CBBC Liability Presentation 071616 Final Ncgfoa
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TSERS/LGERS
Contribution-Based Benefit Cap
July 2016
Compliance Section: Contact Information
Nick Byrne
Deputy Director, Policy, Planning &
Compliance
(919) 814-4163
Shannon Wharry
Employer Compliance Manager
(919) 814-4187
2
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.
3
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.
4
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.
5
The Contribution-Based Benefit Cap Explained
Average Final Compensation
Maximum Benefit
Calculation
$175,000.00
Accrual Rate/Multiplier
×
0.0182
Years of Service
×
30
Maximum Benefit Amount
Accumulated Employee Contributions
CBBC Calculation
If the maximum
benefit amount
exceeds the cap, a
liability is incurred.
$95,550.00
$213,698.27
Annuity Factor (for age 60)
÷
10.9528
Contribution Based Benefit Cap Factor
×
4.5
Contribution Based Benefit Cap
Maximum Benefit – Benefit Cap
Annuity Factor (for age 60)
Amount Owed to Retirement System
$87,798.76
$7,751.24
×
10.9528
$84,897.83
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.
7
Before Legislation: Cost Shift for Unforeseen Liabilities
EMPLOYER ONE
Annual Retirement Benefit:
$90,000
EMPLOYER TWO
[Exceeds CBBC]
$90,000
Present Value of Future
Retirement Benefits
Contributions
Plus Investment Gains
$1,000,000
$1,000,000
$1,000,000
$400,000
+ $600,000
$1,000,000
$ 1,000,000
$225,000
+ $175,000
$400,000
$ 1,000,000
$400,000
+ $600,000
$1,000,000
$ 1,000,000
Employer’s Impact on Next
Year’s Liability:
$0
$600,000
$0
Liability Payment Due:
$200,000
$200,000
$200,000
Liability:
Prior to the passage of the new CBBC law, the unforeseen liabilities
were shared by all the employers of the Retirement System.
EMPLOYER THREE
$90,000
Unforeseen
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.
8
After Legislation: No Cost Shift for Unforeseen Liabilities
EMPLOYER ONE
Annual Retirement Benefit:
$90,000
EMPLOYER TWO
[EXCEEDS CBBC]
$90,000
Present Value of Future
Retirement Benefits
Contributions
Plus Investment Gains
$1,000,000
$1,000,000
$1,000,000
$400,000
+ $600,000
$1,000,000
$ 1,000,000
$225,000
+ $175,000
$400,000
$ 1,000,000
$400,000
+ $600,000
$1,000,000
$ 1,000,000
Employer’s Impact on Next
Year’s Liability:
$0
$600,000
$0
Liability Payment Due:
$0
$600,000
$0
Liability:
EMPLOYER THREE
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.
$90,000
Unforeseen
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
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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
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 10
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
11
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
12
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
13
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
14
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
15
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
16
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
17
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
18
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
19
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 twelvemonth 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
20
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
21
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
22
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.
23
Nick Byrne
Deputy Director,
Policy, Planning and Compliance
(919) 814-4163
Shannon Wharry
Employer Compliance Manager
(919) 814-4187
Thank you
24
Appendix
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