Legislative Commission on Pensions and Retirement
What is "augmentation" and why would the 2018 omnibus pension and retirement bill include amendments that end it?
Susan Lenczewski, Executive Director
April 13, 2018
We are frequently asked about augmentation. Under the Minnesota statutes that govern pension benefits for public employees, 'augmentation' is an automatic annual increase in the pension benefit accrued by a member who is no longer in public service, but has not yet reached retirement age. These members are sometimes referred to as deferred vested members because, while they have a vested pension benefit, they are having to 'defer' starting their pension benefit until they reach retirement age.
Augmentation is a set percentage that is applied to the amount of the accrued benefit and increases that benefit, which continues to grow until the member elects to start taking it. For example, if an MSRS or TRA member leaves public employment after having accrued a pension benefit of $1,000 per month, the member's benefit increases each year by 2%. One year after leaving employment, the monthly benefit increases to $1,020; two years, $1,040; three years, $2,061; four years, $1,082; five years, $1,104; six years, $1,126; and so on, until the member reaches retirement age and elects to begin taking his or her pension benefit.
One of the cost-saving benefit reforms in the 2018 omnibus pension and retirement bill is to eliminate augmentation prospectively. Why augmentation?
- Elimination of augmentation appears to have bi-partisan support. The 2018 pension bill, including the provisions that end augmentation prospectively, was unanimously approved by the Legislative Commission on Pensions and Retirement and the Senate, and none of the legislators taking part in these votes raised objections to eliminating augmentation.
- No other governmental pension plan nation-wide provides this benefit except in South Dakota where this benefit was included in a new tier of benefits offered to recently hired employees, in exchange for a less generous pension formula.
- Augmentation is an unknown concept in the private sector; no private sector defined benefit pension plan provides cost-of-living adjustments to deferred vested benefits. Most private sector pension plans do not even pay cost-of-living adjustments on retiree benefits.
- The staffs and executive directors at Minnesota's public pension funds have stated that this is not an easily understood benefit and communication on this topic is seldom effective, including when communicating to members who request a refund of their employee contributions and will thereby not benefit from augmentation. According to one TRA representative, the benefit is difficult to communicate and seldom understood when it is communicated.
- It is not necessary to retain augmentation simply to give former employees another reason not to take a refund of their employee contributions. The most persuasive reasons not to take a refund of employee contributions are that the member will forfeit the value of all employer contributions made on his or her behalf and will lose the right to receive a pension benefit at retirement age. If that is not incentive enough, then other options could be considered to incentivize former employees to leave their employee contributions in the pension fund and not take a refund. These include:
- Eliminating interest on the refund (interest is currently paid on refunds at 4% that is credited beginning with the year in which the contributions were made)
- Permitting refunds only for a brief period of time after leaving employment (such as the first two years)
- Augmentation does not encourage portability, if 'portability' is defined as the ability of an employee to leave a position and take his or her retirement benefits to the next position. Augmentation, in fact, inhibits the transfer of pension benefits.
- Augmentation benefits all former employees, including those:
- whose employment has been terminated because of poor performance, inappropriate or unprofessional behavior, or worse;
- who decide to leave employment to go to more lucrative positions in the private sector; and
- who decide to leave employment to move to another state or leave for personal reasons, such as to raise children or pursue educational goals.
- As active employees and employers are asked to contribute more to fund their pension benefits, with no increase in those benefits, it is reasonable to eliminate benefits, such as augmentation, for individuals who no longer work for a public employer and, thus, can no longer contribute to the funding of their pension benefits.
- In this environment of declining funded ratios and increasing contribution deficiencies, it is reasonable to focus on retaining core benefits for employees who work until retirement, at the expense of benefits for individuals who have chosen to leave public service employment mid-career.
- Based on PERA's experience when augmentation was ended in 2010, there were no identifiable adverse behavioral changes, suggesting that ending augmentation had no discernable impact on the rate of refunds or employment termination. This was observed in a workforce that tends to be more mobile and have higher rates of mid-career departures from public service than the workforces covered by MSRS and TRA.
- In view of the lack of understanding of this benefit, it is reasonable to question whether public employees make mid-career employment decisions with any regard to whether or not their pension benefit will be augmented after they leave public service.