NORTH CAROLINA
DEPARTMENT OF STATE TREASURER
RETIREMENT SYSTEMS DIVISION
________________________________________________________________________________
JANET COWELL
TREASURER
STEVE TOOLE
RETIREMENT SYSTEMS DIRECTOR
H-1195: Fiscal Integrity/Pension-Spiking Prevention Act of 2014
North Carolina’s 918,000 public employees and retirees rely on the integrity, knowledge, and judgment of
the Department of State Treasurer to ensure their pensions are protected. In helping to secure the pension,
the state must have the tools and authority to reduce the risk of fraud and abuse, and to guard the fiscal
integrity of the Retirement Systems.
SECTION ONE: Anti-Pension Spiking – Contribution-Based Benefit Cap
▀ House Bill 1195 would prevent highly compensated individuals from spiking their pensions without
compensating the retirement system for the increased liability. The bill requires the Boards of Trustees of
the state and local systems to establish an anti-pension spiking contribution-based benefit cap factor.
 Pension spiking is not a pervasive problem in N.C., but the Retirement System’s actuary found
enough instances that a solution is warranted.
 The maximum number of people per year who can be affected by the pension spiking cap is 3/4ths
of 1 percent (0.75%) of retirees.
 The pension spiking cap applies to individuals with an Average Final Compensation (AFC) of
$100,000 or higher and will only directly impact a small number of those individuals.
 The Department of State Treasurer endorses this proposal because affects only people who spike
pensions in a manner that creates a significant liability on the Retirement System.
▀ This approach was recommended by Buck Consultants, the Retirement System’s actuary, and further
developed by the Department of State Treasurer in collaboration with the N.C. League of Municipalities,
and the N.C. Association of County Commissioners.
 The employer organizations worked with the Department on the proposal because they saw this as
an opportunity to protect the fiscal integrity of the system.
 This approach will prevent employing agencies in the Retirement Systems from having to pay for
the additional liabilities caused by pension spiking by other employing agencies in the Retirement
Systems.
 For members hired before January 1, 2015, their employer would pay for the additional liability on
the Retirement System caused by the pension spike.
 For members hired on or after January 1, 2015, employer or employee may pay for the additional
liability, or the employee can choose to receive a reduced benefit.
▀ This legislation will enhance the Department of State Treasurer’s tools guard the Retirement System
against Fraud, Waste, and Abuse.
 The factors used in the contribution-based benefit cap will be set every five years by Boards of
Trustees as a part of the regular experience study.
 The Retirement System will report monthly to employers the names of people who may trigger the
cap if they retire within 12 months.
325 NORTH SALISBURY STREET, RALEIGH, NORTH CAROLINA 27603-1385
Telephone (919) 807-3050 or (877) 627-3287 toll free Fax (919) 508-5350
www.myncretirement.com
SECTION TWO: Return of Contributions with Accumulated Interest
This section allows state and local government employees who leave employment within five years to
receive their contributions and accumulated interest at the current statutory rate of four percent. Currently,
all employees receive interest after five years, and only employees who were involuntarily terminated
receive interest before five years.

North Carolina has the only state retirement system in the country that requires new employees to
give the state an interest-free loan for five years.
SECTION THREE: Restore Vesting Period
The section also restores the vesting period to 5 years, instead of 10 years, for all members of the Teachers’
and State Employees’ Retirement System hired after 8/1/2011 and for members of the Consolidated Judicial
Retirement System.
● Ten-Year Vesting is Ineffective
• The vesting period for Teachers & State Employees was increased from 5 years to 10 years in 2011.
• Primarily done as a cost-savings measure, it is not saving much money
• Last year, the one-year savings estimate was 1 basis point, maxing out after more than 10
years at 7 basis points
• 10-year vesting is a disincentive to seek employment as a teacher or state employee
• Discriminates against newly hired employees
● Ten-Year Vesting is Impractical
• Delayed vesting deprives short-term employees of retirement protection
• The Center for Retirement Research estimates that an employee in a plan with 5-year vesting
is 5 times more likely to remain until vesting than an employee in a plan with 10-year vesting
• Less than 40% of new employees will remain in employment long enough to become vested
under the 10-year vesting law
• Difficult for elected judiciary and executive leadership
● Ten-Year Vesting is Inconsistent with HR Goals
• The length of the vesting period is an important factor for job-seekers
• Workers are more mobile these days
• When starting a new job, people have a hard time imagining that they will stay with their
employer for 10 years or more
• 10-year vesting makes it more difficult to hire highly-skilled workers
● Ten-Year Vesting is Uncompetitive• A long vesting period reduces the market competitiveness of the Retirement System relative to other
public and private pension plans
• The 2012 Comparative Study of Major Public Employee Retirement Systems reports that a
total of 56 plans, or 64.4% of the 87 included plans, require five or less years of service to
vest
• By federal law, the vesting period in private sector defined benefit plans cannot exceed 7
years
SECTION FOUR: Effective Date
Sections 1 and 2 of this act become effective January 1, 2015. The remainder of this act is effective when it
becomes law. (Section three is retroactive to 8/1/2011 to avoid creating a set of people with 10-year
vesting.)
Prepared by the Retirement Systems Division staff, 6/8/2014