FIREFIGHTER PENSIONSInternational Association of Fire Fighters

ASK YOURSELFWILL YOU BE ABLE

TO RETIRE?

In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment.

TYPES OF PENSIONS PLANS:

DEFINED BENEFIT PLAN

DEFINED CONTRIBUTION PLAN

DEFINED BENEFIT PLANDEFINED BENEFIT PLANDEFINED BENEFIT PLANMONETARY CONTRIBUTION INVESTMENT RISK

EMPLOYER X X

EMPLOYEE X

• RETIREE RECEIVES A PREDETERMINED AND GUARANTEED BENEFIT BASED ON SALARY AND YEARS OF SERVICE.

• MOST PLANS INCLUDE A DEATH AND DISABILITY BENEFIT.

• THE PLAN IS PRE-FUNDED - IT RECEIVES ROUTINE CONTRIBUTIONS FROM THE EMPLOYER AND OFTENTIMES THE EMPLOYEE DURING THE COURSE OF EMPLOYMENT.

• INVESTMENT EARNINGS DO A SIGNIFICANT AMOUNT OF THE WORK OF PAYING FOR RETIREMENT BENEFITS.

• THE CONTRIBUTIONS ARE INVESTED BY PROFESSIONAL MONEY MANAGERS.

• A PENSION BOARD OF TRUSTEES IS RESPONSIBLE FOR MAKING DECISIONS REGARDING THE PLAN.

DEFINED CONTRIBUTION PLANDEFINED CONTRIBUTION PLANDEFINED CONTRIBUTION PLANMONETARY CONTRIBUTION INVESTMENT RISK

EMPLOYER X

EMPLOYEE X X

• EMPLOYER PROVIDES EMPLOYEE WITH AN INDIVIDUAL INVESTMENT ACCOUNT.

• THE EMPLOYEE HAS OWNERSHIP OF THE ASSETS IN THE PLAN AND DECIDES HOW THE MONEY IS INVESTED.

• AT RETIREMENT, THE EMPLOYEE’S BENEFIT IS PAID SOLELY OUT OF THE CONTRIBUTIONS AND INVESTMENT EARNINGS THAT ACCUMULATED IN THE ACCOUNT.

• MANAGEMENT FEES ARE PAID OUT OF THE ACCOUNT.

• THE EMPLOYER HAS NO FINANCIAL RESPONSIBILITY FOR THE EMPLOYEE AFTER RETIREMENT.

• THE EMPLOYER BEARS THE ENTIRE MARKET RISK.

UNDER ATTACK

UNEMPLOYMENT ↑

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TROUBLES ON MAIN STREET

LAYOFFS

FURLOUGHS

DECLINING TAX REVENUES

•Governments began offering Public Employee Pensions almost 2 centuries ago.

GOVERNMENTS MADE A PROMISE TO PUBLIC EMPLOYEES

The concept was simple and sound.

PUBLIC EMPLOYEES EARN LESS MONEY THAN THEIR

PRIVATE SECTOR COUNTERPARTS

• In order to attract a quality workforce, governments offered guaranteed retirement benefits to protect the employees and family members in their retirement years.

SOCIAL SECURITY

INITIALLY EXCLUDED PUBLIC SECTOR

EMPLOYEES. ALTHOUGH AMENDED,

70% OF ALL FIRE FIGHTERS REMAIN OUTSIDE THE

SOCIAL SECURITY SYSTEM, DEPENDENT ON STATE

AND LOCAL RETIREMENT SYSTEMS.

CONSEQUENTLY, IN LIEU OF SOCIAL SECURITY, PROGRESSIVE STATE AND LOCAL GOVERNMENTS BEGAN INSTITUTING OR IMPROVING PENSION BENEFITS FOR PUBLIC EMPLOYEES.

90 FIREFIGHTERS DIEDIN THE LINE-OF-DUTY

78,150 FIREFIGHTERS INJURED

2009 FIGURES:

THIS IS YOUR DEFINED BENEFIT PLAN...

•Normal Retirement Date

•Age Requirement

• Years of Service

• Social Security: Yes or No?

• Employer’s Contribution

• Employee’s Contribution

• Early Retirement

•Date Vested

•Annuities, Formulas, COLA

•Death & Disability Benefit

THE SUMMARY PLAN DOCUMENT

BENEFIT CALCULATOR

A TYPICAL BENEFIT CALCULATION

2.5% X $40,000 X 20 = $20,000

DOLLARS + SENSE

$21,800• THE AVERAGE ANNUAL BENEFIT FOR A RETIRED STATE

AND LOCAL GOVERNMENT EMPLOYEE IN 2009.

BENE-FACTS

MYTHS & MISPERCEPTIONS

• MYTH: DEFINED CONTRIBUTION PLANS ARE BETTER BECAUSE THEY ALLOW EMPLOYEES TO MANAGE RETIREMENT ASSETS THEMSELVES. WORKERS WANT A DEFINED CONTRIBUTION PLAN AS THEIR PRIMARY RETIREMENT BENEFIT.

• MYTH: WORKERS IN DEFINED CONTRIBUTION PLANS WILL RECEIVE SUBSTANTIALLY HIGHER BENEFITS THAN THOSE OFFERED BY DEFINED BENEFIT PLANS.

• MYTH: THE PUBLIC SECTOR SHOULD CONVERT TO DEFINED CONTRIBUTION PLANS, AS THE PRIVATE SECTOR HAS BECAUSE THEY COST LESS THAN DEFINED BENEFIT PLANS.

WE BELIEVE THAT A DEFINED BENEFIT PLAN

SHOULD CONSTITUTE AN EMPLOYEE’S BASIC RETIREMENT

PLAN, AND SHOULD BE SUPPLEMENTED BY A VOLUNTARY DEFINED CONTRIBUTION PLAN.

DEFINED BENEFIT DEFINED CONTRIBUTION

DEFINED BENEFIT PLANS PROVIDE SECURE RETIREMENT BENEFITS BASED ON A

PERSON’S SALARY AND PERIOD OF SERVICE.

SWITCHING TO A DEFINED CONTRIBUTION PLAN IS LIKELY TO RESULT IN LOWER AND LESS SECURE RETIREMENT BENEFITS. STATE

AND LOCAL EMPLOYEES WHO ARE WITHOUT SOCIAL SECURITY WOULD BE

PUT AT EVEN GREATER RISK.

DEFINED BENEFIT PLANS PROVIDE RETIREES WITH A GUARANTEED FIXED MONTHLY BENEFIT

RETIREES WITHOUT A GUARANTEED FIXED MONTHLY BENEFIT ARE LESS LIKELY TO SPEND ON GOODS AND SERVICES

IF A RETIREE OUTLIVES THEIR RETIREMENT SAVINGS, THEY ARE MORE LIKELY TO NEED GOVERNMENT ASSISTANCE

DEFINED BENEFIT PLANS HELP SUSTAIN STATE AND LOCAL ECONOMIES BY PROVIDING ADEQUATE AND STEADY RETIREMENT BENEFITS FOR A SIGNIFICANT

PORTION OF THE WORKFORCE.

SWITCHING TO A DEFINED CONTRIBUTION PLAN MAY SLOW STATE AND LOCAL ECONOMIES, SINCE A LARGE NUMBER OF RETIREES WOULD LIKELY RECEIVE LOWER

RETIREMENT BENEFITS.

DEFINED BENEFIT PLANS PROVIDE BENEFITS THAT HELP ENSURE AN ADEQUATE STANDARD OF LIVING

THROUGHOUT RETIREMENT.

SWITCHING TO A DEFINED CONTRIBUTION PLAN WOULD RESULT IN PRESSURE ON STATE AND LOCAL

GOVERNMENTS TO AUGMENT DEFINED CONTRIBUTION PLAN BENEFITS AND REQUIRE INCREASED FINANCIAL

ASSISTANCE FOR RETIREES.

DEFINED BENEFIT DEFINED CONTRIBUTION

ALMOST ALL STATE AND LOCAL DEFINED BENEFIT PLANS PROVIDE

DISABILITY AND SURVIVOR BENEFITS AS WELL AS RETIREMENT INCOME.

SWITCHING TO A DEFINED CONTRIBUTION PLAN WOULD REQUIRE EMPLOYERS TO OBTAIN THESE BENEFITS FROM ANOTHER SOURCE, LIKELY AT A

HIGHER COST.

DEFINED BENEFIT DEFINED CONTRIBUTIONDEFINED BENEFIT PLANS ENHANCE THE ABILITY OF

STATE AND LOCAL GOVERNMENTS TO ATTRACT QUALIFIED EMPLOYEES AND RETAIN THEM

THROUGHOUT THEIR CAREERS

SWITCHING TO A DEFINED CONTRIBUTION PLAN WOULD LIMIT THE EMPLOYER’S ABILITY TO ATTRACT A

QUALIFIED WORKFORCE AND INCREASE EMPLOYEE TURNOVER RATES.

THE EMPLOYER BEARS ALL THE RISK IN A DEFINED BENEFIT PLAN

DEFINED BENEFIT PLANS EARN HIGHER INVESTMENT RETURNS AND PAY LOWER INVESTMENT

MANAGEMENT FEES, ON AVERAGE.

SWITCHING TO A DEFINED CONTRIBUTION PLAN IS LIKELY TO LOWER INVESTMENT EARNINGS USED TO

FINANCE RETIREMENT BENEFITS AND INCREASE MANAGEMENT COSTS.

• THERE ARE LAWS GOVERNING PUBLIC PENSION PLANS THAT PROTECT PENSION BENEFITS FROM BEING REDUCED.

• PENSION BENEFITS CURRENTLY PROMISED TO STATE AND LOCAL EMPLOYEES MAY NOT BE ABANDONED.

• DEFINED CONTRIBUTION PLANS ARE COSTLY TO ESTABLISH AND MAINTAIN.

• WHEN GIVEN THE OPTION, MOST EMPLOYEES REMAIN IN THE DEFINED BENEFIT PLAN.

• EVEN WHEN NEW HIRES ARE REQUIRED TO JOIN THE DEFINED CONTRIBUTION PLAN, LONG-TERM SAVINGS FOR EMPLOYERS ARE UNCERTAIN AND MAY TAKE MANY YEARS TO REALIZE.

• SWITCHING TO A DEFINED CONTRIBUTION PLAN WOULD REQUIRE EMPLOYERS TO OBTAIN DISABILITY AND SURVIVOR BENEFITS FROM ANOTHER SOURCE, LIKELY AT A HIGHER COST.

$$$$ COSTS OF SWITCHING PLANS $$$$

DO DEFINED CONTRIBUTION PLANS REALLY OFFER PARTICIPANTS THE OPPORTUNITY TO AMASS

CONSIDERABLE WEALTH ?

• Among participants whose primary retirement benefit is a defined contribution plan, some will, in fact, receive substantially higher benefits than they would under a defined benefit plan. However, many workers will fare worse under a defined contribution plan, and some defined contribution plan participants will have no retirement assets at all.

• In fact, retirement benefits paid from defined contribution plans are significantly less than those paid from defined benefit plans. The U.S. Congressional Research Service found that, for current older workers, defined contribution-type plans will provide annual benefits of less than $5,000 for half the workers. This is little more than one-quarter of the $21,800 average annual benefits currently paid by governmental defined benefit plans to state and local workers.

AN IDEAL RETIREMENT MIX

VOLUNTARY DEFINED CONTRIBUTION PLAN

& SAVINGS

SOCIAL SECURITYDEFINED BENEFIT PLAN

FINANCIAL PLANNERS HAVE LONG REFERRED TO AN IDEAL MIX OF RETIREMENT INCOME SOURCES AS A

“THREE-LEGGED STOOL,” WITH ONE LEG EACH REPRESENTING SOCIAL SECURITY, PERSONAL SAVINGS,

AND AN EMPLOYER PENSION.

X70% OF RETIRED

FIREFIGHTERS DO NOT RECEIVE SOCIAL

SECURITY

MOST PUBLIC PENSION

SYSTEMS ARE GOVERNED BY A BOARD OF

TRUSTEES

What is in the best interest of the system and the plan

participants?

PLAN ASSETS(PENSION FUND)

PLAN LIABILITIES

Fair Value at Start of Year(+)Return on Plan Assets

(+) Employer Contributions(-) Benefits Paid

= Fair Value of Plan Assets at end of year

Liabilities at Start of Year(+) Service Cost(+) Interest Cost

(+/-)Actuarial Gain/Loss(+/-) Plan Gain/Loss

(-) Benefits Paid or Owed= Liabilities at end of year

↵ ↵Difference is the funded status of the plan:Plan Assets > LIABILITIES = Overfunded PlanPlan Assets < LIABILITIES = Underfunded Plan

2008 STATE PENSION FUNDING LEVELS

ALABAMAALASKA

COLORADOCONNECTICUT

HAWAIIILLINOISINDIANAKANSAS

KENTUCKYLOUISIANAMARYLAND

MASSACHUSETTSMISSISSIPPINEVADA

NEW HAMPSHIRENEW JERSEYOKLAHOMA

RHODE ISLANDSOUTH CAROLINA

WEST VIRGINIAWYOMING

21 STATES WERE FUNDED BELOW THE 80% LEVEL

FLORIDANEW YORK

WASHINGTONWISCONSIN

4 STATES WERE FULLY

FUNDED 2008 STATE PENSION FUNDING LEVELS

A storm is brewing across the land....