Supplemental Retirement Plan Lump Sum Change

Page updated on Jun 25, 2018 at 3:16 PM

REMINDER: December 1, 2018 Retirement Deadline

August 15, 2018 is the deadline to apply for retirement if you plan to retire on December 1, 2018 and elect the Supplemental Retirement Plan’s lump sum payment option calculated using the current 5% interest rate. 

If you plan to apply for retirement before this deadline, now is the time to contact the Pension Administration Division and set up an appointment so staff can assist with getting your paperwork underway. Employees are strongly encouraged to return their retirement application by July 25.  Retirement applications must be received by August 15 to be eligible to receive a lump sum payment under the current rate.

To book an appointment before August 15, complete the Appointment Request form BEFORE August 1 and email it to Pension staff at retirement@alexandriava.gov. Act fast—appointments are filling up quickly!

Approved Change

In May 2017,  City Council amended the Supplemental Pension Plan to assume a higher interest rate to calculate lump sum payments. This change helps safeguard the health of the Plan, but also results in smaller lump sum payments to retirees.  

On January 1, 2018 the interest rate used to calculate lump sum payments was changed to a fixed rate of 5%. Lump sums paid before 2018 were calculated using 2.86% based on the 30-year U.S. Treasury rate. This change does not affect members who choose any of the monthly payment options.

On May 3, 2018 as part of the FY 2019 budget, City Council adopted a phase-in schedule for additional increases in the interest rate used to calculate the lump sum payment, until it reaches the Plan's assumed rate of return of 7%.

The adopted phase-in schedule is as follows:

  • January 1, 2018 - 5%
  • January 1, 2019 - 5.5%
  • January 1, 2020 - 6%
  • January 1, 2021 - 6.5%
  • January 1, 2022 - 7%

Other Resources

Original Lump Sum Change video from before Council's adoption explaining the then-proposed change.


Background

City employees who are members of the Virginia Retirement System (VRS), and certain other employees, are members of the Supplemental Retirement Plan. Members receive an additional retirement benefit from the Plan. The Plan is serviced by Prudential and administered by the City Manager with advice from the City's Supplemental Retirement Board. In 2016 the Board recommended a change to the interest rate for the lump sum payment option available to members when they retire, and the City Manager proposed this change to City Council as part of the FY 2018 Budget. This change, which does not affect the monthly payment options, is intended to better reflect expected market rates of return and help ensure the long-term financial sustainability of the Plan. While the Plan is healthy today, this adjustment is necessary to protect its health for the foreseeable future. 

The City created the Plan in 1970 to provide additional retirement payments beyond those provided by VRS alone. The benefits provided by the Plan are unique to the City of Alexandria. Employees and retirees of most jurisdictions that participate in VRS do not receive an additional pension benefit. 

The Plan calculates a retirement benefit for each member, which is based on the member's years of service and salary. This retirement benefit is payable as a guaranteed monthly payment to the member from the Plan for the rest of his or her life. At the time of retirement, instead of the guaranteed monthly payment, the member may decide to choose from additional options for how to receive payments. Many members choose to receive monthly payments, but another option is to receive a one-time lump sum payment. The lump sum payment is calculated on the assumption that members will invest the money during their retirement years and ultimately derive a benefit equivalent to the monthly payment options.

The Plan currently assumes that members can invest the lump sum payment at the 30-year U.S. Treasury rate (2.86% as of January 2017), which is the rate of return for some U.S. government bonds. However, members often choose private investment vehicles that return much higher rates than bonds. As a result, the current lump sum option can be worth far more than the monthly payment options, which creates an unintended disparity between members. Since the Plan is investing its funds at actual market rates but calculating the lump sums based on unrelated rates, the Plan pays out far more than originally intended. This hurts the long-term sustainability of the Plan.  


What is Not Changing?

The approved change does not impact how the Plan calculates any of the monthly payment options. The change does not eliminate the option to elect a lump sum payment. Finally, the change has no effect on VRS benefits, including the PLOP (partial lump sum payment) option available within VRS.


Who is Affected?

The approved change takes effect for any lump sum payments made on or after January 1, 2018. This change will only affect Plan members who are planning to retire after December 1, 2017, AND elect the lump sum payment option. To retire on December 1, an employee must submit the retirement application by August 15, 2017.

The following groups of employees are members of the Plan:

  • Full-time General Schedule employees
  • Part-time General Schedule employees scheduled to work 50% time or more
  • Deputy Sheriffs, Medics, and Fire Marshals
  • Employees of the Virginia Department of Health in Alexandria and some other state employees working in Alexandria
  • Members of City Council

Sworn Police Officers and Firefighters are not members of the Supplemental Retirement Plan and would not be affected by this change.


When Will the Change Take Effect? 

The approved changes will take effect on January 1, 2018.

Employees intending to receive a lump sum under the current 2.86% rate must retire on December 1, 2017. Employees are recommended to return their retirement application by July 15, 2017. Retirement applications must be received by August 15, 2017 to be eligible to receive a lump sum payment under the current rate.

Timeline:

  • Initial Notification: February 2017
  • Participant Outreach: February-April 2017
  • City Council Approves Change: May 2017
  • Recommended Date to Return Retirement Application: July 15, 2017
  • Retirement Application Deadline: August 15, 2017
  • Last Retirement Date Under Existing Plan Rules: December 1, 2017
  • Effective Date of Plan Change: January 1, 2018

Lump Sum Calculator

The Pension Division has created a calculator to help employees estimate their lump sum payments under the new rules. 

  • Lump Sum Calculator - UPDATED 
  • Instructions
  • Update: the Pension Office has been asked to provide an updated lump sum estimate calculator with a variable rate which allows the user to select the interest rate used in estimating the lump sum benefit.  This advanced calculator is provided here:  Lump Sum Calculator_variable rate.

Frequently Asked Questions

The Pension Division has tried to answer many of the questions that are frequently asked about the lump sum change.

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