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Report Outlines Options for States To Improve Portability of Pensions

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Calling pension portability a "critical issue" ahead for the states, a new report from the National Governors' Association's Center for Policy Research suggests that they redesign their systems to increase the mobility of the teacher workforce.

The issue of portability--which involves allowing the transfer of years of experience and pension contributions from state to state--is gaining more national attention as the number of localities experiencing acute shortages of educators grows. (See Education Week, Sept. 21, 1988.)

Experienced teachers now are reluctant to transfer from one state to another to fill those open positions, the report says, because they would sustain loses in their pension contributions that would decrease their benefits after retirement.

But the report argues that "numerous forces combine to make interstate pension portability and the mobility of educators particularly critical issues."

The report, "Pension Portability for Educators: A Plan for the Future," points out, for example, that over the next decade "higher student enrollments and teacher retirements will mean new hiring in most states." And it suggests that because supply and demand for teachers will vary among the states, "local school districts will be forced to recruit in other states."

"In addition," it warns, "new initiatives to improve the quality of the teacher workforce and the working conditions in schools may alter the recruitment and selection process dramatically as schools compete for the best candidates."

A 'National' Solution?

The report outlines five key options open to states to encourage mobility by reducing the pension losses teachers must now accept if they move across state lines.

In undertaking efforts to improve pension portability, it "may be possible to look toward a national solution, rather than a federal law,'' writes the report's author, Jean G. McDonald of the nga. "In short, the designers of state pension plans can also design plans that are portable."

The major options involve: the vesting period, retirement service-credit purchases, interstate agreements for asset transfers, full portability of past service credits, and defined-contribution plans.

Vesting Period

States could, the report suggests, shorten the vesting period in their pension systems--that is, the amount of time required before a teacher qualifies to be in a particular state's retirement plan.

Currently, according to the report, half of the states require a teacher to be employed 10 years before being vested in the retirement system.

States could move to full and immediate vesting, the report suggests, or follow the new federal tax law's provisions on private pension systems. That law requires a five-year vesting period by 1989.

States can also simplify retire8ment service-credit purchases, according to the report.

Service-Credit Purchases

Currently, 38 states allow teachers to purchase retirement service credits for past, out-of-state teaching experience; each state has its own rules for buying into the system.

Some states, for example, require teachers to work in-state for 10 years before they can purchase a limited number of years of credit, usually fewer years than they have actually taught. Most also require a lump-sum payment for those credits.

Some examples of simplication, the report notes, include allowing teachers to purchase credits for all their years of teaching experience, allowing purchases immediately and through monthly payments, and sharing the cost of the credit purchases with teachers.

Full Portability

States also could develop interstate agreements for the transfer of all pension assets accrued by teachers. The report notes that Canada's provinces have a system that allows for full portability of pension funds.

Under the interstate agreements, the exporting state would calculate the contributions from the teacher and employer to its retirement system. The importing state would calculate the amount that would be required under its provisions for the same period at the same salary.

The lower amount from the two calculations would be transferred to the importing state, and teachers would be required to contribute the difference to the importingstate's retirement system.

Interstate agreements also would be required if states opted for full portability of past service credits, according to the report. Under this option, no funds would be transferred, but teachers would have their years of experience credited from one state to another and the teacher would forfeit any right to the previous pension fund.

The option for portability of service credits would work best, the report says, for states that imported and exported approximately equal numbers of teachers.

Another option for full portability would be the creation of defined-contribution plans, such as those offered employees of colleges and universities.

Under such plans, amounts contributed by the employee and em4ployer are placed in an investment fund, with the employee bearing the risk of the investment.

The report points out, however, that states are unlikely to find this option appealing because of the substantial risks it poses for employees. But it argues that states may want to provide such plans on "a menu of benefit options" to teachers.

The center for policy research prepared the report in response to requests by the governors for more information on the subject. The nga and the National Conference of State Legislatures are both on record as favoring increased pension portability.

Copies of the report can be obtained for $6 from the National Governors' Association, Publications Desk, Suite 250, 444 N. Capitol St., Washington D.C. 20001.

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