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Notice of MERS Board Action: Re-employment of Retired Employees without suspension of MERS pension

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Plan Section 31(1)

Email or FAX (517-327-8336)  to: Member Comment

Plan Section 31(1) governs the ability of a retiree to become re-employed by the participating municipality or court from which he or she retired without a suspension of benefits.  The Board is considering amending Section 31(1) to more effectively enforce the requirement that such reemployment follow a bona fide termination of employment.  See November 6, 2009 Memorandum to the Board from the Legal Department. Changes being considered include, but are not limited to:

•  increasing to 180 days the separation from  service period – from the current minimum of 30 days – that is required before a retiree may  become reemployed without suspension of benefits
• suspending benefits for elected or appointed officials who retire and continue in office unless there is  a minimum  break  of at least 1 year between the old and new term in office. 

At its November 13, 2009 meeting, the Board directed that Member Comments be invited for a 90-day period (through February 23, 2010), for consideration by the Board at the March 2010 meeting.

On July 15, 2009, the Board conditionally amended Plan Document Section 43 and Section 43A in response to requests by member municipalities for the creation of a bridged benefit program. The Bridged Benefit Program is an optional provision for adoption on a division-by-division or municipality-wide basis that applies to active employees in a MERS defined benefit plan (excluding Hybrid Program, and the Defined Contribution Program).
The bridged benefit allows an employer (and employee groups) to negotiate for a lesser benefit multiplier percentage on a going forward basis. Municipalities and employees face very challenging economic and fiscal constraints today (and for the foreseeable future). The Bridged Benefit Program is designed to protect employees’ accrued benefits from impairment or diminishment, and allow future service liabilities to be lessened. Future employer contributions will be lowered in most situations, directly affecting the capability to save the jobs of fellow co-workers (and perhaps the need for furloughs or pay reductions), and the continuation of municipal (or court) services that might otherwise be cut. The motivating factor for the Program is the reality that, for benefits to be sustainable, they must be affordable. The Board’s fiscal responsibility initiatives, including the Bridged Benefit Program, are designed with that primary objective in mind.
There are other important features of this new Program.

1. A Supplemental Valuation is required to adopt the Bridged Benefit Program, and the valuation will separately determine the impact of Termination FAC as well as Frozen FAC under the current benefit program, along with the proposed benefit multiplier change for future service. This will provide important and complete information for the parties to consider.
2. The Bridged Benefit Program is NOT subject to the 80% funding requirements under Plan Section 43C(2) – (3) so long as the change is intended to and will reduce actuarial liabilities (and thus improve the division’s funded level).
3. Most municipalities are more likely to adopt the bridged benefit lowering the benefit structure going forward. The ‘flip side’ of the Bridged Benefit Program will permit benefits to be increased for future service ( the new multiplier percentage), without upgrading all accrued prior service (under the prior multiplier) thus not creating new prior service plan liabilities that have not been previously funded. In such cases of a proposed benefit multiplier increase, the 80% funding requirements shall apply (unless the supplemental valuation shows that the change will reduce actuarial liabilities).

The Bridged Benefit Program provides municipalities (and courts) the option to provide a benefit comprised of two segments. The first segment is the accrued benefit amount that a member has earned under the division’s benefit structure including multiplier (using credited service and final average compensation [FAC] as of the future date the employee actually terminates employment). As an alternative to “termination FAC,” “frozen FAC” may instead be adopted (FAC as of the effective date of the benefit change). The second segment is the changed benefit multiplier percentage under which future benefits (on a going forward basis) accrue until termination of employment (using credited service after the benefit change, and FAC as of the date of termination). The two benefit segments are combined to form an employee’s “bridged benefit” amount (the example involves B3 and B2).

(Click graphic for larger view)

The Bridged Benefit Program provisions represent action by the Retirement Board in the exercise of its core powers as Fiduciary and Trustee. The authorizing Program language states it is not subject to alteration or modification, and MERS will not recognize such action.

The amendments to Plan Sections 43 and 43A will take effect October 1, 2009. The Board has directed that Member Comments may be requested with a deadline of September 1, 2009, for consideration by the Board at the September 15 regular Board meeting (in Grand Rapids).

On May 13, 2009, the Board conditionally amended Plan Document Section 43C to further promote fiscal responsibility and MERS overall plan integrity. In summary, the Board added Section 43C to the Plan effective July 1, 2006, to provide that MERS would administer benefit increases only where the municipality (or court) and the affected division was at least 50% funded on an actuarial basis before, and after, a proposed benefit change. MERS is a multiple employer agent governmental pension plan that is a tax qualified trust. In the non-governmental, private pension plan sector, the federal Pension Protection Act of 2006 provided that effective January 1, 2008, additional benefit accruals are not allowed in single employer plans the sponsoring employer is legally responsible for the plan, as in MERS) where the pension plan is less than 60% funded; and prohibits any benefit changes if less than 80% funded.

The Board increased the MERS minimum funding level to 60% effective January 1, 2008. The next step in what is an 18 month interval timetable would be July 1, 2009, and a recommendation to increase to the 70% funding level might have occurred under ‘normal’ circumstances. However, the prevailing market conditions were abnormal and tumultuous in 2008, with MERS 12/31/08 year-end return of -24.79%. This return was better than the average pension fund loss, thanks in large part to the discipline and dynamics of the investment portfolio and allocation policies. 2009 has continued to be only somewhat less volatile. Economic and budgetary difficulties of historic proportion have unfolded, with Michigan an epicenter. The May 8, 2009 Memorandum to the Board from MERS staff Fiscal Responsibility Work Group [weblink] (which includes the Actuary) further notes:

“As of December 31, 2007, the average actuarial funding level for all MERS municipalities and courts was 77.3%. At that time, the actuarial value of assets was 98.85% of the market value of the same assets, close to 1:1 parity. The Actuary advises that on December 31, 2008, due to the market losses, the actuarial value of assets is 139% of the market value of assets. What that means, in terms of the present 60% actuarial funded level requirement in Plan section 43C, is that 60% funded on an actuarial value of assets equals 43.2% funded on a market value basis. The “normal” increase to a 70% actuarial funded level requirement would equal 50.4% funded on a market value basis. Raising the actuarial funded level requirement to 80% would be equal to 57.6% funded on a market value basis. While public pension plans like MERS take the long-term view (as demonstrated in the actuarial funding principles which are not exclusively based on market value of assets as in the private sector, and based on history the market will over time rebound), it is prudent and proactive for the Board to increase the present 60% actuarial funded level to 80%. During these unusual times it seems particularly wise to limit benefit increases to only those municipalities and courts that are above average in terms of how well they have funded their current benefit provisions. ‘Pay off most of your current debts before you incur additional debts.’” (page 2 of the May 8 Memorandum).

On May 13, the unanimous Board increased the minimum funded level for benefit changes from 60% to 80%, with an intended effective date of July 1, 2009.

In addition to other conditions set out in Section 43C, the amendments provide that the 80% funded level requirement shall not apply where the purpose of a proposed benefit change is to reduce actuarial liabilities. A municipality or court below the 80% funded level may request a supplemental valuation, and where the valuation discloses the proposed change will reduce actuarial liabilities, the change may be adopted.

The amendments to Plan Sections 43C will take effect July 1, 2009. The Board has directed that Member Comments may be made through July 13, 2009, for consideration by the Board at the July 15 meeting.

On September 30, 2008, the Retirement Board conditionally approved amendments to Plan Section 23 to provide retirees the ability to select post-retirement benefit options. By this action, as provided in the Board's Member Comment procedure, requests comments by MERS members on the proposed revisions may be submitted for Board consideration. Member Comment may be made through December 31, 2008, for further (including final) consideration by the Board at its January 14, 2009 meeting.

The amendments will permit a retiree to change an option and beneficiary options post-retirement in 3 situations. First (see subsection (9)), where (a) an unmarried retiree chose straight life or (b) the retiree and spousal beneficiary are later divorced and the divorce judgment orders that the selection of the spousal beneficiary is null and void; and the retiree then marries -- after 1st [and before 2d] anniversary of the post-retirement marriage, the retiree may elect spousal benefits for spouse. Second (see subsection (10)), where a retiree makes a spousal beneficiary selection, and the spouse predeceases the retiree, then should the retiree remarry the new spouse may be named as beneficiary -- after 1st [and before 2d] anniversary of the post-retirement marriage. Lastly (see subsection (11)), where an unmarried retiree named a nonspousal beneficiary who later dies, and the retiree later marries, then the retiree may name a new spousal beneficiary.

Several limitations apply to protect the pension system from adverse actuarial impact. In all cases, the post-retirement benefit selection of a spouse may only be made after the 1st [and before the 2nd] anniversary of the post-retirement marriage. Further, subsection (13) specifies that should the retiree die within 1 year of such post-retirement benefit election, the survivor beneficiary's payments shall terminate 12 months after date of death.

Notice of MERS Board Fiscal Responsibility Actions

11/7/2007

On September 18, 2007, the Board approved amendments to Plan Sections 43C and 2C(3)(b), to further promote fiscal responsibility and plan integrity for the entire MERS plan. Effective July 1, 2006, the Board added Section 43C to the Plan Document, and amended Section 2C(3)(b). As now amended, Section 43C will increase the minimum municipality and division funded level threshold for benefit adoptions to 60% from the current 50%; and will reduce the current MERS-wide amortization schedule (declining 1 year each valuation year) from the current 25 years as of the December 31, 2010 annual valuations, to 20 years as of the December 31, 2015 valuation. Amended Section 2C(3)(b) will provide that for new MERS municipalities, effective January 1, 2011, amortization of unfunded liability will be on a schedule of 20 years (as opposed to current 25 years).

The amendments to Plan Sections 43C and 2C(3)(b) will take effect January 1, 2008. The Board has directed that Member Comments may be made through November 7, 2007, for consideration by the Board at the November 13 - 14, 2007 meeting.

The Board is particularly interested in receiving comments on the minimum funded level threshold for benefit changes, and what further funded level tiers (such as 65%, 70%, 75%, etc.) should be considered, and timetable phase-ins (such as, 70% effective January 1, 2009; 75% effective January 1, 2011, etc). MERS is a multiple employer agent governmental plan. In the non-governmental, private pension plan sector, the federal Pension Protection Act of 2006 provides that effective January 1, 2008, additional benefit accruals are not allowed in single employer plans where the pension plan is less than 60% funded; and prohibits any benefit changes if less than 80% funded.

Notice of MERS Board Action

1/15/2007

On September 19, 2006, the Retirement Board considered a request to amend language in Plan section 3(2) [weblinked]. "Temporary" employees "employed in a position normally requiring 6 or more months of work" may be excluded from MERS membership by governing body resolution, and written notification provided to the employee. The request asks that the governing body have the alternative of defining the number of months of "temporary" employment as being 7 or more whole months, not to exceed 12 months. Under the Revised Procedure For Review Of Formal Request For Changes To MERS Plan Document [weblink], the Board has directed that Member Comments are invited on the request with a Comment Deadline of January 15, 2007, and further consideration of the request at the March 2007 Board meeting.

Notice of MERS Board Action

None

Adoption of Fiscal Responsibility Requirements for Adoption of Benefit Increases. On March 14, 2006, the Board approved Plan amendments to further promote fiscal responsibility and plan integrity for the totality of MERS membership. Plan section 2C(3)(b) was amended, the change taking effect immediately; new section 43C will become effective July 1, 2006.

Notice of MERS Board Action

4/30/2006

Closed

Adoption of New Pension Benefit Program H: A DB/DC Hybrid Benefit. The MERS Retirement Board on March 14, 2006 approved addition of a hybrid plan to the menu of programs that MERS employers may adopt. Benefit Program H is a combination of a defined benefit and a defined contribution plan, and employers and members share the rewards and risks involved in either program. A modest DB plan would be financed by the employer; the DC plan would be financed pre-tax by the employer and/or the members. To implement Benefit Program H, new Plan Document Section 19B has been added, and numerous sections amended, with the Plan Document changes to be effective July 1, 2006. The Board has directed that Member Comments may be made through April 30, 2006, for consideration by the Board at the May 17 - 18, 2006 meeting.

Notice of MERS Board Action

10/31/2005

Closed

Requirements to foster fiscal responsibility for participating municipalities with respect to benefit increases.

Notice of MERS Board Action

1/5/2006

Closed

Proposed New DB/DC Hybrid Pension Benefit Program. The MERS Retirement Board on 9/20/2005 approved the proposed addition of a Hybrid Plan to the menu of programs that MERS employers may adopt. The proposed Hybrid Plan, a combination of a defined benefit and a defined contribution plan, will be designed so that employers and members share the rewards and risks involved in either program. A modest DB plan would be financed by the employer; the DC plan would be financed by the employer and/or pre-tax contributions by the members. After the Board's approval of Plan amendments in early 2006, further comment may be sought.