2013-2014 Benefits Task Force: Defined Benefits vs Defined Contribution

The 2013-2014 Task Force on Healthcare, OPEB, and Pension Benefits recommended retaining a defined benefits program for City employees while also adding a defined contribution program. This position was different from what was recommended by the 2009-2010 Budget Task Force.

In support of their recommendations, the 2013-2014 group explained why they felt that retaining the defined benefit plan would be the best approach. The discussion in the report begins at the bottom of page number 29. They highlight three considerations:

Technical Issues: Closing the Defined Benefits plan does not change what the City owes to current and future retirees. However, closing the plan would increase the annual required contributions, prevent contributions and investment gains from future hires from offsetting current expenses, and force the investment strategy to become more conservative as the investment horizon decreased. Closing the plan would actually increase the near-term costs of the existing pension program.

Moral Issues: Defined Benefits plans put most of the investment risks on the City, while Defined Contribution plans put most of the risk on the employee. Moving to only a Defined Contribution plan would expose employees to risks that they are “not prepared to manage.”

Competitive Issues: “The supposed lower costs of DC plans is often just a result of cutting employer contributions to the DC plan, not greater economic efficiency.” This point seems to speak to the Task Force’s concerns about ensuring the City can compete for talented employees and provides viable replacement income.

The Task Force imagined a hybrid retirement benefit structure that could serve as a compromise between the two extremes.

They proposed keeping the existing Defined Benefits plan open to new employees, but thinking of it as providing a baseline of support.

Employees with modest earnings would receive significant protection from the Defined Benefits plan. More highly paid employees would share in the same baseline Defined Benefits plan, but would also have an opportunity to participate in a Defined Contribution plan for their earnings above a predetermined threshold.

In addition to capping the Defined Benefits plan at an earnings threshold, the Task Force also made suggestions about how to reduce the plan’s costs. Their suggestions include increasing the full retirement age to 65, making the adjustment for early retirement actuarially sound, reducing the accrual rate for all employees to no more than 2%, restricting the exchange of accumulated sick days for pension service, calculating the final average earnings using the average of the past five years instead of two or three of the last five, and adopting anti-spiking provisions.

Nearly all of their suggestions would be subject to collective bargaining with the various employee unions, which the Task Force made sure to note.

Following the spring 2014 budget season, the City created a new group called the Hartford Committee on the Restructuring of City Government, which includes representatives of the unions in addition to elected City leaders and experts in government reorganization. The resolution creating the committee specifically referenced the Benefits Task Force and the Tax Task Force as a way to ensure that their recommendations were considered in the restructuring conversation.