As a State of Tennessee municipal subdivision, the City of Brentwood is authorized by state law to participate in the Tennessee Consolidated Retirement System (TCRS), the State of Tennessee retirement plan. The City joined TCRS in July 1973 and offers this defined benefit pension plan, now referred to as the Legacy Plan, to all full-time employees. The City pays the entire costs of participation for employees hired before January 1, 2010. Employees hired after January 1, 2010 are required to contribute 5% of their eligible earnings on a pre-tax basis to share in the cost of this important benefit.
Each participating employer in the TCRS Retirement System, including the City of Brentwood, is charged an actuarially determined percentage of eligible participants’ payroll expense to fund this benefit. The actuarial rates are calculated annually and can vary from year to year based on the demographics of each group, retirement fund investment performance, employee turnover and pay rates, and other relevant factors. In recent years the City has made a practice of contributing above the minimum required rate charged by TCRS. This has been done to ensure the City’s account is approximately 100% funded to cover current and future liabilities and anticipated changes to the actuarial assumptions, including a reduction in the assumed investment return and an increase in life expectancy, both of which would put upward pressure on future required contributions. Currently, the City of Brentwood contributes 14% of payroll expense to fund this defined benefit plan. In Fiscal Year 2017, the City’s annual cost to provide this important benefit was approximately $2.3M. In Fiscal Year 2007 the cost was $1.8M and in 2002 it was $963,000.
In 2014 the State of Tennessee General Assembly authorized the creation of a new Hybrid Pension Plan under the Tennessee Consolidated Retirement System. Since July 1, 2014, all new State of Tennessee employees, higher education employees, and K-12 teachers are enrolled in the Hybrid Plan. In addition, many local governments have adopted the Hybrid Plan for their new employees including Hamilton County, Montgomery County, City of Lebanon, City of Bristol and most recently the City of Gallatin.
Because pension plans carry costs and liabilities that stretch over many decades, the primary reason for the creation of the Hybrid Plan was to limit future liability of pension costs and offer a more sustainable alternative plan over the long-term. The Hybrid plan limits future pensions costs because it is a combination (or “Hybrid”) of 1.) a defined benefit plan, which guarantees specific payouts to retirees based on a formula, and 2.) a defined contribution plan in which the employer contributes fixed amounts to employees’ 401(k) or similar types of accounts. It reduces pension costs by adjusting the formula used to calculate retirement benefits and raises retirement eligibility requirements compared to the current Legacy Plan. It also has cost control features that prevent the City's contribution rate from increasing by instead temporarily reducing employee benefit levels if the plan’s total unfunded level exceeds a certain threshold. A summary of these cost control measures is attached.
Under the Hybrid Plan, the City’s maximum contribution is 9%. The City would contribute 4% of employees’ eligible compensation to a defined benefit component (traditional pension plan) and 5% to a defined contribution component (401k). The employee is also required to contribute 5% to the defined benefit component, the same percentage as exists today under the Legacy plan in place in Brentwood.
An additional feature of the Hybrid Plan is that employees are automatically enrolled in an optional 2% contribution to their defined contribution plan (401(k)). Employees can opt out of this additional contribution at any time. However, as an incentive for employees to continue to contribute to their individual retirement savings accounts, staff recommends that the City match this additional contribution of up to 2% of employee base pay immediately, provided employees do not opt out of this additional contribution. It is also recommended that the City’s matching contribution include a two-year vesting schedule which means employees must complete two years of service to be eligible to receive the City matching contributions. Currently, the City provides this matching incentive to members of the Legacy Plan of up to 3% of base pay after two years of service. State law governing TCRS limits the amount that participating employers are authorized to contribute to employees’ defined contribution accounts to 7%. Because the Hybrid Plan already includes a 5% contribution to the defined contribution component of the plan, the City is limited to only 2% for this additional matching feature. Matching Hybrid Plan members' optional contributions immediately, with a two-year vesting schedule, is designed to partially offset the difference in matching contributions provided to these two groups of employees.
A summary comparison of the benefit and retirement eligibility components of the Hybrid Plan and Legacy Plan is attached. While the Hybrid Plan reduces the lifetime defined benefit portion of the pension plan, the attached benefit earning scenarios developed by TCRS show that if the defined contribution (401(k)) portion of the Hybrid Plan achieves an annual average market return of 6%, the combined annual retiree benefit under the Hybrid Plan would be at least equal to or exceed the annual retiree benefit under the Legacy Plan. Also, the defined contribution component of the Hybrid Plan provides an asset that can be passed to other heirs should there be any assets remaining when the retiree and their primary beneficiary pass away.
Staff believes the benefit of adopting the TCRS Hybrid Plan for future employees will enable the City to control long-term pension obligations while maintaining a competitive position in the labor market by continuing to offer an attractive retirement benefit to new employees. Adopting the Hybrid Pension Plan would ensure the City’s cost of this benefit is capped at 9% of eligible compensation as compared to the current budgeted cost of 14% which is subject to annual variation based on group demographics, investment returns and other actuarial assumptions. To put this into perspective, if all employees currently in the Legacy Plan were in the Hybrid Plan, the cost to the City of this retirement benefit would be reduced by approximately $1M annually. As mentioned above, State Law does not allow modifying the Legacy Plan for current employees.
Upon approval of the attached resolution the effective date of participation in the TCRS Hybrid Plan will be determined by the TCRS Board of Trustees after a six-month waiting period and will affect new employees hired after April 1, 2019.
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