What it is, and why it can result in additional costs to ERS Employers
Have any of your vested employees recently received a pay increase greater than 5%? If those employees retire within 12 months of receiving the increase, the employer will be responsible for the cost of the additional pension in excess of a 5% pay increase, or the increase will not be included in the employee’s pension calculation at all, depending on their date of hire. This is known as the Pension Spiking rule.
- For members who joined ERS before July 1, 2009 there is no cap in the calculation of the retirement benefit; however, the employer is responsible for the full cost of the benefit in excess of a 5% increase. [OCGA 47-2-120(f) and 47-2334(j)].
- For GSEPS members joining ERS on or after July 1, 2009, increases in the calculation of ERS Formula Salary are limited to a maximum of 5% in the 12-month period immediately preceding retirement. [OCGA 47-2-353(2)]
This rule applies even if the “spike” (increase) is not a pay raise intended for the purpose of providing a higher retirement benefit to the employee.
For employees hired before July 1, 2009, below are some common scenarios of an increase in salary resulting in an invoice to the employer for the cost of the additional pension:
- Promotion: An employee receives a promotion with an increase in excess of 5% during the 12 months before retirement. Even if the increase is 5% or less, but the employee also receives another increase during the 12 months before retirement for a total increase in excess of 5%, it is considered pension spiking.
- State Mandated Increases: An employee receives an increase required for their position, resulting in an increase in salary in excess of 5% during the 12 months preceding retirement. Even though the salary increase was required, it still results in an increased lifetime retirement benefit to the employee and an invoice to the employer.
- Temporary Supplement: An employee receives a temporary pensionable supplement. The temporary supplement is considered when determining the amount of any increase during the 12 months before retirement.
The above are just some examples of reasons for pay increases resulting in pension spiking. Any increase in pensionable pay during the last 12 months before retirement, whether granted as one large increase or as several smaller increases, will result in pension spiking. The reason for the increase doesn’t matter, the financial effect on the pension plan is the same, and the cost of the increase in the pension in excess of a 5% increase will be passed along to the employer.