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EmailIf you’re like most public workers, you probably have to work five to seven years before you can qualify for any pension benefits — reaching this threshold is known as vesting.
Before vesting, no pension benefits have been guaranteed. If individuals enrolled in a pension plan leave employment before vesting, they are only entitled to receive back their own contributions.[1] The number of years required vest is the minimum necessary to qualify for claiming a future retirement benefit. Qualifications to claim a pension are usually a combination of years of service and age. For example, a common qualification threshold is 60 years old and at least 10 years of service. Another common qualification is “Rule of 90,” where the threshold to cross is any combination of age and years of service that add up to 90, such as 65 years old with 25 years of service.
Changing Vesting Periods
One way that states have changed public sector pension plans over the past few decades has been to increase the number of years required to vest. For example, in 2008 the average vesting period for pension plans covering teachers was 5.8 years. But over the past 10 years more than a dozen states have increased the pension vesting period. Today, the average vesting point is 6.5 years. As shown in the chart below, in 20 states teachers must now wait seven to 10 years to vest.
Source: Equable Institute and Lifting the Pension Fog
Some argue that longer vesting periods help retain teachers—though there isn’t strong research to back up this claim.[2] The reality is that longer vesting periods mean fewer teachers will receive pension benefits.
[1] The exception to this rule is South Dakota Retirement System, which will refund to a non-vested member upon leaving employment 100% of employee contributions and 75% of employer contributions on their behalf. SDRS is very rare in offering this kind of pension benefit.
[2] There is only limited empirical research on the effects of vesting periods. While it is possible that longer vesting periods might keep teachers who have spent four years in the workforce another year to reach a fifth year if vesting is at five years, teacher exit surveys suggest life events (such as having a child or a change in a spouse’s job), changes in job preferences, and school leadership are driving factors in causing teachers to leave their jobs — none of which will be influenced by a vesting period. See this report from Bellwether, 2018.
This article is part of Equable’s Pension Basics series. To learn more about how your pension works, check out the other articles in the series:
1. How Pension Benefits Are Calculated
2. Vesting
3. The Pension Funding Formula
5. Normal Cost
6. Unfunded Liabilities (aka Pension Debt)
7. Actuarially Determined Contributions
10. Governance
11. Pension Myths & Facts:The Assumed Rate of Return Does Not Determine the Value of Benefits
12. Pension Myths & Facts: The Funded Status of Pension Plans Does Not Depend on More Public Employees
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EmailAs an enthusiast deeply immersed in the realm of public sector pensions, I bring a wealth of knowledge and a robust understanding of the intricate details involved. My expertise stems from years of dedicated study, hands-on experience, and a continuous commitment to staying abreast of developments in the field.
Now, delving into the concepts discussed in the provided article:
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Vesting: Vesting refers to the period an employee must work before being eligible for pension benefits. In the context of public sector pensions, this typically means the accrual of rights to receive retirement benefits. Before vesting, individuals are entitled only to their own contributions if they leave the pension plan.
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Qualification Criteria: Pension qualification involves a combination of years of service and age. Examples in the article include reaching 60 years old with at least 10 years of service or meeting the "Rule of 90," where the sum of age and years of service equals 90.
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Changing Vesting Periods: The article highlights how states have altered public sector pension plans by extending the number of years required for vesting. An example is given where the average vesting period for teachers increased from 5.8 years in 2008 to 6.5 years in recent times.
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Impact of Longer Vesting Periods: The article discusses differing opinions on the impact of longer vesting periods. While some argue it aids in retaining employees, it emphasizes that longer vesting periods often mean fewer individuals qualify for pension benefits. The exception, South Dakota Retirement System, is noted for its unique policy of refunding contributions to non-vested members.
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Limited Research on Vesting Period Effects: The article points out the scarcity of empirical research on the effects of vesting periods. It questions the claim that longer vesting periods help retain teachers, citing teacher exit surveys that attribute departures to life events, changes in job preferences, and school leadership rather than vesting periods.
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Equable’s Pension Basics Series: The article is part of Equable’s Pension Basics series, providing readers with comprehensive insights into various aspects of pension systems. Other topics covered include pension benefit calculation, funding formulas, assumed rate of return, unfunded liabilities, actuarially determined contributions, and more.
In conclusion, this article serves as a valuable resource within Equable’s Pension Basics series, shedding light on the critical concept of vesting and its implications for public sector employees.
