Here is a chronological history of important developments relating to the New Hampshire Retirement System. Note: Unless otherwise indicated, the changes to the plan described below were the result of legislative enactments.
RSA 100-A was enacted to establish the New Hampshire Retirement System (NHRS, the retirement system) by consolidating four separate plans for teachers, police officers, firefighters, and employees of the state and participating political subdivisions. RSA 100-A contained separate plan provisions for Group I (Employee and Teacher) and Group II (Police and Fire). The Board of Trustees consisted of 11 members, chaired by the State Treasurer, with two trustees each from the four member categories, the State Comptroller, and the Bank Commissioner.
Calculation for Average Final Compensation (AFC) changed from the highest 5 years to the highest 3 years.
Group II retirement eligibility changed from age 50 with 25 years of service to age 45 with 20 years of service. Group II benefit multiplier increased from 2.0% per year of service to 2.5%.
In response to a request from the retirement system, the Internal Revenue Service (IRS) issued a favorable determination letter stating that the retirement system was a qualified governmental plan under Internal Revenue Code (IRC) Section 401(a). Subsequent determination letters in 2011 and 2014 re-confirmed that the NHRS plan documents are in compliance with the IRC.
State contribution toward political subdivision employer contributions for teachers reduced from 40 percent to 35 percent. State began contributing 35 percent of the employer contribution for police and fire members working for political subdivisions.
Member contributions standardized at 9.3% for Group II and 4.6% up to the Social Security taxable wage limit for Group I (and 9.2% on any excess). Previously, member contribution rates were assessed on a sliding scale based on age, and, for Group I only, age and gender.
Board of Trustees restructured to replace State Comptroller and Treasurer with two non-member trustees, one of whom would be chair.
Special Account was created to pay for cost-of-living-adjustments (COLAs) and other post-employment benefits (OPEB) from “excess earnings” above the retirement system’s assumed rate of return. In subsequent years, the definition of “excess” was modified by the Legislature periodically. Previously, COLAs were typically paid for through General Fund appropriations. Dedicating investment income over a certain level to pay for additional benefits – known as “gain-sharing” – left NHRS vulnerable in down markets, as investment income in strong years was essentially capped and the income diverted into the Special Account by gain-sharing was unavailable to offset years in which the retirement system did not achieve its assumed rate of return. This undermined the retirement system’s ability to achieve its targeted assumed rate of return over the long term.
NH Constitution amended. Part I, Article 36-a required NHRS to set actuarially sound employer contribution rates which must be paid in full by employers, and established that the pension trust fund is for the exclusive benefit of the membership, not to be diverted for any other purpose.
Autonomy of NHRS from the executive branch confirmed by the NH Supreme Court in NHRS v. Sununu. This case recognized the importance of maintaining independence for the retirement system so that it could operate for the exclusive benefit of its members and beneficiaries, and, if necessary, take action to protect the trust fund.
Legislation authorized NHRS to engage outside counsel for investment and tax matters, and for other purposes authorized by the Attorney General.
Automatic survivor benefit of 50% of the pension benefit to surviving spouse of Group II retiree created.
Group I Social Security offset eliminated, replaced by 10% reduction at age 65. Group I contribution rate increased from 4.6% to 5%.
Medical Subsidy benefit created for Group II members. This benefit, which the Legislature later extended to other member groups, is a payment made by NHRS to the qualified retired member’s former employer to subsidize the cost of health insurance. The amount of the payment is set in statute. In subsequent years, the Medical Subsidy was closed to members who commenced service or retired after specific dates.
Board size increased from 11 to 13 to include trustees from the House and Senate.
Actuarial valuation indicated dramatic increase in unfunded liability from $3.9 million to $217.5 million, attributed to several factors including benefits changes enacted in prior years and revised mortality assumptions. This is a key event in the history of NHRS as it precipitated decisions which substantially contributed to underfunding the plan for more than a decade.
Special Reserve created to credit 50% of any funds that would have gone into Special Account for any member classification funded at less than 125%.
Following the report of a commission consisting of five members of the House and Senate, the Legislature passed House Bill (HB) 51, adopting the “Open Group Aggregate” actuarial methodology and setting the assumed rate of return at 9.75% for the fiscal year ending June 30, 1992, resulting in substantially lower employer contributions than projected in prior actuarial valuations. HB 51 led to artificially depressed employer contribution rates from 1991 to 2007. In addition, the decision by the Legislature to select an interest rate assumption was an encroachment on the constitutional mandate requiring the trustees to establish actuarially sound rates. This legislation, coupled with the gain-sharing provision created in 1983, laid the groundwork for the funding issues that came to a head in the 2000s.
Earnable Compensation in final year of employment capped at 150% of Earnable Compensation in next-highest year.
RSA 100-A amended to require that the Open Group Aggregate actuarial methodology be used to determine the plan funded status commencing with the June 30, 1991, valuation and thereafter.
Board sets assumed rate of investment return at 9%.
Actuarial audit by Ernst & Young pointed out the problems associated with funding the Special Account with excess investment earnings from the pension trust, which, they wrote, presented “potential long term dangers to the actuarial soundness of the system…”
Trigger rate for funding Special Account set at 0.5% over the assumed rate of return. The funding mechanism for the Special Account was responsible for about $900 million being diverted from the pension trust between 1990 and 2000.
Additional contribution program, which allowed members to fund an additional annuity that would allow them to retire at 50% of their AFC, expanded to allow additional contributions to offset the Early Service Retirement benefit reduction for Group I members.
Medical Subsidy authorized for teachers retiring with 20 years of service.
Medical Subsidy authorized for employees of political subdivisions retiring with 20 years of service. Medical Subsidy closed to Group II members who were not retired or in service on June 30, 2000, except those hired prior to July 1, 2005, who subsequently retire on Accidental Disability.
Legislation granted NHRS additional functional autonomy from executive and legislative branches with budget charged to trust fund and authority to hire independent legal counsel.
Medical Subsidy authorized for state employees retiring with 20 years of service.
Legislation granted NHRS additional autonomy by separating NHRS employees from the executive branch and giving the Board of Trustees authority to manage staffing and compensation issues.
Additional contribution program closed to new members due to concerns with the crediting of interest on those contributions at the assumed rate of investment return (then 9%), irrespective of actual market returns.
Medical Subsidy benefit closed to Group I state employees.
Gabriel, Roeder, Smith & Company (GRS) replaced Buck Consultants as the NHRS actuary; Evaluation Associates replaced by Ennis Knupp as investment consultants. GRS is the current system actuary. The current investment advisor is NEPC. Both relationships are monitored regularly and put out to bid by RFP every 3 to 5 years.
Assumed rate of return reduced from 9% to 8.5% by Board of Trustees. Of all the assumptions used to estimate the cost of a public pension plan, none has a larger impact on the plan’s costs than the investment return assumption. This is because over time, earnings from investments account for a majority of revenues. Lowering the assumed rate of return put upward pressure on employer contribution rates.
HB 653 changed the actuarial funding methodology from Open Group Aggregate to Entry Age Normal, a more widely accepted methodology which is still in use. This was a substantial turning point for NHRS as it enabled the proper recognition of the funding status of the pension trust.
HB 653 also added an employer representative to the Board of Trustees and capped the transfer of excess earnings to the Special Account until the trust was funded at 85%.
HB 876 created a commission to study the long term viability of the retirement system. The commission made a number of material recommendations, many of which were subsequently enacted into law. One of these recommendations led to the creation of a decennial commission to meet every 10 years to review the viability of the retirement system.
An outside legal review of the statutory method by which the portion of employer contributions earmarked for Medical Subsidy benefits were reimbursed from the Special Account indicated that the method was not in compliance with IRS regulations, potentially jeopardizing NHRS’ tax-qualified status. The retirement system worked with the Legislature to amend the statute and submitted the changes to the IRS via its Voluntary Correction Program (VCP) In April 2008; at the same time, NHRS submitted a request for a determination letter, which is an IRS ruling on the qualified status of a retirement plan under IRC Section 401(a). The IRS accepted the VCP submission and issued a favorable determination letter in 2011.
HB 1645 enacted, making a number of substantive changes to RSA 100-A, including but not limited to: establishing an independent investment committee including non-trustee members who are investment professionals; transferring $250 million from the Special Account into the pension trust; freezing the automatic annual 8% Medical Subsidy escalator for four years; changing the funding method for the Medical Subsidy to an actuarially determined portion of the employer contribution rate; and changing definitions of Earnable Compensation for active and future NHRS members.
Lawsuit filed by member groups in Merrimack County Superior Court challenging the constitutionality of the HB 1645 enactments that changed the definition of Earnable Compensation and the funding of COLAs (AFT v. State of NH, “AFT”).
Medical Subsidy benefit closed to teachers and political subdivision employees.
RSA 100-A amended to reduce the 35% state subsidy of political subdivision employer contribution rates for teachers, police, and firefighters to 30% in Fiscal Year (FY) 2010 and 25% in FY 2011, resuming to 35% in FY 2012. Note: In 2011, HB 2 (see below) changed the 2012 appropriation to a lump sum of $3.5 million and eliminated the state contribution entirely for subsequent years.
Representative employer parties filed suit in Merrimack County Superior Court, challenging the State’s reduction of the employer contribution subsidy as an unconstitutional unfunded mandate (City of Concord v. State of NH, "City of Concord").
HB 2 enacted, increasing contribution rates by 2%-2.5% for all members and changing benefit provisions for some current members and all future hires by amending the definition of Earnable Compensation; increasing Average Final Compensation from 3 to 5 years; capping the maximum allowable benefit; increasing the Service Retirement age; and reducing the Group II benefit multiplier. These changes essentially created a three-tier benefit structure based on “vested by” or “hired by” date. HB 2 also eliminated the state subsidy of employer contribution rates for teachers, police, and firefighters, replacing it with a one-time $3.5 million appropriation in FY 2012; made the freeze of the Medical Subsidy escalator permanent; created a statutory definition of “part-time” for retirees working for participating employers; and reduced the number of trustees from 14 to 13 and changed the composition of the Board by eliminating legislative members, reducing public employee members, and increasing employer and public members.
Lawsuit filed by member groups in Merrimack County Superior Court (PFFNH v. State of NH; “PFFNH 1”) challenging the constitutionality of the HB 2 enactment increasing member contributions.
Special Account repealed; remaining funds reverted to the pension trust.
NH Supreme Court ruled in favor of the State in "City of Concord," the employer contribution subsidy case.
Lawsuit filed by member groups in Hillsborough County Superior Court (PFFNH v. State of NH; “PFFNH 2”) challenging the constitutionality of the benefit changes in HB 2 enactments.
NH Supreme Court ruled in favor of the State in "PFFNH 1" and adopted the “unmistakability doctrine” in determining that the prospective increase in member contribution rates was not unconstitutional.
NH Supreme Court applied the “unmistakability doctrine” in the "AFT" case, finding that the statutory enactments of HB 1645 were also constitutionally permissible.