Louis Kosiba IMRF Executive Director Richard DeCleene IMRF Chief Financial Officer 1
How Employer Rates Are Calculated How to Understand Funded Status Reducing the Unfunded Actuarial Accrued Liability 2
Benefits are paid based upon a formula with fixed member contributions based upon state statutes. The cost of benefits reduced by member contributions must be paid by investment income or employer contributions. Each year an independent actuary calculates an employer contribution rate, expressed as a percentage of participating payroll, which determines the employer’s contribution. 3
To determine the cost of a pension, the actuary needs four types of information ◦ Member demographic information ◦ Actuarial assumptions ◦ Employer information ◦ Actuarial method for distributing cost This data is used to determine each employer’s individual annual contribution rate 4
Benefits are based on a formula – defined benefit ◦ Salary determines the final rate of earnings ◦ Years of service determines the final multiplier Gender and age impact ◦ Mortality ◦ Disability ◦ Separation from service ◦ Marital status 5
A formal set of estimates of what will happen to IMRF and its members Every three years IMRF’s actuarial assumptions are compared to its actual experience and adjustments are made as appropriate A summary of IMRF’s actuarial assumptions can be found in its Annual Actuarial Valuation Report which is available at www.imrf.org 6
Investment return assumption ◦ Long-term assumption; currently 7.5% ◦ Median return assumption for large public plans is 7.8% ◦ Investment return rate is used to discount actuarial liabilities for funding purposes Retirement age ◦ Estimate of how many members will retire at a given age ◦ Varies by age and gender ◦ Varies by Tier 1 and Tier 2 7
Marital status ◦ Estimate of members with survivor’s pension ◦ Varies by age and gender Mortality for active members ◦ Estimate of active members who will die in a given year ◦ Varies by age and gender Mortality for retired members ◦ Estimate of retirees who will die in a given year ◦ Varies by age and gender 8
Disability ◦ Estimate of number of disabilities in a given year ◦ Varies by age, gender and type of service Separation ◦ Estimate of number of active members leaving service in a given year ◦ Varies by age, gender and type of service Payroll increases ◦ Estimate of future merit increases of between .1% and 7% ◦ Estimate future increase due to inflation of 4% 9
Employer assets increased or decreased by ◦ Employer retirement contributions which do not include death, disability and supplemental payment ◦ Interest credited or charged on opening balance, currently 7.5% ◦ Adjustments, if any ◦ Residual investment excess or shortfall allocated based on employer reserve and annuitant reserve ◦ Employer’s share of the cost of an annuitant’s pension on a present value basis 10
Over or under funded liability for active and inactive members (actuarial assets less actuarial accrued liability) Amortization period ◦ For taxing bodies like Kane County, the amortization period is 30 years for 2013 reducing to 15 years at which time it will become a 15 year rolling period ◦ For example, the amortization period is 29 years for 2014 and will reduce to 15 years in 2028 at which time it will be a rolling 15 years 11
Method used to determine how much of the future costs will be paid each year IMRF uses the most frequently used method – entry ag age n nor ormal Under this method the cost of a pension is allocated on a level percentage o of payroll between the start of employment through retirement The cost of the pension assumes future service and salary increases 12
Using the member demographic data and actuarial assumptions, the actuary calculates the present value of benefits for each active and inactive member for each employer Using this information the actuary then translates the cost into a percentage of payroll rate – normal cost Since the present value of benefits is impacted by the elements of the formula, there are significant differences between Tier 1 and Tier 2 13
Prior to 2006 all IMRF employers had the same normal cost based upon an aggregate calculation of all active members In 2006 IMRF offered to “individually rate” employers who had over 400 active members Only three employers availed themselves to this opportunity For 2013 the aggregated normal cost is as follows: ◦ Tier 1 7.89% of payroll ◦ Tier 2 4.68% of payroll 14
2001 7.66% 2002* 7.60% 2003 7.61% 2004 7.64% 2005* 7.43% 2006 7.42% 2007 7.42% 2008* 7.58% 2009 7.58% 2010 7.58% 2011* 7.89% * Experience Study 15
Normal Cost 7.79% Funding Adjustment 2.71 Disability .11 Death .18 Supplemental Retirement .62 Total 11.41% 16
Tier 1 Tier 2 Total Payroll 41,511,635 1,367,014 42,878,649 Percentage 96.8% 3.2% Normal Cost 7.89% 4.86% Weighted Cost 7.64% .15% 7.79% 17
The funding adjustment represents the carrying costs (principal and interest at 7.5%) on the unfunded liability Present value of benefits for all non-retirees Less: Member assets Future member contributions Employer assets Future employer normal cost contributions Equal Unfunded actuarial accrued liability (UAAL) 18
UAAL at 12/31/2011 $22,767,748 Multiplied by 30 year amortization factor .05518 Require ired c d contribu ributio ion 1, 1,256, 256,348 48 Divided by estimated Payroll 46,359,705 Funding Adjustment Rate for 2013 2.71% 19
Disability contributions are used to pay temporary disability benefits for active members Disability benefits are pooled; effectively this is a cost sharing plan It is not prefunded and is on a pay-as-you-go basis The goal is to have a reserve equal to one year’s estimated payouts All employers pay the same rate which is set each year by the IMRF Board of Trustees The 2013 rate is .11% of payroll 20
Death contributions are used to pay death benefits for active members who die in service Death benefits are pooled; effectively this is a cost sharing plan It is not prefunded and is on a pay-as-you-go basis The goal is to have a reserve equal to one year’s estimated payouts An overall rate is set each year by the IMRF Board of Trustees The overall 2013 rate is .20% of payroll The overall rate is adjusted by IMRF’s actuary to calculate a specific rate for each employer based on the age of its employees Kane County’s 2013 rate is .18% of payroll 21
Supplemental retirement contributions are used to pay the additional “13 th payment” in July of each year The amount of the payment is the ratio of an individual’s qualified payment to the total of all qualified payments times the total amount of supplemental contributions in the pool This is a pay-as-you-go benefit The contribution is .62% and is set by statute For 2013 the 13 th payment is estimated to be 38% of the monthly benefit 22
Available March 29th: GASB disclosures ◦ Show funded status of each employer plan for last three years for its activ ive a and inactiv ive m members o only ly ◦ Reflects actuar arial funded status using five year smoothing of investment returns subject to 20% corridor ◦ Footnote on schedule discloses funded status on market basis For Kane County’s Regular plan ◦ Actuarial funded status increased from 80.38% to 81.97% due to 7.8% achieved actuarial return versus assumed 7.5% ◦ Market value funded status increased more significantly due to 13.5% return as it increased from 76.55% to 84.76% 23
Individual employer’s funded status reflects percentage funded for active and inactive employees It t doe oes n not ot reflect th t the p por orti tion of of th the I IMRF a annuity ty re reserve re rela lated t to it its re retir irees If annuity portion were added to the analysis the funded percentage would increase for underfunded plans but the unfunded dollar amount would remain unchanged. 24
(Millio llions) Non-retirees Retirees Total Actuarial Assets $13,010 $14,482 $27,492 Actuarial Liability 18,121 14,482 32,603 Unfunded Liability 5,111 0 5,111 Funded Ratio 71.8% 100% 84.3% 25
(Thousands) Non-retirees Retirees Total Actuarial Assets $ 99,442 $67,374 $166,816 Actuarial Liability 121,318 67,374 188,692 Unfunded Liability 21,876 0 21,876 Funded Ratio 81.97% 100% 88.41% 26
IMRF is recovering the UAAL over 30 years for 2013 calendar year rates for taxing bodies The amortization period will be reduced one year each year until it reaches 15 years when it will become a 15 year open period 15 year open basically means that the UAAL is refinanced each year Conceptually it will never be paid off 27
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