By Susan MacEachron

Only a few years ago, it was widely circulated that Norfolk’s pension plan for town employees was underfunded by $1 million and that the town would have to borrow to cover the shortfall. The market crash in 2008 had put the town’s plan in serious straits, according to Michael Sconyers, chairman of Norfolk’s Board of Finance.

But First Selectman Sue Dyer, in consultation with the town’s pension committee, began negotiating in 2011 with worker and teacher unions for a critical change to the plan’s structure. In 2013, after mediation, an agreement was reached. The town froze its old pension plan and switched from a defined benefit to a defined contribution plan, effective July 1, 2013.

Defined benefit plans place the burden on employers to save and invest funds that will be sufficient to fulfill promises made to employees for pension payments when they retire. Those payments are scaled to the number of years an employee has worked and his or her age on retirement.

The appropriate funding of a defined benefit plan is determined by making economic projections about the growth rate of the assets set aside and actuarial assumptions about how long people will live and therefore how many years of pension payments the plan must be able to support. Assuming unrealistic rates of growth for the investments under management has been a classic trap, and many public pension plans have been threatened with falling short of their promises to their retirees as a result.

The town governors discovered that Norfolk’s defined benefit plan was underfunded as far back as 2006, according to Sue Dyer. The assets were being managed at the time by Bank of America. Judging that poor performance was part of the problem, the town arranged for its pension fund to be transferred to Union Savings Bank for management, and an uptick was noticed. This was wiped out by a market-wide crash in 2008. Fearing that the town’s pension benefits would have to be paid directly from its operating budget, the governors then masterminded the switch to a defined contribution plan.

Although the old plan is being phased out, 22 former town employees and 15 current ones still receive benefits from it. The fund’s assets continue to be managed by Union Savings Bank and currently amount to $2.14 million, according to Dyer. The plan continues to require annual funding from Norfolk’s operating budget but is considered to be actuarially solvent, Michael Sconyers reports.

The new plan became effective in fiscal year 2013-2014. It too requires an annual contribution from the town’s operating budget. However, the critical difference is that the town contracts to make a specific contribution for each employee but does not guarantee the performance of the funds or the benefits that will be realized from them. Each employee is responsible for making investment decisions about how the money contributed by the town is invested. The funds that are ultimately available for retirement will depend upon the markets and the decisions each employee has made. Town employees also have the option to put aside retirement savings in a plan that is similar to the 401(k) plans that are available in the private sector. These two plans are managed by Nationwide.

Norfolk has a pension committee appointed by the selectmen, chaired by Karen Sebach. There are approximately 42 current town and school employees who are covered by the Norfolk pension plans. The pension contributions for both plans total $148,000 in the current fiscal year.