OCEAN CITY – The proposed ordinance to change newly hired town employee pension plans remains pending as the Mayor and City Council look to review more plan design options.
The current pension plan for current town employees is a defined benefit plan. The proposed ordinance transitions newly hired town employees over to a defined contribution plan, such as a 401(a).
Mary Jo Gary of Mercer Inc. presented the council with the Defined Benefit Plans Freeze Analysis and Retirement Program Consideration report during Tuesday night’s meeting.
The report states, “Under a soft freeze, no additional participants enter a plan, but those who are already participants continue to accrue benefits. A defined contribution plan would be put in place for those who are not eligible to participate in the defined benefit plan.”
The report outlines the circumstances of one option in soft freezing current town employee’s pension plan and adding a defined contribution plan for new hires.
In 2020, for general employees the projected cost of the current plan is $2,530,000 at 8.8 percent of projected pay for the covered group. The projected employer cost of a replacement 401(a) plan for the current plan for current employees would be $2,190,000, and $530,000 for a defined contribution plan for new hires at a 5 percent contribution. This will add a potential cost of $190,000.
In 2020, for public safety employees the projected cost of the current plan is $1,990,000 at 11 percent of projected pay for the covered group. The protected employer cost of a replacement 401(a) plan for the current plan for current employees would be $1,660,000, and $490,000 for a defined contribution plan for new hires at an 8 percent contribution. This will add a potential cost of $160,000.
According to the report, “The cost to the town of soft freezing the current plans and replacing them with this defined contribution design for new hires is more than the cost of maintaining the current plans. There are other replacement plan designs that would be projected to produce savings. Those savings would arise from reductions in the level of benefit provided to covered employees.”
The report also states that neither design is necessarily better or worse, saying, “The appropriate model will depend on the employer’s philosophy and objectives for the retirement program.”
The report identified that “Reducing employer cost thus might mean reducing benefits, or increasing the share of the cost paid by employees rather than the employer.”
Mercer’s report outlines features that need to be taken into account, such as a vesting schedule. Vesting is defined when a participant becomes eligible to receive a benefit even if they leave the employer.
According to the report, the current defined benefit plans have graded vesting beginning at 25 percent with five years of service and grading 100 percent after 15 years. In other words, a participant is not entitled to their accrued benefit until reaching 15 years of service.
According to Mercer, if Ocean City were to switch to a defined contribution plan for new hires, providing faster vesting should be considered, such as 100 percent at three or five years.
Mercer will return to the council with more designs and options on how to switch over to a defined contribution pension plan.
“You really have to understand what happens over time and how it changes…each type of plan has added attributes to it, that can either increase or decrease the cost,” Finance Director Martha Bennett Lucey said on Thursday.
She said the process is challenging because it is a lot of issues that need to be grasped and understood first.
“I think it is important that all of us grasp what’s happening and what it means, not only to future employees but current employees,” Lucey said.