US - The board of the California State Teachers' Retirement System (CalSTRS) has voted to support proposed legislation to help curb pension spiking.
The measure, known as SB 27, would change the types of compensation that are credited to the CalSTRS and CalPERS defined benefit programmes in order to curtail the inappropriate inflation in retirement benefits, known as pension spiking.
The fund said the pending legislation would enhance the internal safeguards currently in place to stop compensation practices some members may undertake to increase their final compensation and inflate their retirement benefits.
A similar bill (SB 1425), which was tied to separate legislation making parallel changes to local retirement systems, including county retirement systems, was vetoed last year by Governor Schwarzenegger.
"Our support of this bill emphasises the seriousness with which we view the damage that spiking does to the financial soundness of our system and to the trust placed in us by the educators of California," said Board chair Dana Dillon.
"We must, however, be mindful of the legal and moral issues of changing the rules on our existing members who have made life decisions based on the rules that existed when they were hired. This principle guides our calls for amending the bill to apply only to new members."
Under current law, benefits are paid to retiring members of CalSTRS Defined Benefit (DB) Programme based on the age, service credit and final compensation at retirement. Final compensation is based on the average annual full-time salary rate over one or three years, depending on the number of years of service. Twenty-five years is the benchmark for a one-year final compensation pension calculation.
The bill specifies which types of compensation would be included in a member's final compensation for the purpose of determining retirement benefits. Salary would continue to be credited to the DB Programme. However, payments, such as stipends for supplemental assignments, car or housing allowances made in addition to salary or wages would be credited to the Defined Benefit Supplement (DBS) Program rather than the DB Programme and would not be included in final compensation.
CalSTRS is also seeking amendments to establish a uniform limitation on annual creditable compensation future members can earn. The limitation would improve upon current processes, which require time-consuming manual reviews that can be perceived as subjective, and serve as a more effective way of combating spiking.
A limit equal to 60% of the IRS annual indexed pension compensation limit (currently $245,000), or $147,000, would be allowed to be credited to the Defined Benefit Programme, with compensation exceeding the limit credited to the member's DBS account.
"CalSTRS uses a hybrid retirement plan in the form of its DBS Programme to accumulate member and employer contributions not creditable to the DB Programme. It works like a defined contribution plan," said Jack Ehnes, CalSTRS chief executive officer.
"Currently, contributions paid for overtime, such as for summer school or after-school activities, or on compensation being paid in order to spike a person's pension, are credited to the member's DBS account, rather than the member's monthly pension. The proposed amendments build on that foundation to further our efforts to prevent pension abuse."
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