VRS Director: Employee Contribution Necessary to Make System Sustainable

Robert Schultze, director of the Virginia Retirement System, said the state must come up with a more predictable plan for funding retirement benefits – one that will require employees to share the risks involved with state government. Although VRS is doing OK now, even with the current shortfall, the system is not sustainable as is, he said.

Schultze spoke Monday at a financial planning and retirement program sponsored by University of Virginia Human Resources.

Employees enrolled in the VRS were required to contribute 5 percent of their salary to the fund until 1983, when the General Assembly chose to pay the employees' portion in lieu of providing a salary increase.

In 2010, legislation required employees hired July 1, 2010 and after to begin contributing this 5 percent member contribution. These employees are in "VRS Plan 2." All other employees enrolled in VRS, hired before July 1, 2010, are in what VRS refers to as "Plan 1." The University has 5,647 Academic Division faculty and staff members and more than 950 Medical Center employees in VRS.

This year, the General Assembly passed legislation requiring employees who are VRS Plan 1 members to begin paying the 5 percent contribution starting June 25. To help offset the cost of the contribution, the General Assembly also approved a 5 percent pay raise for VRS Plan 1 members, effective the same day.

Because of federal FICA taxes, these employees will see a slight reduction in their take-home pay, Schultze said. Anne Broccoli, U.Va.'s director of benefits, said the FICA taxes will result in an average decrease of $8 or $9 per pay period for those paid biweekly; they will see the reduction in their July 8 paycheck. Those paid monthly will see a change of about $16 to $18, starting with the check dated Aug. 1. 

Schultze said it is a case of "bad news/good news": Despite the reduction in take-home pay now, the higher salary figure will give employees higher retirement pay, because retirement pay is based upon the highest three years' salary for those in Plan 1 and highest five years for Plan 2, as well as age and years of service. 

Approximately two-thirds of an employee's VRS benefit is funded by investment gains and the other third by state and employee contributions, he said.

The amount needed to pay retirement benefits, including those for the retirees' beneficiaries, is projected 85 years into the future for each employee. The projection includes the assumption of a certain return on investments. The state's actuaries currently estimate a 7 percent investment return, but the actual return varies from year to year.

The contributions may need to be increased in the future, Schultze warned. "I think the contribution portion has to increase," he said.

He explained, "The past underfunding of contributions has to be made up over the next 10 to 15 years, and we don't think the markets will be as generous to investors in the future as they have been in the past and therefore can't be relied upon to make up for contribution shortfalls."

Before the dot-com bust in 2001, the VRS appeared overfunded due to high returns, so the General Assembly reduced the amount of its contribution. In fact, the state regularly varies the contribution amount depending on how the economy is doing, Schultze's slides showed.

After the stock market fell in 2001, VRS assets fell to $34.4 billion by 2002, but recovered and rose to $58 billion by 2007. Then the housing bubble burst, setting off the Great Recession. After another dip in 2009, investments are doing better and assets have rebounded to $54.8 billion.

But based on projections of how much money would be needed to pay pensions, the VRS appears to be underfunded by more than $17 billion, or about 25 percent.

"If the amount drops below 80 percent, it makes the actuaries nervous," Schultze said. "The risk needs to be shared by the state and the individual."

Other reforms have already been made to the retirement plan for employees hired after July 1, 2010, and this year the General Assembly asked the Joint Legislative Audit and Review Commission to conduct a retirement study with recommendations legislators will consider for 2012.

A summary of VRS-related legislation and list of questions and answers are posted here.

— By Anne Bromley

Media Contact

Anne E. Bromley

University News Associate Office of University Communications