On December 5, 2013, Governor Pat Quinn signed Pension Reform legislation (PA 98-599) into law. The law will become effective June 1, 2014 unless the legislation is challenged in court and a stay is granted. The legislation implements sweeping changes to current employees’ and retirees’ benefits for members of four of Illinois' state retirement systems including the State Universities Retirement System (SURS). This legislation includes major changes for SURS Traditional and Portable plan members. SURS Self-Managed Plan participants are not affected by this change.
SURS Pension Reform Presentation 4-9-14
MAJOR PROVISIONS OF THE LEGISLATION INCLUDE:
SURS Traditional and Portable Plan Member Benefit Changes
Retirement age: Workers age 45 and younger will have to work longer to qualify for retirement. For each year an employee is younger than 46, the retirement age increases by 4 months. For example: A 40-year-old (six years younger than 46) would see the retirement age increase by two years. Current Tier 1 employees (those hired before January 2011) younger than 30 would work an additional five years. NOTE: No change for those 46 and older.
Cost-of-living (COLA) increases: The automatic 3 percent compounded annual increase in retirement income is replaced by a system based on years of service and tied to inflation.
Delayed cost-of-living increase: Current Tier 1 employees (those hired before January 2011) would miss annual adjustments upon retirement. The number of COLAs missed depends on the age of the employee and ranges from one to five.
Employees age 50 or older would miss one adjustment. It would occur in the second year of retirement
Employees age 49 to 47 would miss three adjustments in retirement (years two, four and six)
Employees age 46 to 44 would miss four adjustments (years two, four, six and eight)
Employees age 43 and younger would miss five adjustments (years two, four, six, eight and 10)
For example, employees now 48 would miss three adjustments when they retire: There would be a COLA the first year, they would miss the second-year COLA, receive the third-year COLA, miss the fourth-year COLA, get a COLA in year five, miss the COLA in year six and then get annual adjustments from then on.
Reduced contribution: Employees would have less taken out of their paychecks. The contribution rate drops by 1 percentage point. If you currently have 8 percent taken out of your paycheck toward your pension, that deduction would be reduced to 7 percent.
Salary cap: Caps the maximum salary that a public employee can contribute toward a pension at $109,971. (The cap is adjusted yearly by 3 percent or half the rate of inflation, whichever is less). NOTE: This cap is already in place for Tier II employees who were hired after January 1, 2011.
Bean-counter approved: Annual state pension contributions would be based on a system endorsed by pension finance experts. The current system is not.
Optional Defined Contribution (DC) Plan: SURS would establish a “defined contribution” plan beginning July 1, 2015. Up to 5 percent of Tier 1 employees (those hired before Jan. 1, 2011) would have the option of leaving the defined benefit (DB) pension system for the new plan. Tier 1 members electing to participate in the DC plan will cease accruing benefits under the DB plan. Service credit for the DB plan benefit plan will cease to accrue. However, service credit earned under the DC plan will be used for vesting purposes in the DB plan. Interest crediting for purposes of the money purchase formula (Rule 2) will cease. No service purchases for the DB plans will be permitted.
Money Purchase Formula Revision - Beginning in FY 2015 (July 1, 2014), the annuity factors used to calculate money purchase benefits shall change to a new effective rate of interest. The new effective rate of interest shall be equal to the 30-year US Treasury bond rate plus 75 basis points. The new effective rate of interest shall apply prospectively towards crediting interest to money purchase plan accounts, portable plan lump sum retirements and refunds, purchases of service credit, etc. Changes to the money purchase annuity conversion factors are applied prospectively, but members who retire on or after July 1, 2014, are eligible to receive the money purchase benefit they were eligible to receive had they retired during the fiscal year preceding June 1, 2014 or the money purchase benefit they are eligible to receive under the new formula, whichever is greater. The member must have been retirement eligible during the aforementioned fiscal year for this provision to apply.
Limitation on Unused Sick and Vacation Time Credit: New hires who become SURS participants on or after June 1, 2014, will not be able to use sick or vacation time toward pensionable salary or years of service when calculating retirement.
Funding guarantee: If the state doesn’t make the required payment to the pension funds, the pension systems can go to court to force the state to make the payment. The state retains the ability to adjust the payment schedule.
Pension stabilization fast track: Beginning in 2015, the state will contribute 10 percent of the pension savings from this legislation back into the pension systems. In addition, the state would put an extra $364 million into the pension accounts beginning in the 2019 budget year and then an extra $1 billion annually until the pension funds are fully funded. This “add on” amount will not be factored into determining the annual state contribution. This extra money is intended to get the funds to the 100 percent funded goal faster, perhaps by 2040 if not sooner. The new law puts the pension systems on course to be 100 percent funded by 2043. The new law would mean that the state would have enough money set aside to cover all pension benefits both for retirees and active employees.
SURS continues to analyze the 327-page law to determine its full impact on members, employers and the System in general. The following links are provided by SURS to help members understand the Pension Reform legislation: