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.
- 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.
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.