Pension Terminology

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Terms and Definitions

A number of important pension terms and definitions are outlined below:

TERM

DEFINITION

Actuarial Valuation This is a procedure actuaries use to help pension funds (such as CalPERS) establish the amount a plan needs to collect to meet the fund's current and future payment obligations.                                    
Benefit Formula

Also known as "pension benefit formula," this calculation determines the amount a retiree receives in a defined benefit pension plan.  This amount is typically based on a formula which takes the following factors into account:

  1. The number of service years the employee has in the retirement system;               
  2. The employee's pensionable wage level;
  3. The employee's age at the time of retirement;
  4. A percentage factor

For a more in depth discussion of the benefit formula, including examples, please visit this link

California Public Employees' Retirement System (CalPERS) This is a pension system established by the Public Employees Retirement Law in 1932.  Novato, along with many other local agencies, contracts with CalPERS for retirement benefits.  
Collective Bargaining  California's labor relations law requires local agency employers to negotiate with groups of employees in good faith to try to determine mutually agreeable employement conditions.  Salaries and benefits, including pension and other post-employment benefits, are common subjects for negotiations.
Defined Benefit Pension Plan This plan provides public employee retirees with a guaranteed lifteime monthly income, based on a predetermined statutory formula. 
Defined Contribution Plan Similar to a 401(k) plan. This plan starts with a specified annual contribution amount from the employer, the employee, or both. The benefits received by the retiree are based on any employer and employee contributions and investment earnings (subtracting administration fees). The only guaranteed amount is the annual employer and employee contributions because future benefits may fluctuate based on investment earnings.
Employee Contribution The amount an employee contributes to help fund the retirement program.
Employer Contribution

The amount an employer contributes to fund the employer's pension trust fund on a sustained, ongoing basis in order for the agency to meet is obligations to employees.  The employer contribution is the result of actuarial calculations and generally consists of two components:

  1. Normal costs - including the current and future costs of employee pensions; and
  2. Amortization of any unfunded liability.
Employer Paid Member Contribution (EPMC) As part of collective bargaining, a local agency may agree to pay all or part of the employee's contributions required to be paid by specified members.
Hybrid Pension Plans     These types of plan offer a combination of a defined benefit plan and a defined contribution plan to employees.
Miscellaneous Employees These are "non-safety" or general employee participants in public pension systems.
Other Post-Employment Benefits (OPEB) In addition to defined benefit pension plans, many employers provide other post-employment benefits as part of the overall compensation package to employees.  This includes employer-provided health insurance for retirees, as well as other forms of benefits that can be received after retirement.
Pension Obligation Bonds When a public agency has an unfunded liability in its defined benefit program, it can reduce that liability over time as part of its annual require pension contribution. Some agencies have elected to incur debt through the issuance of pension obligation bonds in an effort to reduce their unfunded liability as part of an overall strategy for managing pension costs.
Public Safety Employees In defined benefit formulas, police, sheriffs, firefighters, and other public safety employees have their pension benefits calculated at a higher rate, with corresponding higher employer and employee contributions.
Second Tier Options (Tier 2) A tier refers to a group of employees whose retirement benefits are different from those of other colleagues at the agency. For example, a new benefit tier might apply to employees hired after a specific date, while those hired previously receive different benefits.
Service Credit Under a defined benefit pension plan, the length of an employee's employment or total years within the pension system is one element used to calculate the benefit formula. City employees generally receive one year of service credit for each year worked.
Vested Benefits In a defined benefit pension plan, vesting means the employee or participant is eligible to receive pension benefits when he or she meets length of service and age requirements.  Vested benefits cannot be take away even if the employee stops working for the employer or never works in covered employment again.
Vested Rights The legal concept that, once earned, the employee becomes entitled to the benefit promised.  To what extent public employers are permitted to alter the vested rights of their employees is a topic of much debate and continues to be the subject of litigation.

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