2010 Pension Reform Legislation Impacts of Act 120

Agenda Funding changes Funding changes Impacts on all members Impacts on all members Impacts on new members Impacts on new members Employer’s role Employer’s role What’s next What’s next

Act 120 – Formerly H.B 2497 Enacted November 23, 2010 Purpose was to curtail the employer contribution rate from rising too high, too fast Purpose was to curtail the employer contribution rate from rising too high, too fast Employer contribution rate caps Employer contribution rate caps Actuarial changes to the funding methodology of the system Actuarial changes to the funding methodology of the system Creation of new benefit classes with reduced benefits for new members of PSERS Creation of new benefit classes with reduced benefits for new members of PSERS

Why Now?

Funding Changes - Employer Contributions

Funding Changes Employer Contributions Suppressed employer contribution rate by using rate caps in future years Suppressed employer contribution rate by using rate caps in future years The rate caps limit the amount the pension component of the employer contribution rate can increase over the prior year’s rate as follows: The rate caps limit the amount the pension component of the employer contribution rate can increase over the prior year’s rate as follows: FY 2011/12 - not more than 3%* FY 2011/12 - not more than 3%* FY 2012/13 - not more than 3.5%* FY 2012/13 - not more than 3.5%* FY 2013/14 - not more than 4.5%* FY 2013/14 - not more than 4.5%* Thereafter - not more than 4.5%* Thereafter - not more than 4.5%* *plus the premium assistance contribution rate

Funding Changes Employer Contributions Rate cap remains at 4.5% until the rate cap no longer applies Rate cap remains at 4.5% until the rate cap no longer applies After that, the rate is what is calculated by PSERS actuary and approved by the PSERS Board, subject to a new minimum employer contribution rate that will be the employer normal cost (currently about 8%), plus the premium assistance contribution rate After that, the rate is what is calculated by PSERS actuary and approved by the PSERS Board, subject to a new minimum employer contribution rate that will be the employer normal cost (currently about 8%), plus the premium assistance contribution rate

Shared Risk Every 3 years, the System will compare the actual investment rate of return with the assumed rate of return for the prior 10 year period Every 3 years, the System will compare the actual investment rate of return with the assumed rate of return for the prior 10 year period If the investment rate of return (less investment fees) is equal to or exceeds the assumed rate of return, the member’s contribution rate will decrease by.5% If the investment rate of return (less investment fees) is equal to or exceeds the assumed rate of return, the member’s contribution rate will decrease by.5% If the earnings during the ten-year period are 1.0% or more below the assumed rate of If the earnings during the ten-year period are 1.0% or more below the assumed rate of return, the member’s contribution return, the member’s contribution rate would increase by.5% rate would increase by.5%

Shared Risk If the System is fully funded at the time of the comparison, then the member contribution rate reverts back to the base rate for the Class If the System is fully funded at the time of the comparison, then the member contribution rate reverts back to the base rate for the Class The investment return measurement return period will begin on July 1, 2011 The investment return measurement return period will begin on July 1, 2011 The rate could never go below the base rate of 7.5% for T-E and 10.3% for T-F members, nor above 9.5% for T-E and 12.3% for T-F members The rate could never go below the base rate of 7.5% for T-E and 10.3% for T-F members, nor above 9.5% for T-E and 12.3% for T-F members If the employer rate is below the final contribution, the shared risk rate will revert back to the base If the employer rate is below the final contribution, the shared risk rate will revert back to the base If the employer rate has not increased in the prior 3-year period, then the shared risk rate will not increase If the employer rate has not increased in the prior 3-year period, then the shared risk rate will not increase

Benefit Changes General Information The benefit reductions contained in this legislation will only impact individuals who become new members of PSERS on or after July 1, 2011 The benefit reductions contained in this legislation will only impact individuals who become new members of PSERS on or after July 1, 2011 Any existing or former members of PSERS who return to service on or after July 1, 2011 will retain their old membership status Any existing or former members of PSERS who return to service on or after July 1, 2011 will retain their old membership status The current pension benefit that a PSERS retiree receives is also not impacted by the legislation The current pension benefit that a PSERS retiree receives is also not impacted by the legislation

Benefit Plan Changes Impacts on All Members Did away with Non-Qualifying Part-Time (NQPT) service Did away with Non-Qualifying Part-Time (NQPT) service Exception, members have one opportunity to purchase NQPT service Exception, members have one opportunity to purchase NQPT service Three-year window beginning July 1, 2011 for current active members to file an NQPT application Three-year window beginning July 1, 2011 for current active members to file an NQPT application Current members who are inactive but return to active service after July 1, 2011, will have a one-year window from their date of return to file an NQPT application Current members who are inactive but return to active service after July 1, 2011, will have a one-year window from their date of return to file an NQPT application New members after July 1, 2011, will have a one-year window from their entry date into the System to file an NQPT application New members after July 1, 2011, will have a one-year window from their entry date into the System to file an NQPT application

Benefit Plan Changes Impacts on All Members Once a member qualifies for membership all service earned after the initial qualification will be considered qualified Once a member qualifies for membership all service earned after the initial qualification will be considered qualified Previously hourly and per diem members had to qualify each year (500 hours or 80 days for hourly and per diem employees) Previously hourly and per diem members had to qualify each year (500 hours or 80 days for hourly and per diem employees)

Benefit Plan Changes Impacts on All Members What is a member? What is a member? Any person that is Active, Inactive, Vestee, or Annuitant. Any person that is Active, Inactive, Vestee, or Annuitant. Membership status for an inactive member is retained for two full school years from the last qualifying year. Membership status for an inactive member is retained for two full school years from the last qualifying year. A vestee or annuitant does not have their membership status expire. A vestee or annuitant does not have their membership status expire.

Benefit Plan Changes Impacts on All Members Members who break membership do have to re-qualify to receive retirement credit for service upon their return. The following constitutes a break in membership: Members who break membership do have to re-qualify to receive retirement credit for service upon their return. The following constitutes a break in membership: terminate and refund their contributions and interest, or terminate and refund their contributions and interest, or terminate without refunding their contributions and interest and return to service after a period of two FY years, or terminate without refunding their contributions and interest and return to service after a period of two FY years, or are not reported as being employed by a public school employer for a period of two FY years or more, regardless of refunding their contributions and interest. are not reported as being employed by a public school employer for a period of two FY years or more, regardless of refunding their contributions and interest.

Benefit Plan Changes Impacts on All Members So, if a person was a full time employee who has not earned five years of credited service therefore the member is non- vested, their member status in FY 09/10 is active. Member goes on unpaid leave September 15, 2009 and stopped working and was no longer reported by an employer. So, if a person was a full time employee who has not earned five years of credited service therefore the member is non- vested, their member status in FY 09/10 is active. Member goes on unpaid leave September 15, 2009 and stopped working and was no longer reported by an employer. FY Ending Member Status FY Ending Member Status 09/10 Active Member until 9/15/09. 09/10 Active Member until 9/15/09. Inactive as of 9/16/09 Inactive as of 9/16/09 10/11 Inactive Member 10/11 Inactive Member 11/12 Inactive Member 11/12 Inactive Member 12/13 Non-Member at start of fiscal year

Benefit Plan Changes Impacts on All Members Qualification in a fiscal year is met in one of two ways Qualification in a fiscal year is met in one of two ways Salaried or FT per diem or FT hourly from the first day of contributing service Salaried or FT per diem or FT hourly from the first day of contributing service Part time hourly or part time per diem it is rendering the minimum of 500 hours, 80 days or the equivalent combination Part time hourly or part time per diem it is rendering the minimum of 500 hours, 80 days or the equivalent combination

Benefit Plan Changes Impacts on All Members Determining whether or not a person has qualifying time: Determining whether or not a person has qualifying time: FY Ending Status 10/11 Qualified (723 hours) 11/12 Qualified (3 hours) 12/13 Qualified (15 hours) 13/14 Qualified (100 hours)

Benefit Plan Changes Impacts on All Members Any member who works between 11/23/2010 and 06/30/2011 is considered qualified for FY 2011, regardless of whether or not the member met the current qualification rules, if the member: Any member who works between 11/23/2010 and 06/30/2011 is considered qualified for FY 2011, regardless of whether or not the member met the current qualification rules, if the member: Was vested (meets the 5/10 vesting rules or superannuation rules such as age 62 and 1 year of service) as of 11/23/2010 or earlier or Was vested (meets the 5/10 vesting rules or superannuation rules such as age 62 and 1 year of service) as of 11/23/2010 or earlier or Qualified in FY 2009 or 2010 Qualified in FY 2009 or 2010

Benefit Plan Changes Impacts on All Members Determining whether or not a person has qualifying time for 10/11 fiscal year: Determining whether or not a person has qualifying time for 10/11 fiscal year: FY Ending Status 08/09 Qualified (700 hours) 08/09 Qualified (700 hours) 09/10 Did Not Qualify (200 hours) 09/10 Did Not Qualify (200 hours) 10/11 Qualified even if works only 10/11 Qualified even if works only one day on or after 11/23/10 one day on or after 11/23/10

Benefit Plan Changes Impacts on All Members If a vestee or superannuated member returns to service on or after November 23, 2010, that service will be qualifying service, regardless of the nature of the employment (salary, hourly or per diem, or full time or part time). If a vestee or superannuated member returns to service on or after November 23, 2010, that service will be qualifying service, regardless of the nature of the employment (salary, hourly or per diem, or full time or part time).

Benefit Plan Changes Impacts on All Members Are you going back to to tell us who qualified or do we have to do that? Are you going back to to tell us who qualified or do we have to do that? No, we are sending out info. on vested members. We will begin notifying Employers after July 1, 2011 when someone is qualified and being reported. No, we are sending out info. on vested members. We will begin notifying Employers after July 1, 2011 when someone is qualified and being reported. Do we need to go back and collect contributions for the school year if we reported wages as WNC prior to the qualification rule changes? Do we need to go back and collect contributions for the school year if we reported wages as WNC prior to the qualification rule changes? No. PSERS will process these billings as Purchases of Service.

Benefit Plan Changes Impacts on All Members An annuitant can still work in an emergency return to service capacity or a return in an extra curricular position An annuitant can still work in an emergency return to service capacity or a return in an extra curricular position There are no changes to waiver eligibility rules There are no changes to waiver eligibility rules

Benefit Cuts for New Members After July 1, 2011

New Membership Classes Two new classes (Class T-E and T-F) for school employees who become new members of PSERS on or after July 1, 2011 Two new classes (Class T-E and T-F) for school employees who become new members of PSERS on or after July 1, 2011 All new members will automatically become Class T-E members. New members have a one-time opportunity to elect Class T-F All new members will automatically become Class T-E members. New members have a one-time opportunity to elect Class T-F Failure to elect Class T-F at time of original eligibility will make the member ineligible for Class T-F forever Failure to elect Class T-F at time of original eligibility will make the member ineligible for Class T-F forever Once the election is made either by action or inaction, the election is permanent Once the election is made either by action or inaction, the election is permanent

Pension Multipliers and Contribution Rates Class T-E Class T-E Pension multiplier is 2% Pension multiplier is 2% Contribution base rate is 7.5% with “shared risk” contribution levels between 7.5% and 9.5% Contribution base rate is 7.5% with “shared risk” contribution levels between 7.5% and 9.5% Class T-F Class T-F Pension multiplier is 2.5% Pension multiplier is 2.5% Contribution base rate is 10.3% with “shared risk” contribution levels between 10.3% and 12.3% Contribution base rate is 10.3% with “shared risk” contribution levels between 10.3% and 12.3%

Class T-E and T-F Members Cannot withdraw contributions and interest when retiring Cannot withdraw contributions and interest when retiring Have a ten year vesting period Have a ten year vesting period For normal retirement, employees must: For normal retirement, employees must: Work until age 65 with minimum of 3 years of service, or Work until age 65 with minimum of 3 years of service, or Attain a total combination of age and service that is equal to or greater than 92 with a minimum of 35 years of service Attain a total combination of age and service that is equal to or greater than 92 with a minimum of 35 years of service One year window for new members to apply for NQPT service (at full actuarial cost) One year window for new members to apply for NQPT service (at full actuarial cost)

Class T-E and T-F Members Pension benefit cannot exceed the member’s final average salary Pension benefit cannot exceed the member’s final average salary The cost to purchase most types of nonschool or nonstate service credit (other than military service) will be the full actuarial cost The cost to purchase most types of nonschool or nonstate service credit (other than military service) will be the full actuarial cost No projection of service for determining superannuation age No projection of service for determining superannuation age Employees starting after July 1, 2011 will contribute based on “shared risk” rate in effect at date of hire Employees starting after July 1, 2011 will contribute based on “shared risk” rate in effect at date of hire

How to Determine Membership Class A contract record should be entered with the first day of paid service as the start date A contract record should be entered with the first day of paid service as the start date It is not the hire date, but the date in which the member begins performing work and receiving remuneration for it It is not the hire date, but the date in which the member begins performing work and receiving remuneration for it If the employee has never been a member of PSERS and is not actually providing services until after July 1, then the contract record should have this employee at a 7.5% contribution rate as a Class T-E member If the employee has never been a member of PSERS and is not actually providing services until after July 1, then the contract record should have this employee at a 7.5% contribution rate as a Class T-E member

Class T-F Election Process New members will have a one-time opportunity to elect Class T-F within 45 days of receiving written notification from PSERS (Class T-C/T-D members do not have this opportunity) New members will have a one-time opportunity to elect Class T-F within 45 days of receiving written notification from PSERS (Class T-C/T-D members do not have this opportunity) T-F election form only has to be returned if member wants to elect Class T-F T-F election form only has to be returned if member wants to elect Class T-F Decision whether to elect or not is final and binding Decision whether to elect or not is final and binding

Election of Class T-F If a member elects to become Class T-F, the employer will be notified the following month and should begin withholding at the Class T-F rate If a member elects to become Class T-F, the employer will be notified the following month and should begin withholding at the Class T-F rate If member is terminated prior to PSERS processing the election, member will be responsible for remitting the payment to PSERS If member is terminated prior to PSERS processing the election, member will be responsible for remitting the payment to PSERS

Employer’s Role In Class T-F Election Process Collection of owed retirement contributions from the member Collection of owed retirement contributions from the member Owed contributions are retroactive to the first day of qualifying membership in PSERS Owed contributions are retroactive to the first day of qualifying membership in PSERS Collected through employer so they remain as “pickup or non-taxed” contributions Collected through employer so they remain as “pickup or non-taxed” contributions Notification to employer will only be based on PSERS’ records Notification to employer will only be based on PSERS’ records

Collection Example Full time salaried employee, earning $50,000 a year elects Class T-F Full time salaried employee, earning $50,000 a year elects Class T-F Employer has reported two months of earnings before the election occurs and PSERS is able to notify employer Employer has reported two months of earnings before the election occurs and PSERS is able to notify employer Employer had collected $625 in retirement contributions from member due to 7.5% rate Employer had collected $625 in retirement contributions from member due to 7.5% rate At the higher rate of 10.3%, the member owes an additional $ for the two reported months At the higher rate of 10.3%, the member owes an additional $ for the two reported months PSERS will notify employer how much is owed, not including subsequent pays the employer has provided to the member PSERS will notify employer how much is owed, not including subsequent pays the employer has provided to the member

Class T-F Election for Members with Multiple Employers The money should come from the employer with the current payroll stream The money should come from the employer with the current payroll stream If the member has multiple current employers: If the member has multiple current employers: If only one employer is full time and the other(s) is part time, it will be the employer with the FT position If only one employer is full time and the other(s) is part time, it will be the employer with the FT position If more than one employer is full time, it will be the full time employer who most recently reported the member. This is defined as the full time employer that most recently submitted a work report for the member If more than one employer is full time, it will be the full time employer who most recently reported the member. This is defined as the full time employer that most recently submitted a work report for the member If all employers are part time, it will be the employer with the If all employers are part time, it will be the employer with the hourly Contract Record hourly Contract Record if none; then the employer with a per diem Contract Record if none; then the employer with a per diem Contract Record if none, then the employer with a salaried contract record if none, then the employer with a salaried contract record

Class T-F Election for Members with Multiple Employers For example Employer has submitted and approved their February Work Report (WR) through January. We will know from July through January 31 Class T-F cost based on WR. That due amount will be in the billing to the current employer (hierarchy previously shared) Concurrently, all employers for the member will receive the Class T-F notification and will be expected to collect the additionally owed Class T-F contributions for the subsequent pays not yet reported

What’s Next for Employers? Four areas of possible updates to software Four areas of possible updates to software New Class T-F member contribution rate, New Class T-F member contribution rate, Tracking employee contribution rates so they can be applied to the appropriate class Tracking employee contribution rates so they can be applied to the appropriate class Collecting additional contributions that are owed due to the election of Class T-F Collecting additional contributions that are owed due to the election of Class T-F Ability to update the rate for Class T-E and T-F members every three years based on the shared risk program Ability to update the rate for Class T-E and T-F members every three years based on the shared risk program

PSERS Changes Continuing with the enhancements to the Employer Web. Phase 1 was implemented this past November. Phase 2 with additional validations and enhancements will be incorporated this summer along with Act 120 changes Continuing with the enhancements to the Employer Web. Phase 1 was implemented this past November. Phase 2 with additional validations and enhancements will be incorporated this summer along with Act 120 changes Additional notifications and reports will be made available Additional notifications and reports will be made available

More to Come New employee orientation information New employee orientation information Updated manuals Updated manuals T-F election information on the PSERS website T-F election information on the PSERS website Additional information in employer bulletins and member newsletters Additional information in employer bulletins and member newsletters Online seminars in the Spring Online seminars in the Spring

Questions?