Detroit workers’ annuity savings are likely to be targeted during the ongoing bankruptcy process, with the city seeking to recoup up to $400 million from them, according to reports.
Detroit Free Press Personal Finance Columnist Susan Tompor writes: “It’s likely to be a worrisome part of the package for general city retirees and workers. But the issue is whether the savers in the plan wrongly benefited from overly generous interest payments at the expense of other retirees.”
City workers who paid into the annuity plan — only general city workers, not police and fire — were able to contribute to the plan with guaranteed rates of return, with the pension funds used to cover the difference between the promised 7.9 percent and the lower, actual return rate.
From another Free Press article:
Under the savings plan, city workers set aside of up to 7% of their pay into an annuity savings fund separate from their pension fund and were guaranteed a rate of return of 7.9%. In part to pay pensioners who had gone years without pension increases, the city’s General Retirement System distributed as bonuses earnings in excess of that 7.9%. For the active worker the bonuses went into the annuity fund; and for the retiree the bonuses was paid by way of a 13th check. The practice continued even in years when investment returns were less than the guaranteed minimum payout, forcing pension fund trustees to divert assets to pay the guaranteed minimum.
By recouping some of those returns, Emergency Manager Kevyn Orr could reduce overall cuts to pension payments as part of the bankruptcy settlement. The cuts are currently proposed at up to 34 percent for retirees in the city’s General Retirement System and up to 14 percent for police and firefighters. Those reductions drop to 26 and 6 percent respectively if retirees approve the city’s offer. About 32,000 current, former and retired city workers are part of the pension system.
In the annuity issue, the city would need to recalculate the value of each employee’s annuity based on the true return rates instead of the 7.9 percent and attempt a “payback” of some of the excess as part of the bankruptcy process.
For active or former city workers not yet collecting pension checks, the difference would be deducted from the value of their annuity account. For retirees collecting pensions, the city would reduce monthly pension checks using actuarial values over a retiree’s expected lifetime.