The state should ensure that pension systems are portable, flexible and fair to all teachers.
Virginia only offers a defined benefit pension plan to its teachers as their mandatory pension plan. This plan 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. However, the state is commended for offering a fully portable supplemental savings plan.
Teachers in Virginia also participate in Social Security, so they must contribute to the state's defined benefit 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. Nonvested 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 teachers who leave the system prior to this point.
Teachers in Virginia with less than five years of service who choose to withdraw their employee accounts 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. Further, 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.
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 with at least five years of service 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.
The state is commended for offering fully portable supplemental savings plans with an employer match. Virginia offers 457 and 403(b) plans with a maximum match lowered to 10 dollars per pay period for fiscal year 2011. In fiscal year 2012, the match is set to return to its previous maximum of 20 dollars. Offering an employer match, of any amount, to supplemental savings plans is very rare.
Virginia Retirement System, Plan 2, Handbook for Members Hired or Rehired on or after July 1, 2010 http://www.varetire.org/Pdf/Publications/handbook-plan-2.pdf
Offer teachers a pension plan that is fully portable, flexible and fair.
Virginia should 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. However, as the sole option, defined benefit plans severely disadvantage 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.
The Virginia Retirement System did not respond to repeated requests to review NCTQ's analyses related to teacher pensions.