Typically, when one enters a new job or profession, he or she is confronted with a daunting task of learning the vocabulary and jargon of that particular field of work. The same can be said for me upon my recent employment at LAGERS. As I traverse this new world of pension vocabulary, I think it might be beneficial to pass my new found knowledge on to you, as I am assuming pension jargon is a foreign language to most who are not directly involved with the field of public pensions.
Though it may seem sophomoric, the first word of great importance in my new line of work is LAGERS. There are numerous people, including myself, who thought LAGERS was an acronym for Local Area Government Employees Retirement System.Much to my chagrin, I quickly learned LAGERS is actually Local Government Employees Retirement System. There is no “Area” in the name.
The next term of importance is defined benefit (DB) pension plan, the kind of plan LAGERS offers. A DB is a type of pension plan where the member is provided with a permanent, protected monthly benefit for the rest of his or her life after retirement. The monthly benefit received by the member is based on the following formula:
Benefit Program X Credited Service X Final Average Salary (FAS)
It is NOT based on how much an employee or employer has contributed to the plan or how well those contributions were invested. That type of plan would be considered a defined contribution (DC) plan and is not a lifetime benefit plan. With the defined contribution plan, benefits are paid until the account balance runs out.
As previously mentioned, the DB is calculated by a specific formula. The first part of this formula is the benefit program chosen by the employer. At LAGERS, there are many options from which an employer may choose. The following is a list of some of those options which determine the multiplier for the formula:
L1 = 1.0%
L3 = 1.25%
L7 = 1.50%
L12 = 1.75%
L6 = 2.00%
Let’s say an employer chooses the L7 plan; the first number (or multiplier) to put in the benefit formula would be 1.50%.
Now for the next number of the formula: credited service. Credited service is the amount of time an employee works for a LAGERS employer. It is calculated as the sum of membership service and prior service. Membership service is any employment earned after an employer has joined LAGERS. A member earns one month of credited service toward his or her benefit for every one month of LAGERS covered employment. Prior service is employment prior to the date an employer joins LAGERS. A LAGERS employer has the option to cover 100%, 75%, 50%, or 25% of prior service. The longer an individual works for a LAGERS employer, the larger his or her benefit will be upon retirement.
So, let us say an employer chose the L3 plan, and the employee has earned 25 years of credited service. The formula, so far, looks like this:
1.25% X 25 X FAS = lifetime monthly benefit.
Let’s finish the equation. FAS, or Final Average Salary, is calculated as either the highest of 36 or 60 consecutive months of wages (depending on the employer’s election) from an employee’s last 120 months (10 years) of credited service. So, if the final average salary of the sample employee above is $2,981, the final equation to calculate that person’s lifetime monthly benefit looks like this:
1.25% X 25 X $2,981 = $931.56.
That individual would receive $931.56 a month for life.
So, now we have a basic understanding of the vocabulary and process of calculating a LAGERS benefit. Yes, there are many more terms to understand, especially within the payment options part of one’s benefit plan, but for now, rest assured. You have succeeded in the interpretation and understanding of a very complex group of terms used within the world of LAGERS.