Guam Legislature Approves Overhaul Of Retirement System

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

Unanimous vote supports creation of 2 new government plans

By Shawn Raymundo

HAGÅTÑA, Guam (Pacific Daily News, May 3, 2016) – Lawmakers on Tuesday unanimously voted to overhaul the government of Guam’s retirement system.

If the proposed legislation, Bill 2-33, is signed into law, it will mark the first time in more than 20 years that Guam’s retirement program has gone through such a drastic change.

Pending enactment, Bill 2, which was introduced by Vice Speaker Benjamin Cruz, will create two new government retirement plans in an effort to address about 8,000 employees who currently are enrolled in the Defined Contribution system but who do not have enough savings generated from contributions and investments to retire.

According to retirement officials, Defined Contribution plan members who are 55 years and older have an average of $50,000 saved in their retirement accounts.

Moved by his colleagues unanimously voting in favor of the long-awaited Bill 2, Cruz expressed his gratitude to his fellow senators during Tuesday’s session.

"All my colleagues spent over 13, 14 months in 11 different public hearings and roundtables to discuss this bill," Cruz recapped, adding: "I want to thank all of you for recognizing our responsibility and recognizing our GovGuam employees are able to retire in dignity."

Since the summer of 2014, when Cruz took up the mantle of reforming retirement from the late Sen. Ben Pangelinan, he’s worked with the Government of Guam Retirement Fund, stakeholders and other lawmakers to draft a passable measure.

With many concerns ironed out and several compromises made to the bill, Cruz last week was ready to move it to the session floor so the legislative body could deliberate. Lawmakers spent Friday afternoon going over the measure with retirement officials before scheduling it for a vote Tuesday.

Cruz credited Pangelinan and former Sen. Anthony Blaz, who died this past January, for being instrumental in drafting the bill with the Retirement Fund.

"I was honored to take up the banner at that point to move it for him. But at the time he had worked with 12 different iterations with the Retirement Fund," he said.

"(Blaz) believed it was an excellent bill. Unfortunately, he too passed," Cruz later stated. "He believed in this bill along with Sen. Ben and the Retirement Fund."

Now with the bill passed, Gov. Eddie Calvo has only 10 working days to sign or veto the bill, or let it lapse into law. If the governor vetoes the bill, lawmakers will need to hold a revote. Considering the bill was unanimously passed, it’s likely to retain a two-thirds majority, overriding the veto.

The government currently has three retirement systems in place — the Defined Benefit plan, the Deferred Compensation — or 457 — plan and the Defined Contribution plan.

The Defined Benefit plan closed to new employees on Sept. 31, 1995, because it was too costly for the government. It left an unfunded liability — currently around $1.5 billion — that the government has to fully pay by 2031.

With the Defined Contribution plan, which replaced the Defined Benefits system, retirement benefits depend on the individual’s amount of contributions to the plan.

Deferred Compensation, a retirement savings plan, is the government’s equivalent to a 401k plan, giving employees the option of having a portion of their paycheck deducted and invested into mutual funds or annuity contracts. This savings plan is available to both Defined Contribution and Defined Benefits plan members.

Under one of the newly proposed plans, the Defined Benefit 1.75 plan, government employees would be more responsible for their retirement, as the minimum contribution rate is set at 9.5-percent along with a mandatory 1-percent contribution to the Deferred Compensation plan.

DB Lite

Initially Bill 2-33 only proposed one new plan, which was commonly referred to as the hybrid plan because it combined elements of the 457 plan and defunct Defined Benefits system. The vice speaker changed the name to the Defined Benefit 1.75 plan, or "DB Lite."

When members under the DB Lite 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, with survivor benefits for spouses and children.

The second system, the Guam Retirement Security Plan, is essentially a cash balance pension plan where the interest credit rate — guaranteed rate of return — would be set at 4 percent annually.

Cash balance plans are similar to Defined Contributions plans in that an employee’s benefits are based on the individual’s account balance, however, a cash balance plan is preferable because it guarantees a rate of return.

Cruz on Tuesday acknowledged Sen. Michael San Nicolas for being persistent about amending certain provisions in the bill and making it stronger by constructing the Security Plan, which is meant to be GovGuam’s very own Social Security program.

"In the hopes of eventually moving toward a Social Security system that’s nationally established, he wanted to put an end to having people on the Defined Contribution plan and have us all on the Social Security plan," Cruz noted. "So I want to thank San Nicolas for his insistence."

Currently, Defined Contribution members and their employers contribute 5 percent each toward the employee’s retirement. Beginning Jan. 1, 2018, the mandatory contribution rate for that plan increases from 5 percent to 6.2 percent. Just like Social Security, employees enrolled under San Nicolas’ Security Plan would have a mandatory contribution rate of 6.2 percent with a 6.2-percent match from their employer.

Up until Tuesday, the measure was meant to close the Defined Contribution to new employees, but lawmakers amended the measure to keep the plan open, allowing new employees hired after Jan. 1, 2018 the choice of opting into either the Security Plan or the refined Defined Contribution plan.

Defined Contribution plan members working for GovGuam between July 1, 2017 and Dec. 31, 2017 would be able to opt into DB Lite or the Security Plan. New government employees hired in that period can choose between the three plans.

The DB Lite will only be open to new employees hired between July 1, 2017, and Dec. 31, 2017. Beginning in 2018, the Security Plan and Defined Contribution plan are to become the primary systems for all new hires, unless a deal for GovGuam employees to pay into Social Security can be worked out with the federal government.

Summary of retirement plans

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