Legislative Commission on Pensions and Retirement
Principles of Pension Policy

(Updated 2/10/2009)

I. Preamble
The Legislative Commission on Pensions and Retirement recommends the following statement of principles, which have been developed since 1955, as the basis for evaluating proposed public pension legislation.  Problems can be avoided or minimized if a sound set of principles is used as a guideline in developing the various public pension funds and plans.
II. Substantive Principles
A. Purpose of Minnesota Public Pension Plans
1. Minnesota public pension plans exist to augment the Minnesota public employer's personnel and compensation system by assisting in the recruitment of new qualified public employees, the retention of existing qualified public employees, and the systematic out-transitioning of existing public employees at the normally expected conclusion of their working careers or the systematic phasing-out of existing employees who are nearing the normally expected conclusion of their full-time working careers by providing, in combination with federal Social Security coverage, personal savings and other relevant financial sources, retirement income that is adequate and affordable.
2. Minnesota public pension plans should play their appropriate role in providing financial security to public employees in retirement.
3. As Minnesota public employee workforce trends develop, Minnesota public pension plans should be sufficiently flexible to make necessary adaptations.
B. Structure of Minnesota Public Pension Coverage
1. Creation of New Pension Plans
a. Minnesota public employers, on their own initiative, without legislative authorization, should not be permitted to establish or maintain new public pension plans, except for volunteer firefighter relief associations.
b. New pension plans for volunteer firefighters should be organized on a county or comparable regional basis if possible.
2. Mandatory Public Pension Plan Membership
To the extent possible, membership in a public pension plan should be mandatory for the personnel employed on a recurring or regular basis.
3. Consolidation of Public Pension Plans by a Minnesota Public Employer
a. The state, with the second largest number of public employee pension plans in the nation, would benefit from a more rational public pension plan structure.
b. The voluntary consolidation of smaller public pension plans should be encouraged, with the development of county or comparable regional public employee pension plans in place of a large number of small local plans to assist in this consolidation if a statewide public pension plan is deemed to be inappropriate.
c. In a consolidation or merger of public employee pension funds, there should be no loss of current pension benefits by any member of the consolidating or merging funds.
d. In a consolidation or merger of public employee pension funds, approval of the affected Boards of Trustees or Directors, the members, and the employers of the consolidating or merging funds should be obtained before the consolidation or merger is finalized.
C. Pension Benefit Coverage
1. General Preference for Defined Benefit Plans Over Defined Contribution Plans
a. Defined benefit plans, where they currently exist, should remain as the primary retirement coverage for Minnesota public employees.
b. Defined contribution plans are particularly appropriate where interstate portability or private sector-public sector portability is a primary consideration of the public employee group, where the public employee group lacks civil service or analogous employment protections, or where the defined contribution plan is a supplemental pension plan.
2. Social Security Coverage
Except for public employees who are police officers or firefighters, coverage by the federal Old Age, Survivors, Disability and Health Insurance (Social Security) Program should be part of the retirement coverage for Minnesota public employees.
3. Equal Treatment Within Pension Plans
There should be equal pension treatment of public employees in terms of the relationship between benefits and contributions.
4. Appropriate Normal Retirement Ages
The normal retirement age should be set in a reasonable relationship to the employability limits of the average public employee and should differentiate between regular public employees and protective and public safety employees.
5. Appropriate Early Retirement Reductions
Public employee pension plans should not subsidize early retirement benefits and, except for appropriately designed early retirement incentive programs, retirement benefits should be actuarially reduced for retirement before any applicable normal retirement age.
6. Uniformity and Equal Benefit Treatment Among Plans
There should be equal pension treatment in terms of the relationship between benefits and contributions among the various plans and, as nearly as practicable, within the confines of plan demographics, retirement benefits and member contributions should be uniform.
7. Adequacy of Benefits at Retirement
a. Benefit adequacy requires that retirement benefits respond to changes in the economy.
b. The retirement benefit should be adequate at the time of retirement.
c. Except for local police or firefighter relief associations, the retirement benefit should be related to an individual's final average salary, determined on the basis of the highest five successive years' average salary unless a different averaging period is designated by the Legislature.
d. Except for local police or firefighter relief associations, the measure of retirement benefit adequacy should be at a minimum of thirty years service, which would be a reasonable public employment career, and at the generally applicable normal retirement age.
e. Retirement benefit adequacy must be a function of the Minnesota public pension plan benefit and any Social Security benefit payable on account of Minnesota public employment.
8. Postretirement Benefit Increases
a. Retirement benefits should be increased during the period of retirement to offset the impact of economic inflation over time in order to maintain a retirement benefit that was adequate at the time of retirement.
b. The system of periodic post retirement increases should be funded on an actuarial basis.
9. Portability
To the extent feasible, portability should be established as broadly as possible for employment mobile public employees.
10. Purchases of Prior Service Credit
Purchases of public pension plan credit for periods of prior service should be permitted only if it is determined by the Commission:
* that the period to be purchased is public employment or relates substantially to the public employee's career,
* that the purchase payment amount from the member or from a combination of the member and the current or former employer must equal the actuarial liability to be incurred by the pension plan for the benefit associated with the purchase, appropriately calculated, without the provision of a subsidy from the pension plan unless an error or an omission by the pension plan was responsible for the loss of service credit,
* that the purchase payment amount must include a minimum payment by the member of the equivalent member contributions, plus compound interest from the purchase period to the date of payment unless the employer committed a particularly egregious error,
* that the purchase payment is the responsibility of the member, with the current or former employer authorized to pay some or all of the portion of the payment amount in excess of the minimum member payment amount, unless the employer has some culpability in the circumstances giving rise to the purchase and then a mandatory employer contribution may be imposed, and
* that the purchase must not violate notions of equity.
11. Deadline Extensions and Waivers
Deadline extensions or waivers should be permitted only if, on a case-by-case basis, it is determined that there is a sufficient equitable basis for the extension or waiver, the extension or waiver does not involve broader applicability than the pension plan members making the request, and that the extension or waiver is unlikely to constitute an inappropriate precedent for the future.
12. Vesting Requirement Waivers
Waivers of vesting requirements should be permitted only if, on a case-by-case basis, it is determined that there is a strong equitable argument to grant the waiver for the requesting public employees.
13. Reopening Optional Annuity Elections
Reopenings of optional annuity elections should not be permitted.
14. Benefit Increase Retroactivity
Retroactivity of benefit increases for retirees and other benefit recipients should not be permitted.
15. Repayment of Previously Paid Benefits and Resumptions of Active Member Status
Repayments of previously paid benefits and resumptions of active member status should not be permitted.
16. Duplicate Public Pension Coverage for the Same Employment
Unless supplemental pension plan coverage is involved, public employees should not have coverage by more than one Minnesota public pension plan for the same period of service with the same public employer.
17. Reemployed Annuitant Earnings Limitations
a. Limitations on the earnings by reemployed annuitants should apply only to the reemployment of an annuitant by an employing unit that is a participating employer in the same public pension plan from which the annuitant is receiving a pension benefit.
b. Reemployed annuitant earnings limitations should be standardized to the extent possible among the various Minnesota public pension plans.
18. Disability Definitions
The definitions of what constitutes a disability giving rise to a disability benefit should be standardized to the extent possible, recognizing the differences in the hazards inherent in various types of employment.
19. Design of Early Retirement Incentive Programs
a. Early retirement incentive programs can have a valid role to play in the public sector personnel system.
b. Early retirement incentive programs should be targeted to situations when a public employer needs to reduce staffing levels beyond normal attrition.
c. Early retirement incentive programs should be financed appropriately, with the cost of the benefits provided under the early retirement incentive program borne wholly by the same public employer that gains any compensation savings from a staffing level reduction, without any subsidy from the affected public pension plan.
20. Future Pension Coverage for Privatized Public Employees
Because of applicable federal regulation, employees of public employers that are privatized should not be allowed to continue public pension plan coverage in the future.  Privatized public employees should receive adequate replacement pension coverage and a better resolution of this topic should be raised with appropriate federal government officials.
21. Supplemental Pension Plans
a. Public employees should be encouraged to engage in personal savings for their retirement.
b. The state should assist this process by making personal retirement savings opportunities available to public employees.
c. Public employers should have an opportunity to elect to provide financial support to established supplemental pension arrangements for their employees.
22. No Intended Ultimate Benefit Diminutions
a. In recommending benefit plan modifications, the imposition of reductions in overall benefit coverage for existing pension plan members should not be recommended.
b. The imposition of a reduction in overall benefit coverage may be imposed for new pension plan members in order to achieve sound pension policy goals.
c. A reduction in some aspect or aspects of benefit coverage may be recommended in combination with a proposed benefit increase or benefit increases in implementing sound pension policy goals.
D. Pension Plan Funding
1. Equal Pension Financing Burden for Generations of Taxpayers
There should be utilized a financing method that will distribute total pension costs fairly among the current and future generations of taxpayers and that will discourage unreasonable benefit demands.
2. Actuarial Funding of Pension Benefits
a. Except for statewide retirement plans with small phasing-out memberships, retirement benefits in Minnesota defined benefit plans should be funded on an actuarial basis.
b. The accruing liability for currently earned pension plan service credit, as measured by the actuarially determined level percentage of covered salary entry age normal cost of the defined benefit pension plan, should be funded on a current basis.
c. The administrative expenses of the defined benefit pension plan should be funded on a current basis.
d. Retirement plan accrued liabilities and normal cost should be determined using the entry age normal actuarial cost method.
e. Pension plan assets should be valued using a method that approaches market values, but smoothes out short-term volatility.
f. Unfunded actuarial accrued liabilities of a defined benefit pension plan, determined by subtracting the actuarial value of assets from the calculated actuarial accrued liability, should be amortized over an extended period of time, but should not exceed thirty years.
g. A portion of any amount by which the actuarial value of assets exceed the actuarial accrued liabilities of a defined benefit plan should be recognized as a credit against the normal cost, and the amount of the credit should be calculated in the same manner as if it were an amortization contribution with a 30-year amortization target date.
3. Allocation of Funding Burden Between Members and Employers
a. The actuarial cost of retirement benefit coverage should be financed on a shared basis between the public employee and the public employer.
b. For general public employee retirement plans that are not closed to new members, the employee and employer should make matching contributions to meet the normal cost and the administrative expenses of the defined benefit pension plan.  Both the employee and the employer also may be required to share some financial responsibility for funding the amortization requirement of the defined benefit pension plan.
c. For general public employee retirement plans that are closed to new members, the employee and employer contributions should be set based on the contribution structure of analogous retirement plans.
d. For protective and public safety employees covered by a statewide public pension plan, the employee should pay forty percent of the total actuarial costs of the defined benefit pension plan and the employer should pay sixty percent of the total actuarial costs of the defined benefit pension plan.
e. For protective and public safety employees covered by a local relief association, employee and employer contributions should be considered in light of the special circumstances and history unique to that association.  Employees should pay an appropriate portion of the normal cost and administrative expenses of the relief association.
f. Actuarial reporting laws should be structured to permit easy application and monitoring of any contribution policy.
4. Funding of Postretirement Adjustments
a. Ad hoc postretirement adjustments should be funded separately from the regular defined benefit public pension plan financing and should not be added to the unfunded actuarial accrued liability of the defined benefit public pension plan.
b. Automatic postretirement adjustment mechanisms should be funded on an actuarial basis as part of the actuarial requirements and contribution structure of the defined benefit public pension plan.
5. Appropriate Basis for Actuarial Assumption Changes
a. Actuarial assumption changes should only be based on the results of the gain and loss analyses in the regular actuarial valuation reports and the results of a periodic experience study.
b. Actuarial assumption changes should stand on their own merit, and should not be changed solely to improve benefits or to lower contribution rates.
6. Appropriate Basis for Modifying Contribution Rates
Member and employer contribution rates should only be modified based on the trend in total support rate deficiency or sufficiency revealed in the regular actuarial valuation reports.
E. Pension Plan Investments
1. Appropriate Investment of Public Pension Assets
a. Public pension plan investment authority should be as uniform as is practicable.
b. Public pension plan investments should be made in accord with the prudent person rule.
c. Public pension plan investment authority should be further regulated by a list of authorized investment types, which should appropriately differentiate between pension plans based on asset size and investment expertise.
d. Written investment policies should be maintained for the investment of public pension plan assets.
e. Public pension plans should regularly report on their investments, including performance.
2. Sole Membership Benefit Dedication of Plan Assets
Recognizing that public pension plan assets exist to defray current and future pension benefit payments, public pension plan assets should be dedicated to the sole benefit of the plan membership in their investment and expenditure.
F. Compliance With Federal Pension Plan Regulation
Consistent with the principles of federalism, dual sovereignty, and comity among governmental entities, public pension plan provisions and administrative operations and activities should attempt to comply with applicable federal pension plan regulation in order to maintain the tax qualified status of public pension plans.
G. Public Pension Plan Fiduciary Responsibility
1. Strong Fiduciary Responsibility Standards
Public pension plan activities should be conducted in accord with strong fiduciary responsibility standards and regulation.
2. Remedies for Fiduciary Breach
Failures to conduct public pension plan activities in accord with the applicable fiduciary responsibility standards and regulation should be subject to appropriate fiduciary breach remedies.
III. Procedural Principles of Pension Policy
A. Adequate Pension Funding
1. Pre-Existing Funding
No proposed increase in pension benefits for any public pension plan should be recommended by the Legislative Commission on Pension and Retirement until there is established adequate financing to cover the pre-increase normal cost, administrative expense, and amortization contribution requirements of the defined benefit public pension plan calculated according to the applicable actuarial reporting law.
2. Funding Increase
No proposed increase in pension benefits for any defined benefit public pension plan should be recommended by the Legislative Commission on Pensions and Retirement unless there is included, in the proposal, adequate financing to meet any resulting increase in the normal cost and amortization contribution requirements of the defined benefit public pension plan that are estimated by the applicable actuary to result from adopting the proposed benefit increase.
B. Preference for General Legislation
No pension legislation of local or special limited application should be recommended by the Legislative Commission on Pensions and Retirement if the purpose and the intent of the proposed legislation would be better served by legislation of general statutory application or if the proposed legislation constitutes a significant departure from previously established uniform pension policy.  Pension legislation affecting local police or salaried firefighters may be recommended by the Legislative Commission on Pensions and Retirement in light of any special circumstances that are unique to the relief association.
C. Explicit Application of Principles of Pension Policy
1. Measurement Against Principles
Each proposed change in retirement benefits or financing should be measured by the Legislative Commission on Pension and Retirement against the current principles of pension policy as part of its consideration to insure that there is adherence to sound pension policy.
2. Formal Reporting of Consistency
The Commission's determination concerning compliance with the principles of pension policy should be a part of the Commission's formal report of its recommendations on proposed public pension legislation.