Statement by Edward W. Kelley, Jr., Member, Board of Governors of the Federal Reserve System, before the Subcommittee on Civil Service of the Committee on Government Reform and Oversight, U.S. House of Representatives, February 25, 1999

Federal Reserve Bulletin, April, 1999 by Edward W. Kelley, Jr.

I am pleased to testify on behalf of the Board of Governors on the Federal Reserve Board Retirement Portability Act and to provide the subcommittee with information on the Federal Reserve retirement system. The Board strongly supports this legislation. The bill would allow certain employees who leave the Board to work for other agencies and who then retire under the Federal Employees Retirement System (FERS) to receive pensions reflecting all of their federal service, including post-1988 service at the Federal Reserve Board. On behalf of the Board and its employees, let me particularly thank you, Chairman Scarborough, and Representatives Cummings, Morella, Mica, Waxman, Norton, Davis, Hoyer, and Moran for introducing this important legislation.

By way of background, the Federal Reserve System has its own defined benefit retirement plan, which has two benefit structures: the Board Plan, covering Board employees hired pre-1984, which is modeled on the Civil Service Retirement System (CSRS); and the Bank Plan, covering Board employees hired after 1983 and all employees of the Federal Reserve Banks. The Board Plan and the CSRS have historically had reciprocity with regard to service credit portability. However, as a result of an oversight that occurred when the FERS statute was first passed, post-1988 service at the Federal Reserve Board by employees enrolled in the Bank Plan and, in some limited situations, those enrolled in the Board Plan, is not creditable service under the FERS.

SERVICE CREDIT PROBLEM

The Board gains and loses employees in transfers between the Board and other government agencies each year. In particular, transfers between the Board and the other bank regulatory agencies--the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision--are common. The Board grants credit under its retirement plan to newly hired employees with previous CSRS and FERS service if the employee renounces benefits under the previous retirement plan (to prevent dual credit). Thus, there is service portability when employees come to the Board. And, generally, there has been portability between the Board and other government agencies in crediting Board Plan service under CSRS. However, because of the oversight mentioned above, post-1988 Bank Plan service at the Federal Reserve Board is not creditable under FERS.

As a result, if a Board employee hired after 1983 (and participating in the Bank Plan) leaves the Board to work for another federal agency and then retires from that agency under FERS, that employee would receive a reduced pension that would not reflect all of that employee's federal government service. This problem also affects any employee who participated in the Board Plan, did not complete five years of service before 1987, and left the Board and reentered federal employment after a break in service of more than one year. In this situation, under current law, the employee would be placed under FERS with no credit for post-1988 Board service. My testimony will refer to these situations as the "service credit" problem.

Under current law, an employee affected by the service credit problem could receive two pensions: the reduced pension from FERS and, if he or she had worked long enough to be vested, a pension from the Board. In this case, because of the way the pensions are calculated, the sum of those pensions would usually be less than a single FERS pension that gave credit for all of the individual's federal government service. Alternatively, if the employee was not vested at the Board, he or she would receive only the reduced FERS pension.

Thus, current law creates a dollars-and-cents problem in retirement security. Depending on the individual's final average salary and years of other federal service, the lack of portability of post-1988 Board service can mean the loss of hundreds or thousands of dollars a year in retirement income.

We have identified about fifty former employees of the Board who have gone to work for other federal agencies and who will have this service credit problem when they retire under FERS. In addition, those of the Board's current workforce covered by the Bank Plan (about two-thirds of the staff) would have the same problem if they should go to another federal agency and retire under FERS. Over time, a growing percentage of Board staff could encounter similar problems since virtually all new hires will have service that is not creditable under FERS.

The service credit problem has festered without resolution since the FERS statute was enacted in 1986. Employees at the Board are very aware of it. The problem is damaging to employee morale, and, just as important, some Board employees are deterred from making sound career moves because their pensions will suffer. And, government agencies' efforts to recruit these employees are hampered.

The bill before the subcommittee would correct the unidirectional service credit problem. It would amend the FERS statute to make post-1988 Board service creditable service under FERS. As a result, when affected former Board employees retire under FERS, their pensions will reflect all their federal government service.