IPERS Overview & Benefit Options Presented by Ronda Onken Senior Retirement Benefits Officer Summer 2012

What is IPERS? The largest public retirement system in Iowa Members include employees of: public schools, cities, counties, state government, state universities, State Board of Regents Approximately 330,000 members 2,200 employers 100,000 retirees $1.3 billion in benefit payments paid annually Some positions are exempt from coverage or have optional coverage. Most full and part time employees are covered. Temporary employees, those who work less than six months, are not covered. A 401A plan is a qualified retirement plan under IRS codes.

What is IPERS? 401A (defined benefit plan) under IRS codes: Lifetime benefits are paid based on a formula not on the amount of contributions. Formula factors Age Years of service The average of your highest three years of salary

How does it work? Lifetime Retirement Benefits, Disability Benefits, Death Benefits and Refunds are paid out. Contributions from Active Members and Employers are paid in. The IPERS Trust Fund The IPERS Trust Fund must be used for the exclusive benefit of members and their beneficiaries.

What’s My Part? Contributions + interest Contributions based on gross wages Current Regular class contribution rate: 5.78% from you, the member 8.67% from your employer Interest is credited quarterly Regular class members contribute at a rate of 3.7%. The employer contributes 5.75%. Deductions for deferred compensation, TSA’s and other qualified tax deferred plans do not reduce the amount of wages reported to IPERS, Special class members include police officers of small towns, Sheriffs and deputies, airport fire fighters and other protection occupation positions. These members and their employers pay a higher contribution determined by the actuaries. The interest rate for 2004 is 2.67%.

What is “vesting”? Vesting status is obtained after: 16 quarters (4 years) of reported wages, or When wages are reported in the same calendar year age 55 or older is attained Only one quarter is credited regardless of the number of employer’s reporting. Effective July 2005, inactive members with less than 16 quarters of credit will not attain a vested status by reaching age 55. An account becomes inactive when a member hasn’t had wages reported in a calendar year.

Vesting Entitles the member to: Monthly retirement or disability benefit A portion of employer’s investment if refund is taken and Is required for a service purchase Members under age 55 must be vested to receive a monthly benefit payment under the disability provisions. A vested member who takes a refund will receive a portion of the employer’s investment based on the number of years they have contributed. For example, a member with 10 years of service will receive 1/3 of the employer’s investment. In order to pay back an IPERS refund or make any other service purchase, a member must be vested.

Monthly Benefit Six monthly payment options IMPORTANT! Always lifetime to member Different death benefit provisions IMPORTANT! Option choice cannot be changed once benefits are paid.

Benefit Formula Monthly benefits are calculated using: Years of Service Age Highest Three Years of Salary (Average)

Benefit Formula – Years of Service Each year worked earns 2% of the 60% payable for the first 30 years. 1% for a maximum total of 65% payable for each additional year after 30. Early retirement reduction if before normal retirement.

Maximizing Years of Service Free credit Leaves of absence Granted prior to July 1998 Requires verification from employer Active military duty Entered military as an IPERS covered employee and returned to IPERS employment within one year of discharge Submission of DD214 form required Credit for missing quarters due to leaves of absences granted before July 1998 can be added to an account. An affadavit completed by the employer along with documentation from personal records, board minutes, etc. must be submitted. Submission of a DD214 is required to add quarters of credit for active military duty. Free credit is given only if you entered active duty from an IPERS covered position and returned within 12 months after discharge.

Service Purchase Options Refunded IPERS service IPERS employment not previously covered Other public system(s) (if not eligible to draw pension from the other system) Active duty military time not eligible for free credit Nonqualified Service - 5 year limit Time not qualified (private employment) Public employment (eligible to draw pension from other system) “Air time” You can buy back the time, not the wages, you took as a refund from previous IPERS covered employment. Non-covered time includes employment with wages of less than $300 per quarter prior to July 1992 and substitute teaching time. Other public employment includes employment in another state, in Iowa (TIAA-CREF for example), federal government for which you will not receive a benefit. Private sector includes any employment with wages paid into social security and doesn’t fall into the other public category. The cost for service purchase is based on the highest calendar year of wages, the increase in benefits and how soon unreduced benefits will be paid if a purchase is made.

Benefit Formula - Age What is considered “normal retirement”? Age 65 Age 62 with 20 or more years of service Rule of 88 (years of service + age) Receiving social security disability or railroad disability Must be vested if applying for disability benefits under the age of 55 Any age reduction is 3% per year or .25% per month from: age 65 with less than 20 years of service credits age 62 with at least 20 years of service the month you will reach the 88 rule if you have at least 27 years of service Any age reduction will be eliminated for members receiving social security disability or railroad disability payments. Regular class members with less than 30 years of service will always have a reduction to benefits. The formula for Special class members is based on 22 years of service and 55 years of age.

Early Retirement Reduction Less than 20 years of service 3% per year for each year under age 65 20 or more years of service 3% per year for each year under age 62 At least 27 years of service and not reaching the Rule of 88 3% per year for each year under 88. Years of service are based on quarters of wages reported to IPERS not employment dates.

Computed Year Example HIGH 3 CALENDAR YEAR WAGES CURRENT YEAR SALARY (2012) 1st $11,000 2nd $13,000 3rd $ 8,875 4th $ 8,875 Computed year salary $41,750 Computed year High 3 Average = $40,583.33 *The computed year salary cannot be more than 103% of the highest calendar year wage (2011). **The computed year average cannot be more than 121% of the 4th highest salary year not being used in the calculation (2009). 2011 $42,000 2010 $38,000 2009 $35,500 High 3 Average = $38,500 ÷ 4 = $8,875 The final high three average used will result in the highest monthly pension payment payable to the member.

Important Facts to Remember! Working any time in a month makes you ineligible for benefits that month. You can get a paycheck in the same month you start IPERS payments.

Retirement Estimates Request estimates from IPERS before deciding on a retirement date. Working a little longer could increase benefits significantly. May be eligible to retire earlier.

Option Summary Always lifetime to member! OPTION 1 Guaranteed death benefit in $1,000 increments OPTION 2 Death benefit only if balance of investment remains OPTION 3 No death benefit OPTION 4 Dual life annuity OPTION 5 Guaranteed 10 year monthly benefit payments OPTION 6 Dual life annuity with pop-up feature for member

Getting Monthly Benefits Started Must terminate employment unless age 70 Must be age 55 or older Unless vested and eligible for IPERS disability benefits Must make application

Taxes Benefit payments are subject to federal and state income tax You can request that the tax can be withheld from monthly benefit payment 1099R mailed each January For detailed tax information, contact the IRS for publication 575 or consult a tax advisor

Bona Fide Retirement No employment with an IPERS-covered employer for one calendar month No IPERS covered employment for an additional three months for a total of four calendar months Months are counted by number of pension payments qualified for and received

When to Contact IPERS 3-5 years from possible retirement for estimates 5-6 months from retirement to obtain application packet At termination, if before age 55 for additional options If a disability occurs

Presented by Ronda Onken Senior Retirement Benefits Officer Changes to IPERS Presented by Ronda Onken Senior Retirement Benefits Officer

Summary of Changes 7/2012 Change in Vesting Rules Change to High 5 Average Change in Early Retirement Reduction Percentage Contribution rates increase 1% New reduction rules apply only to service earned 7/1/12 and later

Contribution Rate Change 7/2011 Contribution rate 13.45% 7/2012 Contribution rate 14.45% Split 60/40 Employee 5.78% Employer 8.67% Possible change +/–1.0% annually Split 60/40 Employee 5.38% Employer 8.07% Possible change +/–1.0% annually The contribution rate would have been 11.95% on July 1, 2011 without a law change. The limit on the yearly change would have been 0.5 percent point up or down each year, although projections show the direction likely would have been up for decades. Increasing the limit on how much the contribution rate each year is important because the rate is still below where it should be. The faster the rate nears the needed rate, the less it will cost in the long run. It is like getting behind on a credit card payment. You pay more interest when you aren’t paying what you should each month. A salary of $45,000 per year will see $180 per year increase of contributions in 2012.

Vesting Rule Change Now through 6/30/2012 On July 1, 2012 Vesting after 4 years On July 1, 2012 Vesting after 7 years Later in the presentation I will address how these benefit will apply to new employees and those who have been working a while.

Vesting Changes Vested on 6/30/12; remain vested At least 4 years of service OR Year age 55 or older and contributing Not vested on 6/30/12; vest at 7 years Vested members gain certain membership rights, such as a right to a lifetime benefit and the right to purchase service. At least 7 years of service OR Month age 65 or older and contributing

High 5 Average Change Now through 6/30/2012 On July 1, 2012 High 3 year average On July 1, 2012 High 5 year average

Compare and use higher of: High 5 Average Compare and use higher of: Snapshot of High 3 on 06/30/12 High 5 at retirement

Example 1: High 5 Snapshot of High 3 High 5 at Retirement 06/30/12 Member retiring December 2014 with pay raise each year. Snapshot of High 3 06/30/12 $45,000 47,000 $139,000 ÷ 3 $ 46,333 High 5 at Retirement $45,000 47,000 49,000 50,000 $238,000 ÷ 5 $ 47,600

Example 2: High 5 High 5 at Retirement Snapshot of High 3 06/30/12 Member retiring December 2014 with decrease in pay. Snapshot of High 3 06/30/12 $45,000 47,000 $139,000 ÷ 3 $ 46,333 High 5 at Retirement $45,000 47,000 40,000 43,000 $222,000 ÷ 5 $44,400

Spiking control still applies $ 37,000 38,000 40,000 41,000 45,000 47,000 52,000 71,000 93,000 $310,000 ÷ 5 $45,000 x 134% = $60,300 6th highest Spiking does not have to be an intentional act to inflate a pension. Any spike, regardless of reason, means the usual employer-employee contributions often have not been paid for the amount of the spike in lifetime benefits. The increased cost must be spread among all employees in the retirement system. High 5 = $62,000

Early retirement age reduction Current Reduce 3% a year for portion of service through 06/30/12 From nearest normal retirement eligibility (Rule of 88; rule of 62/20; age 65) Beginning July 1, 2012 Reduce 6% a year thereafter From age 65

Benefit multiplier – No change 2% a year for 30 years 1% a year in years 31–35 Maximum 65% Benefit Formula: Average Salary X Multiplier

Normal retirement age Age 65 Rule of 62/20 Rule of 88 (No early retirement reduction) – No Change Age 65 Regardless of service Rule of 62/20 At least age 62 with 20 or more years of service Rule of 88 Age + Years of service = 88 or greater

Example: Early retirement Retire age 61 with 26.5 years of service June 30, 2012 Total years 26.5 Annual multiplier Adjustment factor Adjusted to How long Reduction 24 2% 3% 62/20 1 yr 2.5 2% 6% 65 4 yr 24%

Example: Early retirement 24 yrs 2.5 yrs Reduce 3%/year for 1 year Earned before 7/1/12: 24 x 2% = 48% multiplier $54,000 x 48% = $25,920 Early retirement reduction: $25,920 x 3% = $777.60 $25,920 – $777.60 = $25,142.40 Reduce 6%/year for 4 yrs Earned starting 7/1/12: 2.5 x 2% = 5% multiplier $54,000 x 5% = $2,700 Early retirement reduction: $2,700 x 24% = $648 $2,700 - $648 = $2,052 Annual benefit = $27,194.40

Example: Work 6 more months Retire age 61 with 27 years of service June 30, 2012 Total years 27 Annual multiplier Adjustment factor Adjusted to How long Reduction 24 2% 0% Rule of 88 0 yr 3 2% 0% Rule of 88 0 yr

Example: work 6 more months 24 yrs 3 yrs Rule of 88 Earned before 7/1/12: 24 x 2% = 48% multiplier $54,000 x 48% = $25,920 Early retirement reduction: $25,920 x 0% = $0 $25,920 Rule of 88 Earned starting 7/1/12: 3 x 2% = 6% multiplier $54,000 x 6% = $3,240 Early retirement reduction: $2,700 x 0% = $0 $3,240 Annual benefit = $29,160.00

Value of working the additional 6 months Annual Pension with Reduction $27,194.40 Annual Pension with Rule of 88 $29,160.00 Increase of $163.80 per month for lifetime for working an additional 6 months

Contact us: The purpose of this presentation is to give you a brief overview of IPERS and upcoming law changes. For detailed information on your account: Call toll free 1-800-622-3849 or locally at 515-281-0020 Phones are answered by Retirement Benefit Officers from 7:30 am to 5:00 pm Monday through Friday, excluding holidays. Website: www.ipers.org E-mail requests: info@ipers.org Retirement calculators Handbook Newsletters Other important information

Thank You! Presented by Ronda Onken Senior Retirement Benefits Officer E-mail: ronda.onken@ipers.org Phone: (515) 281-0063