History of Virginia’s Judicial Retirement System

The first judicial retirement benefit in Virginia was created in 1914 for the Justices of the Supreme Court of Appeals and provided a pension of two-thirds (approximately 66%) annual compensation at age 70 with ten years of service. Virginia’s current JRS was created in the Code of Virginia in 1970, replacing three existing judicial retirement systems. The provisions governing JRS from that time have developed into what is now colloquially known as Plan 1.

Pension Reform

In the wake of the 2008-2009 financial crisis, the General Assembly passed legislation creating Plan 2 for all members joining on or after July 1, 2010, including judges. The legislation was enacted with the goal to help ensure that retirement benefits for government employees would remain sustainable.

Again following the Great Financial Crisis, with the establishment of the Hybrid Retirement Plan the General Assembly determined that future employees would have to share in the longevity and investment risk of their retirement plans and that future benefits would be designed differently. The new plan designs would not only require risk sharing, but also require additional effort by employees in the form of mandatory and voluntary defined contributions that would in turn be matched by employers based on a statutory schedule.

Prior to plan design changes, employer rates for the JRS plan exceeded 50% of covered payroll and were trending upward. In addition, from 2002 to 2016 as employer contribution rates continued to increase the employer contribution rates were not funded at the actuarially determined and required level which generated unfunded liabilities for the JRS plan (see Chart 1 on page 15).

In 2012, the General Assembly passed legislation creating the Hybrid Retirement Plan for all members joining for the first time or rejoining following a refund on or after January 1, 2014, and for all judges appointed or elected to an initial term on or after January 1, 2014, in accordance with §§ 51.1-304 and 51.1-306.1 of the Code of Virginia. The Hybrid Retirement Plan is a combination of a Defined Benefit (DB) plan or pension and a Defined Contribution (DC) or 401(k)-style plan. The Hybrid Retirement Plan’s design was intended to maintain a foundational DB portion of the plan, improve funded status, incorporate risk sharing between the employer and employee, enhance portability, and lower future employer costs. In addition, members who take full advantage of their voluntary contributions and employer matching funds will be able to accumulate assets for retirement savings in a manner not available to DB plan holders with only the statutory DB benefit formula.

Judges are covered under the Hybrid Retirement Plan if they are appointed or elected to an original term as a judge on or after January 1, 2014, even if the judge had prior service in any other VRS system. Note that if a judge who is a member of the hybrid plan has any prior service with VRS in either Plan 1 or Plan 2 prior to becoming a judge, such prior service will be added to the member’s benefit using the service and benefit multiplier of those prior plans.

Weighting Factors

Judicial service is subject to a weighting factor which serves to accelerate the pace at which a judge accrues service credit. The weighting factor is a plan design feature unique to both Virginia and the judicial retirement plan. As discussed later in the report (see page 16), the weighting factors have changed over time and are now structured based on age at the time of appointment or election to an original term. The use of a weighting factor produces a higher retirement benefit for judges, including for hybrid retirement plan judges, without a higher service retirement multiplier.

Service Retirement Multiplier

The VRS membership date, as well as the date of original appointment or election, both determine the retirement multiplier that is applied in the benefit calculation for a judge. A retirement multiplier is a factor that determines how much of your average final compensation will be used to calculate your retirement benefit under the defined benefit component. (Discussion of the service retirement multiplier can be found on page 19).

Age At Appointment

Judges are typically elected or appointed after acquiring other work experience, which can occur in a VRS-covered position, in governmental service not covered by VRS (e.g., federal service), in the private sector, or a combination of any or all of the three. Historical data shows that the average age at appointment has been consistently around 44 or 45 years old since at least 1979 (see page 21). In addition, judges are subject to mandatory retirement.

Looking at the current judicial population, the data shows that the age at initial appointment distribution of those with prior VRS service is very similar to those without prior VRS service.

Based on the current active JRS population, 47% of judges have prior VRS service and 53% do not have prior VRS service.

Impact of Hybrid Retirement Plan on Judicial Appointments

When considering accepting employment with the Commonwealth, a number of factors are considered, including but not limited to the type of work, salary, and employee benefits the role provides. Whether the hybrid plan has had impacts on judicial appointments is difficult to quantify due to data limitations. However, measuring the available data on judicial vacancies does not appear to show that there have been difficulties with filling allocated positions as a result of the implementation of the Hybrid Retirement Plan (see page 23).

Retirement Benefits

While the benefit formulas for JRS members are the same as general employees, JRS members accrue service at an accelerated rate due to service weighting. What this means is that JRS retirement benefits are higher than general employee retirement benefits because it does not take as long to accrue the same or an even higher level of benefits.

Another feature unique to JRS is the cap on the maximum retirement allowance that a judge may receive. This maximum benefit is designed to serve as a check on service weighting for judicial service. A maximum benefit has been a feature of judicial retirement since 1914 when the first retirement benefit for justices of the Supreme Court was established and fixed at two-thirds of the justice’s salary. The Code of Virginia requires that judges receive a maximum benefit of no more than 78% of average final compensation in most circumstances (75% from July 1, 1970 to July 1, 1998).

While judges in the Hybrid plan, especially judges who had no prior VRS-covered service, may not receive the maximum retirement allowance upon retirement, the 78% benefit is not intended as a goal or a floor, but as a ceiling. It is also important to remember that the Hybrid Retirement Plan DB benefit represents only part of the retirement benefit. Hybrid Retirement Plan members also receive employee and employer contributions to the DC portion of their retirement benefit. Further, the 78% maximum for judges relates only to the DB portion of the plan and does not take into account any benefits received from the defined contribution or another deferred compensation account. (See page 26 or section Retirement Benefits beginning on page 23 for more detailed information on the DC portion of the plan.)

Historical Funded Status

Since 2014, pension reform and the creation of the Hybrid Retirement Plan along with generally favorable market conditions have resulted in the accelerated increase in JRS funded status. As a greater percentage of the active population continues to be covered by the Hybrid plan, given plan assumptions are met, this positive trend is expected to continue.

Other States’ Judicial Retirement Benefits

All 50 states and the District of Columbia offer a judicial retirement plan. The National Association of State Retirement Administrators (NASRA) collected information related to public judicial retirement plans. From the available data, it appears that the JRS Hybrid Retirement Plan provides benefits that are comparable to other state plans, with lower member contribution rates and higher maximum benefit caps than most other plans, and with a comparable or better funded status than other open plans that include or are entirely a defined benefit plan.

From a plan design perspective, the data shows that 42 of the 51 plans provide newly elected or appointed judges a defined benefit plan like VRS Plan 1 and Plan 2. In addition to Virginia, Tennessee offers new judges a hybrid retirement plan that combines the defined benefit plan and defined contribution plan. Kentucky and Texas offer a cash balance plan to newly elected or appointed judges. Arizona and Michigan offer only a defined contribution plan. Pennsylvania, Florida, and Washington offer new judges the option to choose among a defined benefit plan, a defined contribution plan, or a hybrid plan, depending on the state. The data also demonstrates that member/employee contributions for JRS members are lower than most other states that also participate in Social Security.

It should be noted that, according to NASRA research, approximately 12 states offer hybrid plans that combine defined benefit and defined contribution plans to any of their members. Therefore, while only six judicial plans require judges to be in hybrid plan and three others provide the option to participate in a hybrid plan, more than half of the states that offer hybrid plan models provide the same type of plan for judicial members as general employees.

Most other judicial retirement plans also cap the retirement benefit. Of the 49 defined benefit or hybrid judicial retirement plans, 32 plans cap the retirement benefit as a percentage of final salary or average final salary. Of those, 23 plans have a lower cap than Virginia and 8 have a higher cap. In addition, four other states cap average final compensation; thereby effectively creating a cap on the benefit.

Benefit Increase Options

The Hybrid Retirement Plan was implemented by the General Assembly to reduce the cost and risk of the pension plan to the Commonwealth. However, if a policy decision is made to increase the retirement benefits for a subset of Hybrid Retirement Plan members, options exist to modify the Hybrid plan design to provide an income replacement ratio for judges similar to Plan 1 or Plan 2. This is particularly true if the member is maximizing the voluntary contributions to the DC portion of the Hybrid plan. There are four main suggested options for increasing judicial retirement benefits to produce the equivalent of a DB retirement benefit comparable to that of a Plan 2 member. These alternatives were developed to provide options similar to the general intent of recently introduced prior legislation, while also working within the framework of the existing Virginia Judicial Retirement System.

The four options are:

• Increase the employer match for the Defined Contribution Plan for JRS hybrid plan members to 100% of the employee voluntary contributions (up to 4% rather than up to 2.5%);

• Increase the Defined Benefit Plan multiplier to 1.1% prospectively for judges who are at least age 55 at the time of initial appointment or election (age at appointment mirrors prior legislation);

• Increase the Defined Benefit Plan service weighting prospectively to 2.75 for judges who are at least age 55 at the time of initial appointment or election (age at appointment mirrors prior legislation); and

• Move judges prospectively from the Hybrid Retirement Plan to Plan 2.

All options assume existing Hybrid Plan Defined Contribution funds remain where they are currently rather than moving to the Commonwealth of Virginia 457 Plan or the Cash Match Plan.

From a cost, investment risk, and administrative feasibility standpoint, the option to modify the employer matching contribution would result in the fewest impacts to the fund. The outcomes under the next two option are generally the same, with slightly different implementation costs. Compared to the employer match option, these options are more expensive and would also negatively impact the plan’s funded status and unfunded liabilities. They ultimately put the risk and cost of the higher benefit solely on the employer. The remaining option, removing the hybrid benefit tier and reverting to Plan 2 provisions for prospective service would be the most expensive alternative.

Conclusion

The General Assembly implemented pension reform to ensure the stability and protection of future benefit payments, maintain a foundational DB portion of a retirement benefit, improve funded status, incorporate risk sharing between the employer and employee, enhance portability, and lower future employer costs. By design, even following pension reform and regardless of their age at appointment, judges typically receive a higher income replacement ratio in retirement than general VRS members. Through a plan design that includes weighted service and by taking full advantage of voluntary contributions and employer matching funds, hybrid retirement plan judges typically will be able to accumulate assets for retirement savings in a manner not available to DB plan members, potentially receiving a higher income replacement ratio than Plan 1 or Plan 2 members.

Based on budget data, following the implementation of the Hybrid Retirement Plan in 2014 and the subsequent easing of budgetary constraints, the available data on judicial vacancies does not appear to show that there have been difficulties with filling allocated positions as a result of the implementation of the Hybrid Retirement Plan. When comparing to other states, of the 51 judicial retirement plans available, 12 states offer hybrid plans to any of their members with nine of those requiring or allowing judges to participate in a hybrid plan. Virginia’s judicial hybrid retirement plan generally provides benefits similar to or better than other plans’ DB or hybrid plans when considering the multiplier, service weighting, and benefit formula. If as a matter of policy, the General Assembly chooses to change the plan design, the report outlines the costs, impacts and outcomes under four different options.