As a member, employees contribute six percent of their monthly income toward their retirement. If the employee receives significant salary increases in the years before retirement or over the course of their career, their monthly retirement benefit at retirement may exceed what their contributions would be expected to fund.
If an employee receives significant salary increases in the years before retirement or over the course of their career, their monthly retirement benefit at retirement may exceed what their contributions would be expected to fund. Significant late-career promotions, conversion of benefits into compensation, and leave payouts at retirement may also cause monthly retirement benefits to exceed what your employees’ contributions would be expected to fund. The Contribution-Based Benefit Cap was created to protect this system for current and future retirees, by providing a method for the payment of these unforeseen costs. if an employee retires with an average final compensation (AFC) of $100,000 or more (adjusted annually for inflation), they may fall under a contribution-based benefit cap.
If an employee was first hired before January 1, 2015, their last employer will be required to pay the additional contribution if it is determined that their allowance is in excess of the cap and is subject to an adjustment. The Retirement Systems Division will notify the employer and will provide a statement of the cost of the additional contribution required to pay for the benefit in excess of the cap.
If an employee was first hired on or after January 1, 2015, their employer may choose whether or not to pay this additional contribution; if the employer chooses not to pay, the employee will be required to accept a benefit reduced to the benefit cap unless they pay the additional contribution. The Retirement Systems Division will notify the employee and employer and will provide a statement of the cost of the additional contribution required to pay for their benefit in excess of the cap, along with the deadline to submit.
Pension Spiking History
Legislation passed by the 2014 General Assembly establishes, effective January 1, 2015, a contribution-based benefit cap (CBBC) on pension benefits for LGERS and TSERS members who retire on or after January 1, 2015, and whose average final compensation (AFC) is $100,000 or higher (adjusted annually for inflation). This legislation was created to control the practice of “pension spiking,” in which a member's compensation substantially increases to create a retirement benefit that is significantly greater than the member's contributions would fund. Significant late-career promotions, conversion of benefits into compensation and leave payouts at retirement may also cause a members' retirement benefit to exceed what the member's contributions would fund.
The Anti-Pension Spiking CBBC approach was created to protect each system for current and future retirees and to prevent all employers in the Retirement Systems from absorbing the additional liabilities caused by compensation decisions made by other employers.
The Retirement Systems has posted Pension Spiking presentations for LGERS and TSERS that provide examples of pension spiking and how employers and employees will be responsible for paying the liability created by causing the pension spike.
In addition, the Retirement Systems created an Anti-Pension Spiking presentation and a one-page summary outlining the highlights of the legislation.
Estimating Potential CBBC Impact
Your agency can utilize the statutory formula to help determine the likelihood that the retirement allowance of a member might exceed the contribution-based benefit cap (CBBC). The CBBC formula is as follows:
Benefit Formula = Average Final Compensation (AFC) X Multiplier X Service
CBBC Formula = Contributions / Annuity Factor X CBBC Factor
If Benefit is greater than CBBC, the difference is multiplied by the Annuity Factor
The current CBBC Factor for TSERS is 4.5 and LGERS is 4.7. The current multiplier for TSERS is 0.0182 and LGERS is 0.0185. The AFC threshold for 2022 is $116,366.68. The listing of current annuity factors found here for retirements on or after Jan. 1, 2022. You can access the member’s accumulated contribution balance and service history through ORBIT Employer Self-Service (Reporting – View Member Info – View Account History). Please note that the total contribution balance does not include the interest (currently 4%) for the current year.
As a member, you contribute six percent of your monthly income toward your retirement. If you receive significant salary increases in the years before retirement or over the course of your career, your monthly retirement benefit may exceed what your contributions would be expected to fund in retirement. While this scenario is not applicable to the majority of retirees, it is a situation you should be aware of as a possibility depending on your unique circumstances.
If you retired on or after January 1, 2015 as a TSERS or LGERS employee, with an average final compensation (AFC) of $100,000 or more (adjusted annually for inflation), you may fall under the Contribution-Based Benefit Cap which could require an additional contribution to cover your retirement benefit deficit.
The application of the CBBC legislation is different for:
- Those hired before January 1, 2015, and
- Those hired on or after January 1, 2015.
If you were hired before January 1, 2015 and are impacted by the Contrition-Based Benefit Cap (CBBC), your last employer is required to submit the additional contribution to the Retirement Systems Division on your behalf at retirement to cover the gap between what has been paid in and what you are expected to receive in your monthly benefit.
If you were hired on or after January 1, 2015 as a TSERS or LGERS employee and your benefit exceeds the Contribution-Based Benefit Cap (CBBC), you may receive a retirement estimate that explains the possible impact to your retirement benefit. In this estimate, you will be given the retirement benefit calculations for capped and uncapped amounts.
As we receive additional information from your employer during the calculation period and the liability stands, you will receive notification that your monthly retirement benefit is impacted and you have the option to pay the cost due. This liability amount is contingent upon timely receipt of the employer’s final salary contribution summary report and may be adjusted based on additional information received by RSD.
Once you receive notification that you are impacted by the CBBC legislation, you will receive a cost due to be paid by a specific date. You have two options to consider:
- You may pay the cost invoice and receive the uncapped AFC retirement monthly benefit. This is your responsibility to fund; however, you employer may choose to contribute all or a portion of the cost. The capped calculation benefit amount will be paid during processing time, with a retroactive payment for the difference.
- Or, you accept the capped retirement monthly benefit amount based on the CBBC legislation.
The capped calculation means there is a ceiling to the final benefit you are qualified to receive and is directly related to the contributions that have been paid into your pension. The capped calculation refers to the maximum benefit limit you are eligible to receive upon retirement, unless you elect to make the required payment. Even if you elect to make the required payment, you will receive the capped benefit amount until all information has been received and processed (approx. 90-120 days after your retirement date).
The uncapped calculation refers to the benefit amount that does not take into account a contribution-deficit based on time worked, higher salary or salary increases and/or contributions made. This uncapped calculation may be an option if you make a required payment to cover the unfunded liability of the actual contributions you have paid into the pension system.
The Fiscal Integrity/Pension-Spiking Prevention Act, Session Law (S.L.)2014-88was enacted by the North Carolina General Assembly in 2014 and contained the benefit cap which serves to control the practice of “pension spiking,” by preventing all employing public agencies participating in the Teachers’ and State Employees’ Retirement System (TSERS) and the Local Governmental Employee’s Retirement System (LGERS)from absorbing certain unforeseen liabilities caused by compensation decisions made by other employing agencies in the systems. The Law also applies to liabilities caused by non-pension spiking factors such as significant late career promotions. Further, the law allows government entities to maintain the flexibility to set compensation and only applies to retirements of employees with an average final compensation (AFC)of $100,000 or more, adjusted annually for inflation, and is limited to no more than 0.75% of expected retirements in a given year.