Town to purchase annuity contract

By Susan MacEachron

At a meeting on Jan. 10, the Norfolk Board of Selectmen voted to terminate the legacy defined benefit (DB) plan. An annuity contract will be purchased to provide the same monthly benefits to the six current retirees and the two active employees who are vested in the plan.

The town froze its pension obligations in the DB plan effective July 1, 2012. Former first selectman Sue Dyer in 2011 negotiated the change to a defined contribution (DC) plan with the unions representing town employees. The town continued to make annual contributions to the DB plan in addition to the newly created DC plan. At the time, the DB plan had approximately 40 participants, including retirees, former employees and active employees who were vested.

DB plans provide fixed monthly pension payments to retirees based upon a formula that typically considers salary and years of service. Employers are responsible for investment decisions and obligated to make the established monthly payments. With a DC plan, however, employers contribute money to a plan, but employees are responsible for making investment decisions. Future retirement earnings are dependent on how much has been accumulated in the DC plan. 

In 2016 and again in 2021 the town offered all DB plan beneficiaries the option to receive a lump sum in lieu of continuing to receive either their current monthly benefits or the benefits promised upon reaching retirement age. A significant number of plan members chose the lump sum. 

The current decision to terminate the DB plan and buy an annuity contract to cover the town’s obligations was based on two factors: the ability to free up the excess funds in the plan and to remove the risk and responsibility of managing the funds. At a time when Norfolk is facing significant infrastructure repairs and capital improvements, the town’s excess money in the plan will help ease the pressure on future town budgets.

The selectmen voted to engage Mike Morgenroth of Edgewater Advisors to guide the process of finding a top-rated firm to provide an annuity contract to maintain the guaranteed monthly pension payments to the current recipients. Morgenroth anticipates that the search for a firm could be completed by the end of April. 

The plan assets are currently valued at $1.8 million. The town’s pension consultant, TPS Group, estimates there could be over $500,000 of excess assets in the plan that will revert to the town once the annuities are purchased. Interest rates are a critical component in pricing annuities, so the exact amount of excess funds will not be known until an annuity contract is finalized.