What is the Hybrid Cash Balance Plan?
A Cash Balance Plan is known as
a hybrid plan because it has characteristics of both a defined benefit and
defined contribution plan. A Cash Balance Plan resembles a defined contribution
plan because it determines the value of benefits for each participant based on individual
accounts. However, the assets of the plan remain in a single investment pool
like a traditional defined benefit plan.
Monthly Life annuity formula
Accumulated Account Balance \ Actuarial Factor = Monthly Life Annuity
Years of Service
While years of service credit are not a factor in calculating a Tier 3 member's retirement benefit, the service is used to determine retirement eligibility.
Tier 3 members may be eligible to make six (6) different types of service purchases.
Determination of Benefits
Four elements comprise a member's Accumulated Account Balance:
Accumulated Account Balance
Components of the accumulated account balance
Member Contributions + Employer Pay Credits + Base Interest + Upside Sharing Interest
1. Member Contributions
A set percentage of the member's creditable compensation is contributed to the Cash Balance plan each month:
Nonhazardous Members
5% of their creditable compensation
Hazardous Members
8% of their creditable compensation
An additional 1% is contributed by all Tier 3 members to the health insurance fund. The additional 1% is not credited to the individual account and is not refundable.
2. Employer Pay Credits
The Employer Contribution Rate is recommended by the KPPA Board of Trustees each year based on actuarial valuation. The employer pays a set percentage of the member's creditable compensation each month:
Nonhazardous Members
4% of their creditable compensation
Hazardous Members
7.5% of their creditable compensation
Employer pay credits are deposited to the member's individual accounts and represent a portion of the employer contribution.
3. Base Interest
Your member contributions and employer pay credits earn a base interest of 4% annually. Interest is credited to your account on June 30, based on your account balance from the preceding June 30.
New members are not awarded interest credit the first year they participate, as there is no prior year balance.
4. Upside Sharing Interest
Upside sharing interest is the additional interest credit that may be applied to a Tier 3 account. IT IS NOT GUARANTEED. The following conditions must be met before Upside Sharing Interest is credited to an account:
- The system's Geometric Average Net Investment Return (GANIR) for the last five (5) years must exceed 4%
- The member must have been active and participating in the fiscal year
If the GANIR exceeds 4%, the member's account will be credited with 75% of the amount of return over 4%. It is applied to the account balance as of June 30 of the prior fiscal year.
Example of Upside Sharing Interest
| Instructions | Factors |
| Assumed Geometric Average Net Investment Return: | 7.5% |
| Minus Base Interest: | - (4.0%) |
| Amount of Return in Excess of the Base Interest: | 3.5% |
| Multiplied by 75%: | 75% |
| UPSIDE SHARING INTEREST CREDIT = | 2.63% |
| Add Base Interest: | +4.0% |
| TOTAL INTEREST PAID: | 6.63% |
Upside Sharing Interest FY 2022
| System | Base | Upside Sharing | Total |
| CERS Nonhazardous | 4.00% | 1.68% | 5.68% |
| CERS Hazardous | 4.00% | 1.79% | 5.79% |
| KERS Nonhazardous | 4.00% | 1.28% | 5.28% |
| KERS Hazardous | 4.00% | 1.70% | 5.70% |
| SPRS | 4.00% | 1.58% | 5.58% |
Actuarial Factors
Your accumulated account balance is divided by an actuarial factor to calculate your monthly life annuity option. Your age at retirement and type of service (hazardous or nonhazardous) determine the actuarial factor. At retirement, the member is eligible for a monthly annuity until death.
Experience studies are performed by the Systems' independent actuary at least every five years to compare each plan's actual experience to what had been expected (the assumptions). The most recent study was completed in April 2019. Based on that study, actuarial factors were adjusted effective January 1, 2020. Click here to view actuarial factors prior to January 1, 2020.
To calculate your Tier 3 benefits using the current actuarial factors listed below, visit MYRETIREMENT.KY.GOV