On Oct. 30, the Boards of Trustees of the Teachers’ and State Employees’ Retirement System (TSERS) and the Local Governmental Employees’ Retirement System (LGERS) voted to adjust the “cap factor” that each system uses in calculating the contribution-based benefit cap (CBBC). The cap factor for TSERS retirements will change from 4.5 to 5.2 and from 4.7 to 5.8 for LGERS retirements. These changes apply for retirements effective Jan. 1, 2026, or later.
The cap factor defines how large a retiree’s benefit must be, relative to the accumulated value of their own (6% of pay) contributions, for the retirement to be subject to CBBC provisions.
The CBBC determines if an employee is “pension spiking” as they hit retirement, which in turn causes either the employer or employee to pay extra funds to the retirement system to cover the overage (beyond what the individual contributed already) that the employee will be drawing out in their monthly pension. The anti-spiking CBBC approach was created to protect each system for current and future retirees and prevent all employers in the Retirement Systems from absorbing additional liabilities caused by compensation decisions made by other employers.
For retirements from 2016 to 2025, the cap factors have been 4.5 for TSERS, and 4.7 for LGERS. This means, for example, a TSERS retirement may be subject to the CBBC if the retirement benefit is more than 4.5 times what would have been funded by the accumulated value of the retiree’s own contributions.
An increase to the cap factor means that fewer retirements will be subject to the CBBC, and for those that are subject to it, the incremental impact of the CBBC will be less, compared to if the cap factor had not been increased. The update was made as the result of a routine study by the Boards’ consulting actuaries, a review that occurs once every five years. The consulting actuaries’ presentation is available here.
An explanatory memo from the NC Treasurer’s Retirement Systems Division (RSD) staff is available here. Additional RSD guidance issued this week is available here.