Excess interest is those excess investment monies earned by the Pennsylvania Municipal Retirement System over and above what must be paid as regular interest and certain administrative expenses. Excess interest varies from year to year because the award is based on the rate of return earned on PMRS’ investment monies. If the financial markets are doing well, there is a good chance that there will be excess interest. If the financial markets are doing poorly, it is likely that there will not be excess interest for that year. Excess interest earned in a given year is allocated in the following year. PMRS Board of Trustees adopted a formula for deciding the amount of each year’s excess interest. This formula is used to smooth the roller coaster ride that the financial markets tend to take. The board’s goal is to allow plans to participate in up markets while still allowing PMRS to save for down years.

Cash Balance Plans
In cash balance plans, excess interest is automatically allocated to the active members’ accounts and to retired members. For example, an excess interest award of 5% would mean that the active members’ accounts would earn 5% excess interest plus regular interest. For a retired member, the monthly benefit would increase 5% but be reduced by the option factor if the retiree did not select a single life benefit.

Defined Benefit Plans
In defined benefit plans, excess interest is allocated by the governing body of the municipality. The allocation may be made to the municipal reserve (employer’s account), to the active and vested members, to the retired members, or to any combination of the three types of accounts.

Allocating to Municipal Reserve
Allocating excess interest to the municipal reserve means that when the actuary next values the plan, there will be more assets than anticipated. All other aspects of the valuation being equal, this translates into lower employer costs in the future. The lower cost will be reflected as a lower unfunded liability or as a larger actuarial surplus. Depending on your plan’s cost, the excess interest award also may impact future state aid allocations.

Allocating to Active and Vested Employees
If excess interest is given to active and vested employees, the money is tracked separately until the member starts to draw a monthly benefit. At that time, the excess investment account is divided by a life expectancy factor to produce an additional monthly benefit. This excess interest benefit is in addition to the benefit that has been separately promised and funded by the employer’s and employee’s contributions.

Assume an active member’s account holds $30,000 in excess interest at retirement.

The estimated monthly benefit shown represents the single life or maximum benefit. If an individual selects a survivor benefit other than a single life benefit, the monthly amount will be reduced.

Allocating to Retirees
If the retired members’ reserve is allocated excess interest, the retiree will be given a boost in his/her monthly retirement check for the remainder of the life of the retiree.

Helpful Information
No two plans are exactly the same, but here are some points to consider.

If a plan eliminated member contributions several years ago and the excess interest is allocated to the members on an equal percentage basis (based on the employee’s account balance), the employees hired since the member contributions were eliminated will not participate in the excess interest award.

Awarding excess interest to the retirees on an equal percentage means that those more recently retired tend to get larger monthly increases than those who have been retired for long periods of time because the latter is usually receiving a lower monthly benefit. Therefore, the value of the retirement benefit is less.

If the municipality takes the excess interest and the plan also is eligible for state aid, the municipality could be reducing the amount of state aid it would be eligible to receive in future years.

The allocation of excess interest can have a significant impact on your municipal account, the active plan participants and any retired members. The excess interest award is our special way of sharing PMRS investment earnings with our plan members.