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June 19, 2014 01:00 AM

Detroit to freeze city pension funds, replace with hybrids

Christine Williamson
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    Morningstar

    Detroit's two public pension funds will be frozen on June 30 and replaced with new hybrid plans as part of the city's efforts to exit Chapter 9 bankruptcy protection this fall.

    Three city ordinance change proposals were filed Thursday that will enable Kevyn D. Orr, the city's emergency manager, to freeze the $2.8 billion Detroit General Retirement System and the $3.4 billion Detroit Police & Fire Retirement System.

    The move is “designed to strengthen the city's pension funds while maintaining defined benefit retirement programs,” Mr. Orr said in a news release on Thursday.

    If approved by the City Council, the ordinances will move all current city employees and new hires into the new hybrid pension funds on July 1, Mr. Orr said in the news release.

    Current employees now in the General Retirement System will move into the New GRS Active Pension Plan, which requires a 4% employee contribution and a 5% employer contribution of base salary.

    Current employees now in the Police & Fire Retirement System will move into the New PFRS Retirement System with a 6% employee contribution and employer contributions of 12.25% for firefighters and between 11.2% and 12.25% for police officer. Public safety employees hired after June 30 will make an 8% employee contribution.

    Mr. Orr did not outline features of the hybrid plans that require employees to bear some of the investment risk in his news release, but the fourth version of the city's recovery plan filed in bankruptcy court on May 5 describes “risk-shifting levers” that will be applied if the plans' funded status falls based on a “three-year look back of smoothed returns.”

    The risk-shifting levers to increase the funded status of each plan to 100% over the following five-year period include raising employee contributions, eliminating cost-of-living-adjustments, and in the case of the New GRS plan, reducing the benefit accrual rate, according to court documents.

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