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Understanding DROPs: Essential Strategies and Insights for Public Safety Retirement
On September 19th, NCPERS will host a webinar to explore why Deferred Retirement Options Programs (DROPs) are so popular with public safety members, especially as some advocate for their use to mitigate staffing shortages in the post-COVID environment. We spoke with the panelists about the actuarial trends they're seeing with public safety retirement systems and what public pension leaders should know about DROPs.
By: Lizzy Lees, Director of Communications, NCPERSResearch shows that pensions play an essential role in strengthening the public safety workforce, but public safety retirement systems often face unique challenges. On September 19th, NCPERS will host a webinar, Understanding DROPs: Essential Strategies and Insights for Public Safety Retirement, to explore why Deferred Retirement Options Programs (DROPs) are so popular with public safety members, especially as some advocate for their use to mitigate staffing shortages in the post-COVID environment.
We spoke with webinar panelists Aaron Chochon, senior actuary at CavMac, and Ryan Gundersen, senior consultant at CavMac about the actuarial trends they're seeing with public safety retirement systems and what public pension leaders should know about DROPs.
What is a Deferred Retirement Options Program?
A Deferred Retirement Option Program is a benefit provision which can be used by members to effectively commence their retirement benefit without actually leaving their job. The number of years a member can participate in the DROP can vary, but a lot of sponsors put the cap at five years.Now, DROP participants don't actually receive their retirement checks until they exit the DROP. Instead, a portion or, more often, all of their monthly benefit is credited to a nominal account, and accrues with interest credits. When the member exits the DROP and retires, they will receive the accumulated value of their nominal account as a lump sum and their monthly retirement checks. It's important to note that their retirement benefit is going to be based on the pay and service earned as of the date they entered the DROP, and not when they retire.
Are there different types of DROPs?
There are two main types of DROPs: (i) a Standard DROP (i.e., a Forward DROP) and (ii) and a Back DROP. Standard DROPs behave just how we explained above: An eligible member decides to participate in the DROP, they continue to work while their nominal account builds, and then they retire. When they retire, they'll receive the accumulated balance of their nominal DROP account and begin to receive their retirement checks which, again, are based on the member's pay and service as of the date they began participating in the DROP.A Back DROP allows a member to retire today and receive benefits as if they had elected to participate in the DROP however many years ago they elect. In effect, they are retroactively participating in a Standard DROP.
What factors should be considered before implementing a Deferred Retirement Options Program?
The first thing we would recommend considering is the question, what is the plan sponsor hoping to achieve with their DROP? For example, if the plan sponsor is looking to retain late career employees, a DROP can be an effective retention tool. There are many elements to a DROP, and there is no single design that can accomplish every potential goal for every stakeholder. Each design element creates a decision point, and having an overarching purpose helps to guide these decisions so that legislators and plan sponsors can create a coherent, purpose-driven program.As with all benefit changes, it is important to consider the potential cost impact of a new DROP. There are essentially two elements which contribute to the cost impact: (i) the DROP design itself and (ii) how the design impacts member behavior. While the provisions themselves are relatively easy to model, it is always difficult to accurately predict how member behavior will change when a new program is introduced to a pension system. Because of this uncertainty, it's best to consider a range of possible scenarios. This is particularly true with Back DROPs because they allow members to retroactively participate in the DROP, which increases the risk of anti-selection.
Why are DROPs especially popular with public safety members?
There are several potential reasons for this. One thing we know is that employees like having access to some kind of lump sum benefit upon retirement. Unlike other potential offerings, a DROP allows the member to receive a lump sum without taking a benefit reduction. Also, public safety employees are encouraged to retire earlier than other public employees due to the physical requirements of their work. As a result, many public safety plans have subsidized early retirement or a cap on their benefit service. With a DROP, members can continue to work without giving up the value of the subsidy, or they could continue to work while effectively commencing their benefits once they reach their benefit service cap.From an employer's perspective, DROPs help retain experienced personnel who might otherwise retire early. Other groups of employees also show interest in DROPS, but because they're usually not eligible to retire until later in life it's not as attractive.
What actuarial trends has CavMac observed with public safety retirement plans in recent years?
For public safety members who don't already have a DROP, we have seen continued interest in establishing one, as well as expanding the eligible group. Recently, employers and plan sponsors have become more receptive to the idea as a way to alleviate current staffing shortages.Still have questions about DROPs? Register here for NCPERS' September 19th webinar.
To learn more about the key issues impacting public safety retirement plans, don't miss NCPERS Public Safety Conference. Register here to join nearly 400 public safety pension professionals on October 27-30 in Palm Springs.
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