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The TRF Pre-1996 account was created as a pay-as-you go plan in 1921. In 1995, the General Assembly created a special Pension Stabilization Fund to protect Pre-1996 account retirees against any disruption in benefit payments.
There are two distinctly separate accounts within the Indiana State Teachers’ Retirement Fund (TRF). The Pre-1996 account includes teachers who started their service before 1996. The 1996 account includes teachers who started service on or after 1996. The defined benefit (pension) benefit for each account is funded differently.
Pension plans at the Indiana Public Retirement System (INPRS) are funded in one of two ways. Many of the plans in the system – including the 1996 TRF account – are actuarially funded, meaning money is set aside today to fund projected benefits years in future.
Actuaries project the amount of benefit payouts will be years in the future, and what funding must be set aside today to fund the future benefit. Funded status reported for an actuarially funded plan is the difference between the accrued liability and the actuarial value of assets. Often this number is reported as a percent.
TRF’s pre-1996 fund is a pay-as-you-go plan that has been in place since 1921. It is not pre-funded and its funding status is low by design. Typically in pay-as-you-go plans, no funds are set aside today to fund projected benefits years in the future. Instead, these plans are funded in the year the benefit payment is provided to the member.
Reporting a funded status percent for pay-as-you-go plans is misleading as these plans are not actuarially funded.
In the case of Indiana TRF, the state’s General Assembly recognized potential risks of the pay-as-you-go approach and, in 1995, established a separate fund to protect TRF retirees against any disruption in payments and to smooth out payments from the state as the baby boomer generation retires. At that time, the pre ’96 plan was closed to new entrants and the actuarially funded 1996 fund was established for all new members. At the fiscal year ending June 30, 2011, the Pension Stabilization Fund’s assets were $2.26 billion.