Excess Pension Costs
1. What are excess pension costs (EPC)?
Excess pension costs (EPC) are calculated on an individual basis as part of the member’s retirement benefit when the member retires. If there are significant non-base pay increases during the member’s Average Final Compensation (AFC) period, an excess in the maximum retirement allowance (pension spiking) is determined and the member’s last employer is responsible for additional employer contributions or EPC. EPC calculations apply to employees or former employees with an ERS membership date prior to July 1, 2012.
2. How is it determined that there has been an excess in the maximum retirement allowance (pension spiking)?
ERS receives employer payroll (PR) records while the member is working. The PR records include but is not limited to the following:
- Member demographic information (i.e. SSN, Retirement Group Code, Retirement Class Code, etc.);
- Employer information (i.e. State or county, Billing location, payroll number, etc.); and
- Payroll information (i.e. amounts earned by ERS Pay Amount fields, Pay Period Date, Earning Periods, FTE%, Bargaining Unit, Member Contributions, etc.)
The ERS processing system totals the semi-monthly PR records received from the employers by month to provide each member their service credit and monthly eligible compensation (based on earning period) that is then used to calculate their AFC. For retirees with an ERS membership date prior to July 1, 2012, the AFC is the three (3) highest years (12 consecutive month periods) where service credit has been earned. This process also calculates the breakdown of the member’s monthly eligible compensation between base pay and non-base pay (eligible compensation = base pay + non-base pay). Base pay is defined as the normal periodic payments of money for service, the right to which accrues on a regular basis in proportion to the service performed; recurring differentials; and elective salary reduction contributions under sections 125, 403(b), and 457(b) of the Internal Revenue Code of 1986, as amended.
When a member retires, ERS “finalizes” the member’s maximum retirement allowance (note: a member may select an alternate retirement option per HRS). The maximum retirement allowance formula is Years of Service x Benefit Multiplier x AFC (i.e. 30 yrs x 2% x $3000 = $1,800 monthly pension benefit).
An excess in the maximum retirement allowance (pension spiking) is determined if the two requirements in HRS §88-100 listed below exist:
- The employee’s or former employee’s average non-base pay, divided by the employee’s or former employee’s average base pay, is greater than ten percent; and
- The employee’s or former employee’s average final compensation non-base pay ratio divided by the comparison period non-base pay ratio is greater than or equal to one-hundred twenty percent.
3. How is the EPC calculated?
EPC costs for employer contributions for an individual are based on the “excess” amount of the annual pension benefit multiplied by an Annuity Factor for how long the pension will be paid (the retiree’s life expectancy at retirement). The Annuity Factor is based on the retiree’s age, gender and employment group. The Employer/Billing Location is determined at this time based on the last employer using the Employer Code; Billing location and payroll number that identifies the agency/department.
4. How and when will the Employers be notified/billed for the EPC?
The final EPC for a fiscal year is not determined until after the June pension payroll is processed. The EPC for a member/retiree is calculated when the member is finalized and may change during the year if a member’s benefit is recalculated after finalization. Amounts are calculated as of June 30 each year. Amounts for individual members finalized are totaled for employer contribution requirements. If a member’s EPC was previously billed to an employer in a prior fiscal year and the retirement benefit was recalculated, the net increase/decrease EPC is billed to the employer (or current EPC – prior year EPC = amount billed for current FY).
The additional contributions required by this section are payable in a lump sum within two fiscal years; provided that, if the additional contributions required in a fiscal year are greater than ten per cent of the employer’s contributions (excluding the additional contributions) to the pension accumulation fund for that fiscal year, the employer may pay the additional contributions over a period of three fiscal years in installments equal to no less than one-third of the original amount of the required additional contributions, plus interest on the unpaid balance, commencing on the first day of the second fiscal year following the retirement of the employees or former employees, at an annual rate equal to the investment yield rate assumption for actuarial valuations of the system.