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January 24, 1994 12:00 AM

MAINE PANEL SUGGESTS REFORMEMPLOYEES COULD OPT OUT OF PLAN

By Marlene Givant Star
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    A commission studying the Maine State Retirement System has recommended the Legislature allow teachers and public employees to opt out of the severely underfunded public pension system and instead be covered under Social Security.

    Maine is believed to be the first public pension system to consider such a plan, and is one of the few states that is not part of the Social Security system.

    In addition, the commission, created by the governor and Legislature and headed by Robert A.G. Monks, recommended the state establish a defined contribution plan to supplement the retirement income of those employees who opt out.

    Mr. Monks, the shareholder activist and former head of the Labor Department's Pension and Welfare Benefit Administration, ran a similar commission for the retirement system in 1988. A 30-year resident of Maine, Mr. Monks heads Lens Inc., a private equity firm in Washington.

    The plan would allow the system to pay off its $1.2 billion accrued pension liability over a 30-year period, while its $5 billion actuarial liability would become a federal rather than a state matter, Mr. Monks said.

    Contributions by the state to the defined contribution plan would match those of participants in a system modeled after the Federal Employee Thrift Retirement System. The system was formed in 1986. Mr. Monks was a trustee of the fund.

    If adopted, the recommendations effectively would cause the defined benefit plan to be phased out over the next 30 years because of diminished participation.

    "Over 30 years we contemplate the defined benefit system will gradually be of less significance," Mr. Monks said. "Younger people have been subsidizing the system. We're giving new hires and people with less than 10 years the opportunity to opt out," Mr. Monks said of the proposals.

    "You have to wait 25 years before you benefit from the employer contribution. (The fund) is heavily weighted to people who stay a long time. It's the reverse of being portable," Mr. Monks said.

    As few as 25% of employees stay with the plan long enough to reap the benefits, Mr. Monks added.

    "It (the defined benefit plan) will turn out to be too expensive in light of the number of people who will go into Social Security," he said.

    The bipartisan commission also has recommended a piece of legislation asking for a transition committee of plan participants, state officials and a chairman representing the public to effect the changes, which will take several years. The development of federal system took about five years, Mr. Monks said.

    The report was prepared on behalf of the commission by William M. Mercer and presented to the governor Jan. 19.

    Mr. Monks said no significant changes are expected in the investments of the fund, which have had very good performance.

    Defined contribution investments would be overseen by state trustees, as in the federal system. Only the packaging would change, so that what is managed in a separate account for the defined benefit plan might be offered as an "option" of the defined contribution plan, he said.

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