CBBC Liability Presentation 071616 Final Ncgfoa

This presentation provides general information about Pension Spiking and its potential implications for members of the North Carolina Retirement System.. 135-5a34 This presentation provi

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Contribution-Based Benefit Cap

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Compliance Section: Contact Information

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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

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Session Law 2014-88 / G.S 128-27(a3) & G.S 135-5(a3)

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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.

• 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)

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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.

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The Contribution-Based Benefit Cap Explained

Accumulated Employee Contributions $213,698.27

Contribution Based Benefit Cap Factor × 4.5

Contribution Based Benefit Cap $87,798.76

Maximum Benefit Amount $95,550.00

Amount Owed to Retirement System $84,897.83

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.

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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

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Before Legislation: Cost Shift for Unforeseen Liabilities

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EMPLOYER ONE EMPLOYER TWO EMPLOYER THREE

[Exceeds CBBC]

Present Value of Future

Prior to the passage of the new CBBC law, the unforeseen liabilities

were shared by all the employers of the Retirement System.

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After Legislation: No Cost Shift for Unforeseen Liabilities

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

EMPLOYER ONE EMPLOYER TWO EMPLOYER THREE

[EXCEEDS CBBC]

Present Value of Future

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Considerations in Setting the Contribution-Based Benefit Cap

Factor

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• 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

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Frequently Asked Questions

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Is a significant increase in salary

the only factor that can cause a

member’s benefit to exceed the

CBBC?

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What are some key areas for

consideration related to the CBBC

liability?

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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.

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Additional Questions?

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Appendix

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THE REVIEW ZONE:

Applying the New CBBC Law

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How does the new law work?

additional contribution to account for the significant benefit.

• The CBBC law introduces an umpire to ensure more quality pitches

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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

• For pitches with an AFC under $100,000, the

Retirement System always hits a home run!

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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?

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