This past week, the Illinois General Assembly passed a bill aimed at reforming the pension systems for most Illinois public employees and Governor Pat Quinn has signed the bill into law. It is likely too early to begin a full assessment of what these changes mean for participants, including those in the State University Retirement System (SURS). Time will be needed to fully review, interpret and digest the implications of the entire 327 page bill. Additionally, lawsuits to contest the constitutionality of this bill are expected and will take time to resolve. At this point, we know very little. The following is an attempt to summarize key provisions and begin thinking about planning to be done in the future. As so much is unknown, it is likely too early to begin making decisions regarding your employment or retirement prospects. This includes trying to contact SURS for an assessment of your individual situation. Below are some of the key provisions with some of my own planning commentary in red:
- A Tier 1 participant is an employee or retiree who began SURS participation before January 1, 2011. A Tier 2 participant is an employee who began SURS participation on or after January 1, 2011.
- This content mostly applies to all pensions, written specifically to those in the SURS system. A colleague, Dave Grant of Finance for Teachers, has a more thorough blog post specific to the Illinois Teachers' Retirement System (TRS). You can read his post here.
Automatic Annual Increases:
Beginning in 2015, annual increases for Tier 1 participants will be 3%, compounded annually, but will only apply to the lesser of the annuity or a multiplier equal to $1,000 times number of years of service. The multiplier will be adjusted annually by inflation (CPI-u). Since the cost of living adjustment (COLA) was added to the SURS pension in 1989 and has become a large portion of the pension liability, this was a likely target of reform. In past conversations Karen and I have had with a knowledgeable SURS official, it was this official's opinion this COLA Adjustment was not constitutionally guaranteed. Soon to be filed court cases will be the final judge.
For those under the age of 46 (as of June 1, 2014), retirement eligibility will be delayed. The younger you are, the longer the delay.
Tier 1 participants will be subject to the same pensionable earnings limits that Tier 2 participants are already subject to (currently about $110,000, adjusted annually). Participants exceeding this limit at the time of enactment will be grandfathered in at their earnings rate on June 1, 2014. It appears if your salary is currently over this $110,000 limit, future pay increases will not increase your pensionable earnings except to the extent the pensionable limit exceeds your income. However, number of years in the SURS system will still affect your final pension. This is a big loss for higher income earners or those who expect higher income in the future.
Employee Contribution Decrease:
Tier 1 participants will have their contribution decreased by 1%. This appears to be a point of negotiation in exchange for other losses of benefits. This will likely be a point of consideration for the courts to judge if this is adequate consideration for lost benefits. At a minimum, anyone affected may consider contributing that 1% decreased contribution to an alternate retirement savings vehicle such as their 403b or Deferred Compensation Plan.
Defined Contribution Plan:
Tier 1 participants will have the option of electing into a defined contribution type plan by July 1, 2015. This will be limited to 5% of participants. A lot more details are to be worked out here, though it will likely look similar to the SURS Self Managed Plan (401a). This may be enticing to younger, higher income participants.
Unused Sick/Vacation Time:
For new hires after June 1, 2014, unused sick and vacation time will no longer be applied towards service credit or enhancing pensionable earnings.
Note: It appears many of these changes are not slated to affect participants in the self-managed plan or Tier 2 participants.
This is a very contentious issue with various interested parties and real impacts on many people. It will take a lot of time before all these issues are sorted out. As more is known, we will be addressing the individual impact with each of our affected clients. For those who are not our clients, I acknowledge that planning in uncertainty is difficult and stressful. My best advice is focus on what you can control and build some cushion into your savings plan to deal with the uncertainty. Contact us if you want the peace of mind of having an experienced Advisor on your side helping to plan for events such as this.