Kentucky’s Proposed Pension Reform Plan

On October 18, 2017, Governor Matt Bevin and state Republican leaders unveiled a plan that transitions Kentucky Retirement Systems’ traditional pension plans and hybrid ‘Cash Balance’ plans into Defined Contribution Plans for all newly enrolled (and many current) employees.  If the bill passes, substantial changes will be made, impacting participant benefits, retiree healthcare, disability, and death benefits. 

Among the largest affected cohorts under this plan are Kentucky Employee Retirement Systems (“KERS”) and County Employee Retirement Systems (“CERS”) nonhazardous new members, whose employer contributions would be restructured, consisting of a 2% mandatory amount in addition to a 50% match.  Like all Defined Contribution plans, employees bear the brunt of financial responsibility and risk.  Employees control their contribution amounts and essentially the extent of their retirement.  One of the biggest changes proposed eliminates the ability for employees to convert unused credits for sick leave or service purchases as a way to increase total estimated income prior to retirement, effectively increasing an individual's entitled pension amount. 

Under current law, retirement age is governed by the ‘Rule of 87’ (age + service = 87) for ‘Tier II’ and ‘Tier III’ employees. The new proposal has no retirement age, as the total amount within each individual plan account depends on the amount the retiree is able to save during their employment.  (Of note, there may be tax consequences for individuals under this plan that would affect the timing of their retirement, but that are not contemplated here.)   Members’ disability and death benefits, and eligibility to receive such benefits, would also see major changes, shifting the burden both to elect and pay for such benefits to the employee. As some affected employees do not contribute to Social Security, and are therefore ineligible for Social Security Disability Insurance, this would mean employees who do not opt-in and pay for these benefits could be left without any form of disability insurance. 

This proposed bill will change the way that government employees are compensated for retirement during their working years and upon retirement. It is not clear how much the reform bill will cost taxpayers, or how some of its provisions will affect individuals and their retirement elections.  However, should the bill pass, major benefits changes (and tax implications) are certain for Kentucky state and county employees.

KRS has provided its own explainers and 'side by side' comparisons of benefits under the plan on their web site, here.