NEW RETIREMENT REALITIES:PENSIONS AT A CROSSROADS

By: Craig Mason Chief Pension Executive City of Houston

PRESENTATION

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COH Pension SystemsIn Context - Overview

3 separate plans – civilians, police, firefighters,

Administration of plans is outsourced to independent trust organizations:

- Houston Municipal Employees Pension System (HMEPS)

- Houston Police Officers’ Pension System (HPOPS)

- Houston Firefighters Relief and Retirement Fund (HFRRF)

The trust organizations are established and governed by separate state statutes to:

- Manage the plan’s investments

- Pay benefits when due

The description of benefits is included in the state statutes

HMEPS and HPOPS have ability to trump state statutes through Meet & Confer

Unions do not bargain on pension benefits

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COH Pension Systems

In Context – Pension Board Composition

HMEPS HPOPS HFRRF

- Elected active beneficiaries 4 3 5- Elected retired beneficiaries 2 2

1- Appointed by:

○ Mayor 1 1 1○ City Council 2○ City Controller 1○ City Finance Director 1 1○ All other trustees 2○ Elected beneficiary trustees 1

- Total trustees 11 7 10

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COH Pension Systems

In Context – Pension Participants and Assets

HMEPS HPOPS HFRRF

Actives 13,333 5,245 3,949Retireds 8,340 2,878 2,550Deferred Vesteds 5,742 22 8

_____ _____ _____Total Members 27,415 8,145 6,507

Est. Assets 3/31/2010 $1.962B $3.085B $2.783B

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Benefit Decisions in 2000-2002 Increased the Plans' Liabilities Resulting in Unanticipated and Undesirable Increases in City Contributions as of 2005

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HFRRF HMEPS HPOPS

COH Pension SystemsThe Challenge – City Contributions Increase

to Unsustainable Levels, 2002-2005

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COH Pension SystemsAddressing the Challenge – In General

Mayor White assumed office in January 2004 – Inherited the challenge

Orchestrated a general election in May 2004:- Citizens of Houston elected to opt out of State constitutional provision

prohibiting localities from reducing accrued pension benefits- Option available, but not used yet

Formed a task force of business leaders to assist in addressing the issues

Executed Meet & Confer Agreements with HMEPS and HPOPS

Created the position of Chief Pension Executive for the City

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COH Pension SystemsAddressing the Challenge – HMEPS

Interim steps in 2004:- reduced future benefit accrual rates- increased eligibility age for retirement from “rule of 70” to “rule of 75”- increased mandatory employee contribution rate from 4% to 5%- transferred an asset valued at $300 million to the pension fund- adopted a schedule of increasing dollar contributions for FY2005 thru FY2007

Resulted in reduction in actuarially calculated contribution rate from 52% to 24%

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COH Pension SystemsAddressing the Challenge - HMEPS

Long term “reform” in 2007 – Adopted an objective based plan design for new employees

- Integral element of total compensation

- Basic Level of income replacement at no cost to employee

- Promote “career” employment

- Consider Social Security benefits

- Enhance ability to hire “mid-career” employees

- Provide employees capital accumulation opportunity/flexibility

- Increase risk sharing/responsibility of employee

Future City contributions of 15% of payroll

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COH Pension SystemsThe New Plan - HMEPS

Hybrid approach with both DB and DC features- Basic level of income replacement – City responsibility- Capital accumulation opportunity – employee responsibility

Income replacement:- target full benefit at age 62 ** 45% + SS + EE at 25 yos ** 50% + SS + EE at 30 yos- options to retire “early”- optional survivor’s benefit- no COLA- no DROP- estimated City contribution rate, 6% of payroll

Individual capital accumulation account provides supplemental benefits

City risks reduced (investment, inflation, longevity)

Employee risks increased with more flexibility, responsibility