State Teachers Retirement System of Ohio Pension Reform Summary

Transcription

1 Welcome to the STRS Ohio webinar. During this webinar we will explain changes to pension plan components resulting from the 2012 passage of pension reform legislation. This legislation was enacted to preserve the financial security of the defined benefit pension for Ohio s public educators. By the time we conclude this presentation, it is our hope that you will have a better understanding of these changes and how they impact your retirement eligibility and future retirement benefit. 1

2 Today we will review five key components that were impacted by pension reform legislation. They include retirement eligibility requirements for an unreduced or reduced benefit, the benefit formula used to determine your benefit amount, final average salary, the member contribution rate and the cost-ofliving adjustment. Our presentation also includes examples to further explain how these legislative changes impact you and your retirement benefit. 2

3 Let s begin by reviewing eligibility requirements for retirement benefits. Under current eligibility requirements, an STRS Ohio member enrolled in the Defined Benefit Plan is eligible for unreduced benefits at age 65 with five years of service credit or any age with 30 years of service credit. FAS, or final average salary, is the average of your three highest years of earnings and is a factor in calculating your retirement benefit. The retirement benefit is calculated by multiplying the years of service credit by 2.2%. The resulting percentage is the percent of FAS that is received. An individual with five years of service receives 11% of their FAS and an individual with 30 years receives 66% of their FAS. For members retiring on or before July 1, 2015, there is an additional percentage over the 2.2% for each year of credit beyond 30 years. For members retiring August 1, 2015, and later, the benefit will be calculated by multiplying all years of service by 2.2%. 3

4 Effective August 1, 2015, service credit requirements for an unreduced benefit will increase to 31 years of service and will increase every two years thereafter until reaching a requirement of 35 years of service on August 1, The table in the middle of this slide shows this phased-in increase of service credit requirements. Effective August 1, 2026, to receive an unreduced retirement benefit, a member will need to be age 60 with 35 years of service or age 65 with five years of service. 4

5 There is a misperception for some members that the change in eligibility requirements for an unreduced benefit means that they will receive a lesser percentage of their FAS under the new eligibility requirements than they would under the current requirements. This is not true. Let s look at an example. Assume you re age 45 with 23 years of service credit as of July 1, You will first reach eligibility for an unreduced benefit at age 60 with 38 years of service credit, fulfilling the age 60 with 35 years requirement. If you multiply 2.2% by the 38 years of service, you can see that you would receive 83.6% of your FAS. Remember, under the current unreduced benefit eligibility requirement of 30 years of service the benefit is 66% of FAS. 5

6 What about eligibility for a reduced retirement benefit? Under current eligibility requirements, an STRS Ohio member enrolled in the Defined Benefit Plan is eligible for reduced benefits at age 60 with five years of service credit or age 55 with 25 years of service credit. An individual with five years of service receives 9.3% of their FAS and an individual with 25 years receives 41.2% of their FAS. This percentage is calculated by multiplying 2.2% by the years of service and an early retirement reduction factor. The reduction in the benefit formula is based on how many years you are retiring before the unreduced benefit formula will take effect for you. 6

7 Effective August 1, 2015, service credit requirements for an early retirement with a reduced retirement benefit will increase to 26 years of service and will increase every two years thereafter until reaching a requirement of 30 years of service on August 1, The table in the middle of this slide shows this phased-in increase of service credit requirements. As mentioned earlier, the current eligibility requirement for an unreduced benefit is any age with 30 years. Effective August 1, 2015, members can still retire at any age with at least 30 years of service; however, effective August 1, 2015, under the new eligibility requirements, that would now be a reduced benefit versus an unreduced benefit. 7

8 Let s look at an example. Like our previous example, we will again base this on an individual who is age 45 with 23 years of service credit as of July 1, On July 1, 2021, this member will reach age 52 with 30 years of service, fulfilling the any age with 30 years of service requirement for a reduced benefit. This reduced benefit would be 41.6% of FAS. Let s compare that percentage of FAS with waiting to reach eligibility for an unreduced benefit, which would occur on July 1, 2029, when this member reaches age 60 with 38 years, fulfilling the age 60 with 35 years requirement. By working the additional eight years, this member would receive 83.6% of FAS. This higher percentage is more than double the reduced retirement benefit of 41.6%. 8

9 What if you are eligible to retire on July 1, 2015? Will you receive a lesser retirement benefit if you retire after the new eligibility changes take effect? No. You don t need to rush to the door if you are already eligible to retire but desire to teach longer. If you re eligible to retire on July 1, 2015, you will maintain that eligibility even if you teach longer and retire later. When you do retire, your benefit will be based on the greater of the calculation under the new formula or your benefit as of July 1, 2015, under the current formula. You will receive no less of a Single Life Annuity benefit than you could have received on July 1, 2015, under the current formula. 9

10 Here is an example of the transition benefit. Suppose I retire on July 1, 2015, with 35 years of service and a $60,000 FAS. I would receive a retirement benefit equal to 88.5% of my FAS, or $53,100. On the other hand, what if I wait and retire July 1, 2016, with 36 years of service and a $61,000 FAS? The benefit would be 79.2% of my FAS, or $48,312. Remember, the benefit for the July 1, 2016, retirement is based on 2.2% for all years of service versus the July 1, 2015, retirement benefit that is based on an escalating percentage for all years over 30. If I retire in 2016, I will receive the $53,100 benefit I would have been eligible for in 2015, which is the higher benefit of the two. If my benefit isn t going to be higher by retiring later, why would I work longer? A couple reasons might be that I will still be receiving my full salary and my health care premiums as an employee are going to be lower than they will be as a retired member obtaining coverage through STRS Ohio. 10

11 As we ve already indicated, your final average salary, or average of your highest years of earnings, is a key element used in your benefit calculation. Beginning August 1, 2015, the final average salary calculation will be the average of the five highest years of earnings versus the three highest years of earnings. Here is an example of how an FAS is calculated based on the three highest years versus five highest years. As you can see, in this example, the difference between the three-year average and five-year average is a couple thousand dollars. In other words, the difference in a three-year FAS and five-year FAS may not be as much as you might think. Also keep in mind that if there are years where your raises are low, you may see even less of a difference between a three versus five-year average. 11

12 Another change resulting from pension reform legislation was an increase in the member contribution rate the percentage of your salary that you pay into STRS Ohio. This 4% increase over the previous 10% contribution rate is being phased in 1% per year. The increase started July 1, 2013, and concludes July 1, 2016, when the rate will reach 14%. In other words, effective July 1, 2013, the rate increased to 11% and increases to 12% in 2014, 13% in 2015 and to 14% in

13 The last component of pension reform legislation that we will review today is the cost-of-living adjustment. STRS Ohio benefit recipients receive a cost-of-living adjustment increase on their retirement benefit. Pension reform legislation changed the timeline of when the first COLA is received. New retirees now receive a 2% COLA beginning on the fifth anniversary of retirement. It is added to the regular monthly benefit and is not compounded over the previous year. The COLA is based on the effective retirement date. For example, if your effective retirement date is July 1, 2015, you will receive your first COLA on July 1, 2020, your fifth anniversary. 13

14 This concludes our webinar highlighting the changes to pension plan components based on 2012 legislation. Further details can be found on the STRS Ohio website. Also available on the website is a benefit estimate calculator that can help you in estimating your retirement benefit. I encourage you to register for an Online Personal Account if you have not already done so. Having an online account enables you to access a lot of information pertaining to your STRS Ohio account and benefits. A few of the features you can access in this secure area include the Service Retirement Application, a benefit estimate calculator that uses your account information and retirement health care plan option information. The site is password protected to keep your information safe. To register, go to our website and click Register for your personal account in the upper right corner of the screen. STRS Ohio also offers an news service to deliver important news and information to members. If you do not already receive the eupdate, you can also register for this on our website. I hope this presentation has been helpful in explaining pension plan changes and has provided you with background information that will be helpful to you as you plan for your retirement. 14