The California Public Employees’ Pension Reform Act (PEPRA) of 2013 became effective on January 1, 2013. PEPRA primarily affects “new members,”
as defined below:
- Eligible employees who joined KCERA on or after January 1, 2013, and
- Eligible employees who returned to KCERA and to a different employer after January 1, 2013 following a break in service of more than six months. These “new members” also had previously severed membership by withdrawing their contributions.
PEPRA’s primary areas of impact concern benefit formulas, final average compensation period, pensionable compensation, salary cap and retirement contributions. Here is a summary of each area.
- Benefit Formulas. PEPRA prevented plan sponsors from offering their new employees a defined benefit formula above certain limits. KCERA’s General Tier II (“1.62% at age 65”) and Safety Tier II (“2% at age 50”) formulas fell under the limit and therefore could apply to new members. Only West Side Recreation and Park District adopted General Tier III (“2.5% at age 67”) for its new employees.
- Final Average Compensation (FAC) Period. New members subject to PEPRA rules will have their retirement benefits calculated on their highest 36 consecutive months of “pensionable compensation.”
- Pensionable Compensation. Final average compensation (also known as “pensionable compensation” in PEPRA) includes a member’s salary and eligible special pays earned during the FAC period. The Board of Retirement adopted a resolution listing special pay items considered pensionable compensation for new members subject to PEPRA rules.
- Salary Cap. PEPRA set a maximum compensation amount on which retirement benefits earned under the new PEPRA formula will be calculated. General Tier III members subject to PEPRA rules can only earn benefits on pensionable earnings up to the federal wage salary cap.
- Retirement Contributions. PEPRA required equal sharing of normal costs between the employer and the employee. New members subject to PEPRA rules will pay retirement contributions equal to 50% of the “normal cost rate,” as calculated by KCERA’s actuary.