About the pensions
Unlike a 401(k) plan, a pension is a true retirement plan that provides income replacement for life, Mason said. A 401(k) is a capital accumulation plan generating an unknown sum of money that a retiree can outlive. The city’s pension plan is a defined benefit plan, meaning the city bears the investment and longevity risks. The benefits are based on an employee’s salary and length of service and are not dependent on employee and city contributions and investment performance.

For providing retirement benefits to career employees, a pension plan is more cost-effective for the city than a 401(k) but more risky, Mason said.

It’s more cost-effective because the city doesn’t pay out as much to employees who leave early as it might if it were contributing to a defined contribution plan. It’s more risky because the city tells employees they’ll make a certain amount of money for the rest of their lives and must deliver on that amount, regardless of the stock market or economy.

But the benefit doesn’t just last for the rest of the retiree’s life. If a retiree dies before her spouse, the spouse will get 100 percent of her pension payments for the rest of his life. Other employers reduce survivor’s benefits to 66 percent or less.

“That is a very rare feature,” Mason said. “Usually in the corporate world, the full pension is only paid to the participant. In most cases, he is able to choose to have a reduced benefit with a portion continued on to his spouse.

“Here, it’s automatic with no reduction. So that’s a great feature.”

Specifics of the city’s three pension plans (See accrual box)
For municipal employees:
There are three pension groups for municipal employees. Full-time municipal employees hired before Sept. 1, 1981, and between Sept. 1, 1999, and Dec. 31, 2007, are automatically enrolled in Group A and contribute 5 percent of their pretax pay.

For the first five years, employees are not vested, and if they leave during that time, they may request a full reimbursement of their contribution from the Houston Municipal Employees Pension System.
After five years, employees become vested, meaning they have earned the pension benefit even if they leave before becoming eligible to retire. The amount paid to a municipal retiree each month is a percentage of the average amount of the gross pay on the employee’s highest 78 paychecks. The longer an employee works for the city, the higher the percentage, up to 90 percent.

Vested municipal employees can receive a pension when they turn 62 or are at least 50 and their age plus years of service equal 75 or more.

What you earn though your years of service isn’t just what you’ll get in benefits, though. Retirees who were hired as city employees before Jan. 1, 2005, will get a 3 percent cost-of-living increase in their benefit each year. Those hired on or after that date will get a 2 percent increase each year.

Group B is the noncontributory group that receives smaller benefits. Only employees hired before Sept. 1, 1999, could have elected to join that group.

Group D is also a noncontributory group that receives smaller benefits. All municipal employees hired on or after Jan. 1, 2008, are in this group. (See Changing pensions.)

For a more secure retirement, municipal employees can participate in DROP. (See DROP in some extra cash.)

For classified firefighters:
Classified firefighters automatically are enrolled in the Houston Firefighters Relief and Retirement Fund and contribute 9 percent of their pretax pay toward their pension. They are eligible for the pension after 20 years on the job with no age requirement, at which time they’ve earned 50 percent of their eligible income. After 30 years, firefighters earn the maximum 80 percent. Eligible income is the average amount of the gross pay, including overtime, on the highest 78 paychecks.

Classified firefighters who leave in less than 10 years can get a refund of their contribution from HFRRF. Those who leave after 10 to 20 years can get a refund or deferred pension benefits starting at age 50.

All classified firefighter retirees receive an extra monthly benefit of $150 and a yearly 3 percent cost-of-living increase.

Firefighters can also build a bigger retirement egg by participating in DROP. (See DROP in some extra cash.)

For classified police employees:
Classified police employees are automatically members of the Houston Police Officers Pension System. Those sworn in before Oct. 9, 2004, contribute 9 percent of their pretax pay toward the pension and are eligible for pension benefits after 20 years on the job. They also receive a $5,000 lump sum upon retirement.

Those sworn in before Oct. 9, 2004, who work for the city for less than 10 years can get a refund of their contribution from HPOPS. Those who work 10 to 20 years can take a delayed retirement and start receiving benefits at 60.

Those sworn in on or after Oct. 9, 2004, must be 55 with at least 10 years of service to be eligible for pension benefits. They contribute 10.25 percent of each paycheck to the pension, and can earn up to 80 percent of their regular pay.

The monthly pension benefit for classified police employees is a percentage of the average gross amount of the employee’s last 78 paychecks, excluding exempt time, overtime and strategic officer staffing pay. The longer an employee works for the city, the higher the percentage, up to 80 percent.

All classified police retirees receive an extra monthly benefit of $150 and a yearly cost-of-living adjustment of between 2.4 percent and 8 percent, depending on the Consumer Price Index for All Urban Consumers.

Classified police employees hired before Oct. 9, 2004, can join DROP to increase their retirement security.

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