TSERS/LGERS Contribution-Based Benefit Cap

TSERS/LGERS Contribution-Based Benefit Cap July 2016

Compliance Section: Contact Information Nick ByrneDeputy Director, Policy, Planning & Compliancenick.byrne@nctreasurer.com (919) 814-4163 Shannon Wharry Employer Compliance Managershannon.wharry@nctreasurer.com (919) 814-4187

Brief Overview of Defined Benefit Plans • A defined benefit plan promises a specified monthly benefit at retirement based on a set formula. • Under TSERS and LGERS, a member’s benefit is determined based on a statutory formula: Average Final Compensation (compensation during 4 highest-paid years in a row) x Accrual Rate (.0182 for TSERS and .0185 for LGERS) x Years of service = ANNUAL RETIREMENT BENEFIT • Employer contributions, employee contributions, and investment returns on the pooled assets determine the total dollars in the fund. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Session Law 2014-88 / G.S. 128-27(a3) & G.S. 135-5(a3) • Per Session Law 2014-88, “The Board of Trustees shall adopt a contribution-based benefit cap factor recommended by the actuary, based upon actual experience, such that no more than three-quarters of one percent (0.75%) of retirement allowances are expected to be capped.” • The factor is a comparison of a member’s contributions to the member’s retirement benefit. The General Assembly decided to establish a minimum percentage of value of the retirement benefit that will be paid for by the value of the accumulated contributions. • TSERS: Retiree’s benefit that is 4.5 times greater than accumulated contributions will exceed the CBBC or accumulated contributions must pay for 22.2% of benefit value • LGERS: Retiree’s benefit that is 4.7 times greater than the accumulated contributions will exceed the CBBC or accumulated contributions must pay for 21.2% of benefit value • The Board of Trustees shall modify such factors every five years, as shall be deemed necessary, based upon the five-year experience study as required by G.S. 135-6(n). This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

The Contribution-Based Benefit Cap The law, “The Fiscal Integrity Act of 2014”, was enacted in July 2014 with several key features: • Establishes a Contribution-Based Benefit Cap (CBBC) to be set by the LGERS/TSERS BOT • In October 2015, the TSERS BOT set the CBBC cap at 4.5 and the LGERS BOT set the cap at 4.7 • The CBBC prevents all employers in the Systems from absorbing unforeseen liabilities caused by compensation decisions made by certain employers. • Sets an AFC of $100,000 for applying the formula (indexed for inflation). • CBBC liabilities are paid by the employer for impacted employees first hired prior to January 1, 2015. An individual first hired before January 1, 2015, cannot have his or her retirement benefit reduced under the CBBC law. • Provides options for employees hired in 2015 or later. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

The Contribution-Based Benefit Cap Explained Maximum Benefit Calculation CBBC Calculation If the maximum benefit amount exceeds the cap, a liability is incurred. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

What is a Contribution-Based Benefit Cap (CBBC) Liability? • A CBBC liability typically arises as a result of a substantial increase in compensation that results in unusually high liabilities to the Retirement System. • Prior to the change in the law, these unforeseen liabilities were then absorbed by other members and employers in the Retirement System. • Liabilities in excess of the CBBC are not a pervasive problem in North Carolina, but the Retirement Systems’ actuary found enough instances that a solution was warranted. • CBBC Totals as of July 12, 2016: • More than $2.7 million collected for 53 retirements in excess of the CBBC This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Before Legislation: Cost Shift for Unforeseen Liabilities Unforeseen Liability Prior to the passage of the new CBBC law, the unforeseen liabilities were shared by all the employers of the Retirement System. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

After Legislation: No Cost Shift for Unforeseen Liabilities Unforeseen Liability On and after January 1, 2015, under the new CBBC law, the cost of the unforeseen liability is paid by the employer or employee whose retirement caused it. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Considerations in Setting the Contribution-Based Benefit Cap Factor • Analysis and sample factors rely on data from the actuarial valuation for December 31, 2014. • Based on the assumptions provided by the Systems’ actuary, 9,850 TSERS members and 3,476 LGERS members were expected to retire in 2015: • In 2015, the number of TSERS retirees expected to be impacted was 26 and the number of LGERS retirees expected to be capped was 6. The total number impacted among both Systems was 20. • In 2016, the number of TSERS retirees expected to be impacted is 41 and the number of LGERS retirees expected to be impacted is 12. Thus far, a total of 33 members have been impacted. • Since January 1, 2015, a total of 53 CBBC liabilities have been incurred by LGERS and TSERS employers. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Summary • The Contribution-Based Benefit Cap will prevent employers in the Retirement Systems from absorbing the additional liabilities caused by individual decisions of other employers. • The cap only applies to individuals with an Average Final Compensation (AFC) of $100,000 or higher, adjusted annually for inflation, and will only impact a small number of those individuals. • For members who enter the Retirement System from which they retire before January 1, 2015, the last employer will pay the cost of the additional liability on the Retirement System. • For members who enter the Retirement System from which they retire on or after January 1, 2015, the employer or employee may pay for the additional liability, or the employee can choose to receive a reduced benefit. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Frequently Asked Questions This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Is a significant increase in salary the only factor that can cause a member’s benefit to exceed the CBBC? This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

What are some key areas for consideration related to the CBBC liability? This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

The CBBC liability is an additional employer contribution and any invoice sent to an employer to account for a CBBC liability is due in lump sum to the Retirement System the fourth day of the month following the member’s month of retirement. The law allows the Retirement System to provide a twelve-month installment payment plan option for employers who request one. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Additional Questions? This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Shannon Wharry Employer Compliance Managershannon.wharry@nctreasurer.com (919) 814-4187 Nick ByrneDeputy Director, Policy, Planning and Compliancenick.byrne@nctreasurer.com (919) 814-4163 Thank you

Appendix

THE REVIEW ZONE: Applying the New CBBC Law

How does the new law work? • Before the CBBC law, the Retirement System had to swing at every pitch and pay out the full retirement benefit without asking for an additional contribution to account for the significant benefit. • The CBBC law introduces an umpire to ensure more quality pitches. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Which pitches are reviewed? The umpire monitors the playing field to determine which pitches are considered fair. The umpire only makes a call on pitches with an Average Final Compensation (AFC) of $100,000 or more, adjusted annually for inflation. AFC ≥ $100,000 • For pitches with an AFC under $100,000, the Retirement System always hits a home run! This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

A pitch the umpire does not review Since the pitcher’s AFC was under $100,000, the umpire does not review the pitch. The member’s retirement benefit is processed and paid. If the pitcher throws a ball with an AFC under $100,000, the batter swings and hits the ball out of the park. It’s a home run! But how did the batter know to swing? This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Which balls enter the REVIEW ZONE? For pitches with an AFC of $100,000 or more, the umpire determines which are in the STRIKE ZONE... …and which are in the REVIEW ZONE. The next few slides will show how the umpire makes the call. Strike Zone Review Zone This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

A pitch in the STRIKE ZONE Example of a pitch over the plate: • Prudence Parker received annual raises of 6% per year and had no benefit conversions at end-of-career. • The umpire reviews the pitch and determines that it is in the STRIKE ZONE. Amount Employer Owes Retirement System = $0 This example uses a Pension Spiking factor of 4.5. The Board of Trustees selected a factor of 4.5 for TSERS and 4.7 for LGERS during the October 2015 Board Meeting. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Calculation details for Prudence P. The cap does not have an impact because the maximum benefit of $95,550.00 is less than the cap of $108,385.33. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

A ball in the REVIEW ZONE Example of a ball that enters the REVIEW ZONE: • Steven Spiker received annual raises of 6% per year and receives $40,000 in additional compensation as a result of benefit conversion during the AFC period. • The umpire reviews the pitch and determines that it is in the REVIEW ZONE. Amount Employer Owes Retirement System ≈ $85,000 This example uses a Pension Spiking factor of 4.5. The Board of Trustees selected a factor of 4.5 for TSERS and 4.7 for LGERS during the October 2015 Board Meeting. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Calculation details for Steven S. The cap does have an impact because the maximum benefit of $95,550.00 is greater than the cap of $87,798.76. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Prudence P. vs. Steven S. Both Prudence and Steven retired on the same day from the same system with the same pension benefit. The big difference is that Prudence and her employer paid more into the Retirement System than Steven and his employer. When Steven retires, his employer owes an additional ~$85,000 to make up for this difference. This charge to the employer is the increased cost that the Retirement System would have borne in the absence of the new CBBC law to pay the same benefit to Steven Spiker as Prudence Parker. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

The future of the REVIEW ZONE Example of a ball that enters the REVIEW ZONE after 2020: • Just like his dad, Steven S., Jr. received annual raises of 6% per year and an additional $40,000 as a result of benefit conversion during the AFC period. • The umpire reviews the pitch and determines that it is in the REVIEW ZONE. • Since Steven S., Jr. first entered the Retirement System in 2015, he has options…. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

Options for members first hired in 2015 or later When Steven S., Jr. retires he has three options: • His employer can choose to pay the ~$85,000 owed to the Retirement System, or • He can pay the ~$85,000 himself, or • He can choose to receive a reduced pension benefit. If Steven S., Jr. chooses option #3, his annual pension benefit would decrease by $7,751 – from $95,550 to $87,799 This example uses a Pension Spiking factor of 4.5. The Board of Trustees selected a factor of 4.5 for TSERS and 4.7 for LGERS during the October 2015 Board Meeting. This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System. Each member’s situation is different, so please contact the Retirement System if you have questions about your specific situation. The Retirement System does not provide legal, financial or retirement advice. Members are advised to consult their financial advisor, accountant or attorney for additional guidance. Employers are urged to contact the Retirement Systems Division with any questions related to application of the law to individual members.

TSERS/LGERS Contribution-Based Benefit Cap

TSERS/LGERS Contribution-Based Benefit Cap

Presentation Transcript