In conjunction with this week’s passage of a state budget for fiscal year 2018, the Illinois General Assembly approved a new law that significantly changes the Illinois Pension Code by creating an optional “Tier III” benefit structure and changing the way state government funds TRS.
None of the Pension Code changes enacted on July 6 affect active Tier I members or retired members in any way. There are no changes to benefits, active member contributions or health insurance coverage for Tier I and retired members. There are no changes to Tier II except that these members will be able to switch to Tier III.
The legislature did not extend the state’s income tax to retirement income.
NEW TIER III BENEFIT STRUCTURE
The law gives current Tier II members and future Tier II members – all new teachers – the option of joining a new “Tier III” retirement plan.
The optional Tier III “hybrid” retirement plan has two parts – a small life-long “defined benefit” (DB) pension and a “defined contribution” (DC) plan similar to a 401(k).
It is unknown at this time when Tier III will be available to members. Before Tier III can be implemented, the plan must be reviewed and approved by the U.S. Internal Revenue Service. It is unknown how long that process may take. The TRS Board will establish the final implementation date of the Tier III plan.
For Tier III members, the full retirement age will be 67 years and the automatic annual increase (AAI) is the same as the Tier II AAI – one-half of the previous year’s consumer price index, not compounded.
The calculation for an initial pension under Tier III is Service Years multiplied by Final Average Salary multiplied by 1.25 percent. The Tier I and Tier II pension calculation is Service Years multiplied by FAS multiplied by 2.2 percent.
CHANGES TO STATE FUNDING FOR TRS
New laws enacted with the state budget are designed to reduce the amount of money TRS will receive in fiscal year 2018 – and in the near future – from state government in its annual contribution to TRS. It is expected that the original state contribution for TRS in fiscal year 2018 – $4.65 billion – will be recalculated.
First, TRS must retroactively “smooth” the fiscal effect of any changes made in the TRS assumed rate of investment return over a period of five years. The “smoothing” applies to any assumption changes from 2012 on.
Second, local school districts will pay more of the cost of a member’s pension if that member’s salary is equal to or greater than the governor’s statutory salary. The district will be responsible for paying the actuarial cost of the benefits earned on the portion of the member’s salary that exceeds the governor’s salary, currently $177,412.