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Two Years On, Saybrook Pension Change is Having Desired Effect

Two years ago, the town of Old Saybrook switched its pension plan from a defined benefits (DB) plan to a defined contribution (DC) plan, and the enrollment numbers show that the transition is proceeding as hoped, with incremental changes heading in the right directions.

While both are based on stock holdings, the DB plan guarantees retired employees a pension based on salary and length of employment. This means that the town is obligated to pay that pension for the rest of the retired employee’s life; costs to the town are unpredictable.

The town’s DC plan—a 401a plan similar to private sector 401k plans—requires employees to contribute at least five percent of their annual salary up to a maximum of eight percent; that contribution is matched by the town. When the employee reaches the age of retirement, 62, he or she is then able to draw on the account, which up until that point was not taxed. The amount the employee is able to collect is based on how much was saved and how the stock market has performed; the town, having paid its matching contribution, has no further obligation.

In April 2017, at a special meeting of the town’s Pension and Benefits Board (PBB) to discuss the transition, the DB plan had 95 active (employed) town employee participants and 53 retirees. There were also 28 active school district employee participants and 20 retired. Certified teachers and administrators participate in the Teachers Retirement System administered by the state’s Teachers Retirement Board.

As of July 1, 2017, the DB plan was closed to most town employees, who were instead placed in the DC plan. In mid-July 2018, the DB plan had 82 active participants and 62 retired. On the school district side were 26 active participants and 23 retirees. In the DC plan, there were 13 town employees and zero school employees enrolled.

By the end of June of this year, the number of active town DB participants had dropped to 76, and there were 60 retirees on the plan. The school employee numbers were 19 active participants and 22 retirees. The number in the DC plan had increased to 20 town and 2 school employees.

“This is the reason we put the plan into place: to lower the town’s long-term liability,” said First Selectman Carl P. Fortuna, Jr.. “And it would appear to be having that effect.”

Volunteer fire fighters were not included in the transition plans and remain on the DB plan, as do police officers.

“It is so difficult to recruit and retain police officers that DC plans generally are not pushed in the public safety realm,” Fortuna explained by email. “Towns that had negotiated DC plans have actually gone back to DB plans due to retention issues.”

Fortuna worked with ICMA-RC, a company that manages public sector retirement accounts, to come up with a plan to submit to the PBB for approval. The town already had a 457 account, a voluntary deferred retirement savings plan, through the company.

It took PBB three years to approve the change: it was formally adopted and referred to the Board of Selectmen on April 27, 2017.

“The reason it took so long was varied,” Fortuna stated. “[T]he PBB wanted to do its due diligence before endorsing it; we had to hire an attorney to draft a plan document; we wanted to allow employees to switch from the DB to the DC if they wanted; and we had to make sure the administration of the plan was set up through ICMA-RC.

“In the meantime,” he continued, “I had to negotiate with the [town employee] unions to incorporate this into their collective bargaining agreements. The contracts do not all come up at the same time so it took a few years to make sure it was in them.

“[W]e made it quite clear we would arbitrate this issue if need be and felt we would win,” he said. “I don’t believe we traded anything to get a DC plan in the contracts. However, there is always give and take.”

Concerns about the “state of the world’s finances around us” drove the move, Fortuna said.

“If a town pension plan is not well funded, then the taxpayers are going to have to come up with more money to meet that payroll of retirees,” he explained.