years in 2012 and declines annually until it reaches 10 years, then it remains at 10 years thereafter. Projection assumptions, MERS: Costs increase in line with individual pay increases. Projection assumptions, medical/dental: Costs increase by 6.75% per year. It is certain that actual experience will not conform exactly to the assumptions used in this analysis. To the extent future experience deviates from those assumptions, the results of this analysis could vary from the results presented here. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions, changes in economic or demographic assumptions, increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period or additional cost or contribution requirements based on the plans funded status), and changes in plan provisions or applicable law. Due to the limited scope of our assignment, we did not perform an analysis of the potential range of such future measurements. We performed a limited review of the data used directly in our analysis for reasonableness and consistency and have not found material defects in the data. If there are material defects in the data, it is possible that they would be uncovered by a detailed, systematic review and comparison of the data to search for data values that are questionable or for relationships that are materially inconsistent. Such a review was beyond the scope of our assignment. If the underlying data or information is inaccurate or incomplete, the results of our analysis may likewise be inaccurate or incomplete and our calculations may need to be revised. This work product was prepared solely for the Town for the purposes described herein and may not be appropriate to use for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. Except as otherwise indicated above, the explanatory notes contained in the July 1, 2011 Valuation Report dated November 22, 2011 and the 2011 Experience Study Report dated March 28, 2012, including statements of reliance and limitations on use, continue to apply. I have not explored any legal issues with respect to the proposed plan changes. I am not an attorney and cannot give legal advice on such issues. Millimans advice is not intended to be a substitute for qualified legal counsel. I am a member of the American Academy of Actuaries and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein.

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