HD9 - The Portability of Retirement Benefits Between the Commonwealth and Its Political Subdivisions


Executive Summary:
This study of the portability of retirement benefits between the Commonwealth and its political subdivisions was conducted in response to House Joint Resolution 104, approved during the 1994 Session of the General Assembly. A copy of HJR 104 may be found in Appendix A. The study was performed by a task force of representatives from the Association of Municipal Retirement Systems and the staff of the Virginia Retirement System (VRS).

The Association and VRS recognize the need for portability to enhance the employer's ability to attract a quality work force; encourage greater regional cooperation; improve employer/employee relations; improve job opportunities and mobility; reduce retirement income loss due to job mobility for a greater number of Virginia workers; and reduce administrative costs.

Portability is a complex issue. There are two central components of portability: pension portability and pension preservation. Generally, pension portability means the ability of workers to take their pensions with them when they leave an employer. Pension preservation means that the value of benefits received after retirement is not reduced as a result of changes in employment. The difficulty in implementing portability lies in determining a mechanism that is equitable to the employee and the retirement plans, and reasonable to administer.

The task force's study of portability included: determining the scope of the study; defining portability; identifying the need for portability; determining the level of interest in intrastate portability; establishing eligibility requirements for portability; identifying the potential movement of benefits among the retirement plans involved in the study; reviewing current purchase of service statutes; determining the level of portability occurring in other states; investigating different portability models and the associated costs; and identifying administrative requirements.

Portability may be accomplished by consolidation of retirement plans or through reciprocity. Reciprocity is an arrangement among two or more plans which allows the transfer of benefits, service or assets among plans upon job changes. The trend among state and local retirement plans to consolidate the many plans within a state into one or a few plans has been significant in terms of increasing portability. The VRS is an example of a consolidated plan. There is 100% portability of retirement benefits and 100% income preservation for VRS members employed by the 853 public employers participating in VRS. A change in employment among employers participating in VRS does not affect the plan participant's benefits. 100% portability is possible because VRS benefits are uniformly applied, and participating employers have agreed to pay the costs associated with portability. The costs are the result of the benefit being calculated on combined service and the highest average final compensation, wherever it may occur during employment. The costs are shared among the specific employers, are prorated on the basis of service and are reflected in the employer's contribution rate.

There is reciprocity among public plans on an intrastate basis in several other states. In general, the transfer of service and/or assets from one plan to another is rare because of the diversity of plan designs and because of the costs associated with crediting employees with service performed for another, earlier employer. The preferred model of intrastate portability in other states, with some variation, appears to be that in which each employer pays a benefit to the retiree, taking into consideration service and salary earned in other plans covered by the reciprocal agreement. There are significant differences in the benefit structures of the VRS and retirement plans included in this study. Information on intrastate reciprocal agreements may be found in Appendix B. A summary of the plan differences may be found in Appendix D.

The task force acknowledges the complexity of preserving the pension income through portability, the high costs to achieve portability, and the difficulty in achieving portability in a manner that is equitable to the employee and retirement plans. However, the task force agrees that the need for workers to consolidate retirement benefits does exist. Therefore, the question seems to be not if portability of retirement benefits is needed and desirable, but: 1) to what degree will retirement income be preserved; 2) who will pay the cost of that preservation; and 3) is that cost justified?

Any degree of portability of pensions and preservation of retirement income can be accomplished by incorporating different features in the reciprocal agreements. Each step toward achieving 100% portability (and 100% income preservation) adds to the cost, with the cost of 100% portability being very high. The task force studied several portability models and identified the associated costs. The change in the retirement benefit(s) under the different models may be found in the "Comparison of Benefits" section of this document.

Based on the findings of the study, the task force suggests that portability may be accomplished in the following manner: 1) the municipal plans, on an optional basis, amend plan provisions to accept the direct transfer of funds for conversion to service; 2) the present value of a vested, terminated plan participant's accrued retirement benefits be transferred directly, if allowed by the Internal Revenue Service (IRS) regulations, to assist in funding the conversion of such service; and 3) the employee be permitted to pay any difference in funds, as determined by the receiving plan, in order to receive credit for equal service in the receiving plan if the transferred funds are insufficient. The transfer of the present value of the accrued benefits terminates the plan participant's membership and all rights and benefits in the transferring plan. The present value of accrued benefits is the actuarial equivalent of the total of the retirement annuity paid from the date of retirement up to the person's actuarial life expectancy. The dollar amount representing the present value of the accrued benefits will not be the same for all plans because each plan has its own earnings assumption, actuarial assumptions and benefit design. The task force also suggests that municipal plan regulations be amended to allow the purchase of prior service in order to provide the means for non-vested members, not eligible for portability as discussed in this document, to achieve some degree of portability.

The task force requests the passage of enabling legislation to permit portability among plans during the 1995 Session of the General Assembly to be effective July I, 1996. A delay in the effective date is requested in order to obtain a private letter ruling from the IRS regarding the tax deferred, direct transfer of the present value of accrued benefits on behalf of a vested, terminated participant from one defined benefit plan to another. Draft legislation to allow portability is set out in Appendix E.