New Hybrid Retirement Plan Released For Guam Employees

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Pacific Islands Development Program, East-West Center With Support From Center for Pacific Islands Studies, University of Hawai‘i

Draft Bill introduced by Vice Speaker

By Shawn Raymundo

HAGÅTÑA, Guam (Pacific Daily News, March 25 2016) –Vice Speaker Benjamin Cruz is just another step closer to being able to move the hybrid retirement bill closer to the session floor after rolling out the first revised draft of the measure Wednesday.

The Government of Guam Retirement Fund and stakeholders had a chance to discuss the newest version of Bill 2-33, more commonly referred to as the hybrid bill. The bill now reflects several changes that were proposed over the course of a series of recent roundtable meetings.

Many revisions came from Sen. Mike San Nicolas’ recent legislation, Bill 266-33, which included a litany of provisions meant to be merged with the hybrid plan. San Nicolas introduced the bill as a way to compromise on the numerous ideas discussed.

The previous draft of Bill 2 was meant to create a new single retirement system to replace the government’s problematic Defined Contribution plan. The way the bill is drafted now, the government is set create two retirement plans — the hybrid system and the Guam Retirement Security Plan.

The hybrid retirement system was the brainchild of the Retirement Fund, which spent more than a decade drafting the plan. Retirement officials recently estimated that DC members over the age of 55 have saved an average of $50,000 for their retirement.

The DC plan hasn’t generated enough revenue from investments and contributions, nor does it provide a guaranteed annuity or floor of benefits.

In a DC plan, a retiree’s benefits depend on the individual’s amount of contributions into retirement, according to the U.S. Department of Labor.

When members under the hybrid plan retire, the Retirement Fund would provide annuity equal to 1.75 percent of the retiree’s average annual salary for each year of service. The person would also retire with survivor benefits for their spouse and children.

San Nicolas’ proposed Security Plan is essentially a cash balance plan, where employees and the government contribute 6.2 percent of the member’s base salary, matching Social Security.

Under the Security Plan, the interest credit rate — guaranteed rate of return — would be 4 percent annually. Cash balance plans are similar do DC plans in that an employee’s benefits are based on the individual’s account balance, however, San Nicolas said, a cash balance plan is preferable because it guarantees a rate of return.

Should the new hybrid-security bill become law, DC members would have the option to switch over to either of the retirement systems between Jan. 1, 2017 and Sept. 30, 2017.

New government employees hired between Oct. 1, 2016 and April 1, 2017 would be enrolled into the hybrid plan while all new hires joining the government on or after April 1, 2017 become Security Plan members.

Restricting hybrid plan access to only DC members and a small window of new hires limits the increase to the government’s unfunded liability risk. Retirement officials initially estimated the hybrid plan to create another $142 million in unfunded liability, depending how many DC members opt in to it.

The current contribution rate for DC employees is 5 percent, which government employers match. Under the new hybrid-security bill, the minimum contribution rate would increase to 6.2 percent for both employee and employer effective Jan. 1, 2018.

The hybrid plan, so named because it combines elements of the government’s now defunct Defined Benefit system and Deferred Compensation plan, requires members to have a contribution rate of 9.5 percent and contribute 1 percent to the 457 Compensation plan.

The DB plan was the government’s retirement system before 1995, when it closed because it was too costly. DB plans define the benefits a member will receive upon retirement.

The 457 plan, another name for the Deferred Compensation system, gives employees the option of having a portion of their paycheck deducted and invested into mutual funds or annuity contracts.

Social Security

The hybrid-security plan also intends to craft a pathway for the government of Guam to adopt Social Security. Pending congressional legislation from Guam Del. Madeleine Bordallo, the federal program could soon become available for all new government hires.

San Nicolas noted that the current draft will need to be revised some more before it’s ready for a legislative debate in session.

"Mr. chairman I believe we’re very close," San Nicolas told Cruz in the middle of Wednesday’s lengthy discussion.

Cruz, who chairs the Legislature’s Committee on Appropriations and Adjudication, said he planned to move the bill forward to next week’s legislative session, but acknowledged it would futile if the Calvo administration isn’t completely on board with the projected costs and figures in the retirement plan.

He asked newly appointed Department of Administration Director Christine Baleto to go over actuarial costs with the governor’s finance team so they can provide additional and necessary input.

Breakdown of retirement plans

The current draft of Bill 2-33 creates two new retirement plans for GovGuam employees while amends some provisions of the current retirement system. The following is a breakdown of the plans and how they would impact government employees, both current and future.

Defined Contribution

Who would be enrolled?

What is the member and employer’s contribution rate?

What do members get at retirement?

Hybrid Plan

Who would be enrolled?

What is the member and employer’s contribution rate?

What do members get at retirement?

Guam Retirement Security Plan

Who would be enrolled?

What is the member and employer’s contribution rate?

What do members get at retirement?

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