Pension update

[utrecht]

I've mentioned recently that my pension fund (Dallas Police and Fire Pension) was named Best Mid sized pension. They've done a very good job short and long term. Although they are in pretty good shape, there was a meeting recently where the actuaries recommended a few changes. These will require a vote of the members.

1) Currently people in our "DROP" program stop making pension contributions when you join. You keep working but for pension purposes you are retired. You no longer accrue any further pension credit. Your pension check goes into an interest bearing account which pays 8-10% interest. The recommended change is that all DROP members will have to contribute the same 8.5% of their salary that they contributed before entering DROP. I will vote FOR this but find it strange because DROP members will have to contribute even though they are not accruing benefits.

2) All new hires will only receive a multiplier of 2% per year (its currently 3%)

3) All new hires will use "high 5" instead of "high 3"

4) All new hires must be 55 before entering DROP. Currently you can join anytime after you have 20 tears of service, but if you join before 50, you dont get the full 3% per year of service.

This should keep the pension fund strong for the long term and it will cause limited pain for any current employees.

 

[youbet]

The movement to make public pensions less generous seems to be gaining momentum........

 

[Purron]

Good to hear about a well run pension fund for a change. So much news about bad ones these days. The proposed changes sound reasonable and I believe many pension funds are looking at similiar things.

 

[utrecht]

Good to hear about a well run pension fund for a change. So much news about bad ones these days. The proposed changes sound reasonable and I believe many pension funds are looking at similiar things.

Does it sound fair for DROP members to have to keep contributing even thought they no longer accrue further pension credit? Alot of people already in DROP are ticked off because they will essentially be taking an 8.5% pay cut and getting nothing for it. They do get paid an over sized amount of interest at 8-10%, but they were already getting that.

(I will be joining DROP in just over a year at 48 years old).

 

[Midpack]

Does it sound fair for DROP members to have to keep contributing even thought they no longer accrue further pension credit? Alot of people already in DROP are ticked off because they will essentially be taking an 8.5% pay cut and getting nothing for it. They do get paid an over sized amount of interest at 8-10%, but they were already getting that.

(I will be joining DROP in just over a year at 48 years old).

Many of us who lost pensions in the private sector had a similar experience. When my pension was frozen, my pay did not increase, in essence the same thing as you describe if I understand your situation correctly. Not sure the word "fair" applies in either case, it's business and employee retention.

 

[flyfishnevada]

The change for the DROP members may be a calculated ploy to encourage people to retire and therefore get new hires in that will pay into the system and make less money.

 

[Rustic23]

If I understand the DROP, you continue working, draw your pension, which is put into an account, with 8-10% interest. What is this in money for the average recipient? i.e. how much is going into the account, and how much are you giving up in salary? What happens to the sustainability of your pension fund if you don't accept the deal?

 

[youbet]

Does it sound fair for DROP members to have to keep contributing even thought they no longer accrue further pension credit.

Do you have the option of not joining DROP?

 

[utrecht]

If I understand the DROP, you continue working, draw your pension, which is put into an account, with 8-10% interest. What is this in money for the average recipient? i.e. how much is going into the account, and how much are you giving up in salary? What happens to the sustainability of your pension fund if you don't accept the deal?

Yes, that is how DROP works. I think the only real problem is that when DROP was started the max you could stay in was 5 years and then you had to completely retire. Then they changed it to where you could stay in basically forever. Some people have over a million dollars in DROP and they are collecting what is currently 9.0% interest so they are making a killing and wont leave. Obviously the pension fund returns havent been 9% over the past several years so DROP members have become a liability.

The interest rate is based on the rolling 10 year avg of the pension fund returns but must remain between 8-10% and can only change by 0.25% per year. Personally I think they should remove the 0.25% cap and make it more like 6-10%.

I believe each change will be voted on separately. I'm almost positive the changes regarding only new hires will pass easily. I'm almost as sure that the change in contributions for DROP members will pass also because there is a lot more people not in DROP than there is people already in. The people already in DROP are against it for obvious reasons. The rest of us wont be losing anything that we already have so the sustainability of the pension is more important than getting a "raise" when we enter DROP.

I have no idea what happens if nothing passes, but the pension is pretty well funded already. I think this is more of a preemptive strike than a reaction to a problem.

 

[utrecht]

Do you have the option of not joining DROP?

Yes, but you cant revoke your decision if you are already in.

 

[youbet]

Yes, but you cant revoke your decision if you are already in.

You are going to join even though you don't think the new provisions are fair? Why?

 

[Rustic23]

While the new system may not be as good as the old, it is not necessarily unfair. Somemade up numbers, if you are making $100,000 a year and putting 8% into your pension, and you go on DROP, it appears you will still get the same take home, and you will be putting your pension into a tax free account drawing 8-10% interest. That sounds like a pretty good deal. Not as good as getting a 8% pay raise and getting the savings, but still not bad.

 

[utrecht]

I didn't say they weren't fair. I asked what other people thought. I've had the pension benefits coordinator run numbers for me (as everyone does when they get in their mid to late 40's). Because of the high interest rate, just about everyone comes out ahead by entering DROP at 48, even though at 48 you only get 2.75% per year instead of 3% if you wait until 50. In my situation, the break even point is 83. If I die before 83, I come out ahead by joining at 48. If I live past 83 it wouldve been better not to join. They run the numbers with no attention paid to the fact that you will get an 8.5% pay raise when you join. If you invest that 8.5% then obviously joining DROP is an even better deal but most people wont do that. Most people spend it which is why the current DROP members are upset. They have already committed that money to monthly expenses like new cars, so if they have to start contributing again, they are going to have a problem.

Im not sure if its fair to tell people who joined the program under the old rules that they have to now start contributing again. I DO think its totally fair for anyone who hasnt joined yet. If the new people (like me) dont like the rules they dont have to join. On the other hand, if they grandfather anyone already in, then there will be a large group of people suddenly join before the rules take affect and I doubt they want that.

 

[utrecht]

While the new system may not be as good as the old, it is not necessarily unfair. Somemade up numbers, if you are making $100,000 a year and putting 8% into your pension, and you go on DROP, it appears you will still get the same take home, and you will be putting your pension into a tax free account drawing 8-10% interest. That sounds like a pretty good deal. Not as good as getting a 8% pay raise and getting the savings, but still not bad.

Yes, but you are now making pension contributions but not getting any further pension credit for that money. I guess you could say that you are paying for the opportunity to make a guaranteed 8-10% interest, which once you are in DROP for several years, is a lot of money.

 

[Leonidas]

I always thought that my retirement contributions becoming DROP contributions was a good thing, especially since they were earning a good rate of return tax-free without me making any investment decisions. But, our program was set up that way from the beginning, and I guess some might see the change as losing money as opposed to having a nice automatic tax-advantaged investment with a good guaranteed rate.

Our new hires (after 10/9/04) lost the DROP benefit. Those who were grandfathered in saw their contribution rates increase and the DROP interest rates changed. It's based on a five-year average of actual system returns, so this coming year the DROP interest rate is 5%. If I were you guys I would be loving that 9%.

Down here the latest pension to-do has the mayor claiming that the FD's pension is out of whack. Statements have been made alleging that some firefighters are retiring at 170% of their active salary. This is all claimed to be complete BS by the folks in charge at the red menace's pension system. Considering that the FD's pension board includes the city treasurer and two citizens, and a mayor's representative, you would wonder how it could get out of whack like that. I hear that the head dude on their pensions claims it is all a political ploy to force them to negotiate directly with the city on contractual issues, they are the only pension that doesn't, just so the mayor can get some juice out of them in the form of yet further delayed city contributions into the fund.

They never learn. The city still hasn't recovered from the years of not fully funding the police and municipal pension systems.

 

[Purron]

Yes, but you are now making pension contributions but not getting any further pension credit for that money. I guess you could say that you are paying for the opportunity to make a guaranteed 8-10% interest, which once you are in DROP for several years, is a lot of money.

I remember the good old days of earning 6% on a CD. These days, a guaranteed 8-10% interest rate would be awesome. But, alas, we must keep rates low so people can borrow and spend. And, from your accounts, many of those in the DROP program use this windfall to live above their means.

Sad really.

 

[youbet]

I didn't say they weren't fair. I asked what other people thought.
.

Oh, OK. I thought you were asking if others thought it was unfair because you thought it was unfair.

To answer your question then, no, it's not unfair IMO. Both the current penison provisions and the proposed changes seem like an excellent retirement package in today's world. Congratulations on having such a good deal!