Pension Flexibility: Virginia

2015 Pensions Policy

Goal

The state should ensure that pension systems are portable, flexible and fair to all teachers.

Meets in part
Suggested Citation:
National Council on Teacher Quality. (2015). Pension Flexibility: Virginia results. State Teacher Policy Database. [Data set].
Retrieved from: https://www.nctq.org/yearbook/state/VA-Pension-Flexibility-74

Analysis of Virginia's policies

Virginia no longer offers a defined benefit pension plan to its teachers as their mandatory pension plan. The state now offers a hybrid plan for members hired on or after January 1, 2014. A hybrid plan has elements both of defined benefit and defined contribution plans. Although Virginia's plan is a hybrid, the defined benefit part is not fully portable, does not vest until year five, and does not provide any employer contribution for teachers who choose to withdraw their account balances when leaving the system. It also limits flexibility by restricting the ability to purchase years of service. The state, however, is commended for offering a fully portable supplemental savings plan, which also includes an employer match.

Both plan members and employers contribute to both parts of the retirement plan. Members contribute four percent of their earnings to the defined benefit component of the hybrid plan. In addition, members and employers each contribute 1 percent for the defined contribution component. Members may elect to contribute an additional 4 percent to a 457 Deferred Compensation Plan and commendably employers match up to 2.5 percent. Therefore, the total possible member contributions equal 9 percent while the total possible employer contribution to the two defined contribution accounts add up to 3.5 percent. Members vest in 100 percent of the employer contributions to their defined contribution accounts after four years.

Teachers in Virginia also participate in Social Security, so they must contribute to the state's defined benefit component of the hybrid plan in addition to Social Security. Although retirement savings in addition to Social Security are good and necessary for most individuals, the state's policy results in mandated contributions to two inflexible plans, rather than permitting teachers options for their state-provided savings plans.

Vesting in a defined benefit plan guarantees a teacher's eligibility to receive lifetime monthly benefit payments at retirement age. Non-vested teachers do not have a right to later retirement benefits; they may only withdraw the portion of their funds allowed by the plan. Virginia's vesting at five years of service limits the options of many teachers who leave the system prior to this point. According to a recent report, only 50 percent of employees in Virginia's teacher-covered pension plan vest, meaning that 50 percent of teachers do not become eligible for a pension and, therefore, can only collect their refundable contributions.

Teachers in Virginia with less than five years of service who choose to withdraw their employee accounts from the defined benefit component upon leaving only receive their own contributions plus interest, but not any employee contributions paid for by the employer. Certain school districts in Virginia pay all or a portion of teachers' mandatory contribution as an employment benefit; these are referred to as picked-up contributions. Teachers with at least five years of service receive their entire employee account, which consists of their own contributions and any contributions picked-up by employers plus interest. This means that those who withdraw their funds accrue no benefits beyond what they might have earned had they simply put their contributions in basic savings accounts.

Teachers with less than five years of experience who were employed by a district in which the employer picked-up the mandatory employee contribution may be leaving the system with no savings beyond Social Security. Furthermore, teachers who remain in the field of education but enter another pension plan (such as in another state) will find it difficult to purchase the time equivalent to their prior employment in the new system because they are not entitled to any employer contribution.

Teachers immediately vest in their own contributions made to the defined contribution portion of the pension plan. They also vest in 50 percent of the employee contributions after 2 years of service, 75 percent after 3 years of service, and 100 percent of employer contribution after 4 years of service. Employer contributions made to the Hybrid 457 Deferred Compensation Plan are also subject to this vesting schedule.

Virginia limits teachers' flexibility to purchase years of service. The ability to purchase time is important because defined benefit plans' retirement eligibility and benefit payments are often tied to the number of years a teacher has worked. Virginia's plan allows teachers to purchase time for previous teaching experience, up to four years. While better than not allowing any purchase at all, this provision is less than most states' and disadvantages teachers who move to Virginia with more teaching experience.

The state's plan also allows teachers to purchase up to one year of service per approved leave of absence, up to four years. This is a disadvantage to teachers who need to take more than four years of total leave over the course of their career, such as for paternity or maternity care or for other personal reasons.

Citation

Recommendations for Virginia

Offer teachers a pension plan that is fully portable, flexible and fair.
While Virginia is commended for offering a hybrid plan, which provides greater portability than a standalone defined benefit plan, the state should also offer teachers for their mandatory pension plan the option of either a defined contribution plan or a fully portable defined benefit plan, such as a cash balance plan. A well-structured defined benefit plan could be a suitable option among multiple plans. As the sole option, however, the hybrid plan still disadvantages mobile teachers and those who enter the profession later in life. Because teachers in Virginia participate in Social Security, they are required to contribute to two defined benefit-style plans.

Increase the portability of its defined benefit plan.
If Virginia maintains its defined benefit plan, it should allow all teachers that leave the system to withdraw interest and employer contributions. The state should also allow teachers to purchase their full amount of previous teaching experience, at least one year per approved leave of absence, and decrease the vesting requirement to year three. A lack of portability is a disincentive to an increasingly mobile teaching force.

State response to our analysis

Virginia did not respond to repeated requests to review this analysis.

How we graded

Research rationale

Anachronistic features of teacher pension plans disadvantage teachers early in their careers.

Nearly all states continue to provide teachers with a defined benefit pension system, an expensive and inflexible model that neither reflects the realities of the modern workforce nor provides equitable benefits to all teachers. To achieve the maximum benefits from such a plan, a teacher must begin and end his or her career in the same pension system. Teachers who leave before vesting—which is as much as 10 years in some states—are generally entitled to nothing more than their own contributions plus some interest. This approach may well serve as a retention strategy for some, but on a larger scale it fails to reflect the realities of the current workforce. At present, the United States is experiencing an explosion in school-age populations in some states, while other states are experiencing a decline. The nation's workforce needs to be able to respond to these changes. The current workforce is increasingly mobile, with most entering the workforce expecting to change jobs many times. All workers, including teachers, may move to jobs in other states with no intention of changing careers. To younger teachers in particular, a defined benefit plan may seem like a meaningless part of the compensation package and thus fail to attract young talent to the profession. A pension plan that cannot move across state lines and that requires a long-term commitment may not seem like much of a benefit at all.

There are alternatives. Defined contribution plans are fair to all teachers at all points in their careers. These plans are more equitable because each teacher's benefits are funded by his or her own contributions plus contributions from the employer specifically on the individual employee's behalf. This is fundamentally more equitable than defined benefit plans, which are generally structured to require new teachers to fund the benefits of retirees. Moreover, defined contribution plans are inherently portable and give employees flexibility and control over their retirement savings. It must also be noted that defined benefit plans can be portable and fair, if structured as cash balance plans or plans that permit the withdrawal of employer contributions.

Pension Flexibility: Supporting Research
NCTQ's analysis of the financial sustainability of state pension system is based on actuarial benchmarks promulgated by government and private accounting standards boards. For more information see U.S. Government Accountability Office, 2007, 30 and Government Accounting Standards Board Statement No. 25.

For an overview of the current state of teacher pensions, the various incentives they create, and suggested solutions, see Robert Costrell and Michael Podgursky. "Reforming K-12 Educator Pensions: A Labor Market Perspective." TIAA-CREF Institute (2011).

For evidence that retirement incentives do have a statistically significant effect on retirement decisions, see Joshua Furgeson, Robert P. Strauss, and William B. Vogt. "The Effects of Defined Benefit Pension Incentives and Working Conditions on Teacher Retirement Decisions", Education Finance and Policy (Summer, 2006).

For examples of how teacher pension systems inhibit teacher mobility, see Robert Costrell and Michael Podgursky, "Golden Handcuffs," Education Next, (Winter, 2010).

For additional information on state pension systems, see Susanna Loeb, and Luke Miller. "State Teacher Policies: What Are They, What Are Their Effects, and What Are Their Implications for School Finance?" Stanford University: Institute for Research on Education Policy and Practice (2006); and Janet Hansen, "Teacher Pensions: A Background Paper", published through the Committee for Economic Development (May, 2008).

For further evidence supporting NCTQ's teacher pension standards, see "Public Employees' Retirement System of the State of Nevada: Analysis and Comparison of Defined Benefit and Defined Contribution Retirement Plans." The Segal Group (2010). Can be accessed at: http://docplayer.net/16288272-Public-employees-retirement-system-of-the-state-of-nevada-analysis-and-comparison-of-defined-benefit-and-defined-contribution-retirement-plans.html