BILL ANALYSIS Ó
SENATE COMMITTEE ON
PUBLIC EMPLOYMENT AND RETIREMENT
Dr. Richard Pan, Chair
2015 - 2016 Regular
Bill No: AB 2404 Hearing Date: 6/27/16
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|Author: |Cooley |
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|Version: |6/13/16 As amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Pamela Schneider |
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Subject: Public Employees' Retirement System: optional
settlements
SOURCE: California Public Employees' Retirement System
ASSEMBLY VOTES:
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|Assembly Floor: |79 - 0 |
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|Assembly Appropriations |19 - 0 |
|Committee: | |
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|Assembly Public Employees, |7 - 0 |
|Retirement/Soc Sec Committee: | |
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DIGEST: This bill eliminates and combines several of the
optional retirement benefit settlements available to members of
the California Public Employees' Retirement System (CalPERS),
the Judges' Retirement System (JRS I), and the Judges'
Retirement System II (JRS II), that retire on or after January
1, 2018, in order to simplify members' retirement choices and
administration of these retirement systems.
ANALYSIS:
Existing law:
AB 2404 (Cooley) Page 2 of ?
1)Allows a retiring CalPERS, JRS I, or JRS II member to receive
a lifetime benefit paid to the member alone (i.e., an
unmodified allowance), or to elect one of twelve optional
settlements that reduces the retiree's lifetime benefit in
order to provide a lump sum payment or continuing allowance to
a designated option beneficiary or option beneficiaries upon
the retiree's death.
2)Requires CalPERS to make an actuarial reduction to the
retiree's benefit, relative to the retirement option chosen,
which is cost-neutral to CalPERS and is calculated based on
the member's age at retirement, and the age(s) of the
designated option beneficiary or option beneficiaries.
3)Differentiates between an option beneficiary and a survivor-a
survivor most often being a spouse who was married to the
member for at least one year prior to retirement, and who is
married to the retiree at the time of death. A survivor may
also be a dependent child or parent, as specified.
4)Requires that a survivor receive 25% of the unmodified
allowance if the member had Social Security coverage and 50%
if the member had no Social Security coverage. This provision
applies to all state and school members and local members if
contracted for with CalPERS. The survivor allowance, if
applicable, is paid even if the retiree elects an unmodified
retirement benefit.
5)Requires that if the option beneficiary is not also a survivor
(i.e., not the retiree's spouse or dependent child or parent),
and the retiree had a survivor at the time of death, then the
retiree's benefit be split, as specified, between the option
beneficiary and survivor. The combined amount paid to the
option beneficiary and the survivor, if applicable, cannot
equal more than the benefit paid to the retiree.
6)Allows under various scenarios, such as death of a spouse or
divorce, that a retiree who chose an option may be allowed to
"pop up" to the unmodified allowance or to name another option
beneficiary, as specified.
This bill:
1)Reduces the number of optional settlement choices for members
AB 2404 (Cooley) Page 3 of ?
of CalPERS, JRS I and JRS II that retire on or after December
31, 2017.
2)Allows members of CalPERS, JRS I, and JRS II that retire on or
after January 1, 2018 to elect an unmodified allowance, as
defined, which provides no ongoing benefit to an option
beneficiary or return of unused member contributions in the
event of the retiree's death, or one of the following optional
settlements:
a) Return of Remaining Contributions Option 1, which makes
a very small reduction to the unmodified benefit and allows
a designated beneficiary to receive any unpaid member
contributions remaining on account in the event that the
retiree dies before all contributions have been paid out.
In most cases, it takes approximately 10 years to exhaust
the member contributions.
b) The 100 Percent Beneficiary Option 2, which pays the
same actuarially reduced retirement allowance over the
retiree and option beneficiary's lifetime, as specified,
and pays any unpaid member contributions remaining on
account to a designated beneficiary in the event that the
retiree and option beneficiary both die before all member
contributions have been paid out.
c) The 100 Percent Beneficiary Option 2 with Benefit
Allowance Increase, which pays the same actuarially reduced
retirement allowance over the retiree and option
beneficiary's lifetime, as specified, and allows the
retiree to pop up to the unmodified allowance if the option
beneficiary predeceases the retiree.
d) The 50 Percent Beneficiary Option 3, which pays an
actuarially reduced amount over the retiree's lifetime,
pays 50% of that amount to the option beneficiary upon the
retiree's death, and pays any unpaid member contributions
remaining on account to a designated beneficiary in the
event that the retiree and option beneficiary both die
before all member contributions have been paid out.
e) The 50 Percent Beneficiary Option 3 with Benefit
Allowance Increase, which pays an actuarially reduced
amount over the retiree's lifetime, pays 50% of that amount
to the option beneficiary upon the retiree's death, and
AB 2404 (Cooley) Page 4 of ?
allows the retiree to pop up to the unmodified allowance if
the option beneficiary predeceases the retiree.
f) The Flexible Beneficiary Option 4, which pays an
actuarially reduced amount over the retiree's lifetime and
provides a specified dollar or percentage of the member's
unmodified allowance to one or more option beneficiaries
upon the retiree's death; and
g) Optional Settlement 5, which provides for a partial
distribution of the actuarial present value of a portion of
the unmodified monthly allowance of specified members of
the State Peace Officer/Firefighter and State Patrol
benefits plans. The remaining allowance may be paid
unmodified or reduced under one of the options.
3)Makes clear in each option that if there is a survivor who is
different from the option beneficiary, then the option
beneficiary allowance is the amount that exceeds the amount
deemed payable to the survivor.
4)Allows a member with an unmodified benefit to choose a
somewhat higher amount of benefit in the early years of
retirement in exchange for having a somewhat lower benefit
later in retirement as specified.
5)Revises and recasts various administrative provisions in
connection with optional settlements provided to members of
CalPERS, JRS I and JRS II.
6)Makes clarifying and technical changes to update
cross-references related to retirement payment options.
Background
When a CalPERS member chooses one of the retirement options, his
or her allowance is actuarially reduced to cover the lifetimes
of the retiree and his or her beneficiary or beneficiaries. In
other words, instead of the benefit being paid over one
lifetime, it is now set to be paid over two or more lifetimes.
The reduction is based on the member's age at retirement and the
life expectancy of the beneficiary(s), and is estimated to be
cost-neutral to CalPERS. A member's beneficiary choice is
irrevocable as long as the beneficiary is living, although it
may be changed following specified life events, such as the
AB 2404 (Cooley) Page 5 of ?
death of the beneficiary or a divorce (if the beneficiary is the
spouse) and associated court order awarding all of the retiree's
CalPERS benefit to the retiree. A beneficiary may also
voluntarily revoke his or her right to an on-going benefit to be
received in the event of the retiree's death.
A "survivor" has a statutory right to a portion of the retiree's
benefit upon the retiree's death, even if not specifically named
as a beneficiary and even if the retiree takes an unmodified
benefit. Generally, a spouse who was married to the retiree for
one year prior to retirement, and who is married to the retiree
at the time of death is defined as a survivor; a dependent child
or parent, as specified, may also be a survivor if there is no
surviving spouse.
In cases in which the retiree dies first and there is a survivor
and another person named as the beneficiary, the survivor
benefit (either 25% or 50% depending on the retiree's job prior
to retirement) is paid to the survivor, and the remaining
portion of the optional benefit is paid to the beneficiary. If
the survivor is also the beneficiary, then the entire optional
benefit will be paid to the survivor/beneficiary. Conversely, if
there is a beneficiary but no eligible survivor, then the entire
optional benefit will be paid to the beneficiary.
FISCAL EFFECT: Appropriation: No Fiscal
Com.: Yes Local: No
According to the Assembly Appropriations Committee, the bill
will result in "minor and absorbable administrative costs to
CalPERS. Any actuarial reduction to a member's benefit is
cost-neutral to CalPERS and is based on his or her age at
retirement and the age of the designated beneficiary or
beneficiaries."
SUPPORT:
California Public Employees' Retirement System (source)
OPPOSITION:
None received
AB 2404 (Cooley) Page 6 of ?
ARGUMENTS IN SUPPORT:
According to the author:
In 2013, CalPERS participated in a Cost Effectiveness
Measurement Benchmarking (CEM) Analysis and was found to
have the most complicated set of pension payment options
when compared with similar retirement systems. Some
options are redundant and provide the same benefit using
different language. Other options provide adjusted
benefits under certain circumstances. These options are
infrequently chosen by members and require CalPERS staff to
perform manual calculations that slow retirement estimate
processing.
The complexity of CalPERS' current retirement plan design
creates administrative burdens that negatively impacts
customer service and educational efforts. This bill
streamlines the CalPERS plan design by consolidating
redundant retirement options. This bill also simplifies
estimate processing, education activities, and payment
processes.
As stated by CalPERS, the changes proposed in AB 2404 will
"simplify members' retirement choices, help mitigate member
risk, and improve the customer experience. They will also help
to reduce complexity in the administration of the retirement
system, simplify our benefit payment processes, and increase the
effectiveness of our member counseling activities and
communications."