Monday, March 30, 2020

Annual Actuarial Valuations

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Experience Study
Managing UAL

The annual actuarial valuation (AAV) is an important tool to help you budget for your municipality’s retirement benefits, with information specific to your municipality's retirement plan. While MERS pools assets for investment purposes, individual accounts are maintained for each municipality. Each entity is responsible for the employer contributions needed to provide benefits for its employees and former employees. To see a consolidated report of all MERS plans, please click here.

The annual actuarial valuation is a report provided to you as a snapshot of your MERS Defined Benefit Plan as of December 31 each year. The report provides insight to your plan’s liabilities, funding levels, contributions for both the employer and employee, and important GASB Information. The information in the report will provide your contribution rates for your following fiscal year.

When to expect your report

You can expect your report to arrive by June 30 for the previous calendar year. For instance, you can expect the 2018 report to arrive by June 30, 2019. This report will contain contribution rate information for the 2020 fiscal year.

Understanding your annual actuarial valuation

This guide outlines each section of your report, as well as answers to some frequently asked questions. For more information, please contact your MERS Regional Manager. Click the section title for more information about that part of the report.

Executive Summary

Note: There has been a change in actuary and actuarial software since the December 31, 2017 valuation. Throughout your report you will see references to valuation results generated prior to the 2018 valuation date. Results prior to 2018 were received directly from the prior actuary or extracted from the previous valuation system by MERS's technology service provider.

In the 2018 report you will see that your funding level reflects any contributions made to the surplus division.

sample funded ratio

The following explanation on how the surplus division works can be found immediately following charts highlighting employer required contributions and employee contribution rates:

The employer may contribute more than the minimum required contributions, as these additional contributions will earn investment income and may result in lower future contribution requirements. Employers making contributions in excess of the minimum requirements may elect to apply the excess contribution immediately to a particular division, or segregate the excess into one or more of what MERS calls "surplus" divisions. An election in the first case may reduce any unfunded accrued liability and lower the payments throughout the remaining amortization period (which would be reflected in the next Valuation report).

An election to set up a surplus division specifically allocates assets to an "asset-only" divison would not immediately lower future contributions, however the assets from the surplus divisions could be transferred to an unfunded division in the future to reduce the unfunded liability in future years, or to be used to pay all or a portion of the minimum required contribution in a future year. For purposes of this report, the assets in any surplus division have been included in the municipality's total assets, unfunded accrued liability and funded status, however, these assets are not used in calculating the minimum required contribution.

MERS strongly encourages employers to contribute more than the minimum contribution shown above.

Please also note the in-depth explanation on Investment Return Assumption and Asset Smoothing. This is a key area that all groups should understand when evaluating the actual dollars your budget will commit to your pension costs.

In the 2018 AAV you will see more information on assumption changes that were approved by the MERS Retirement Board on February 28, 2019. In summary, the Board adopted a reduction in the investment rate of return assumption to 7.35%, effective with the December 31, 2019 valuation and first impacting fiscal year 2021 contributions. The Board also changed the assumed rate of wage inflation from 3.75% to 3.00%, with the same effective date. IMPORTANT: This report includes a "What If" scenario of 7.35%/3.00% in order to show the potential impact of this assumption change.
Once again you will see a 5 year asset smoothing as approved in the 2015 Experience Study. The Experience Study is a comprehensive, detailed analysis that reviews MERS' funding policy and compares actual experience with the current actuarial assumptions.

More information on the Experience Study and the changes that occurred as a result of the most recent study can be found here.

The Comments on Asset Smoothing section has been updated to a link to this "How Smoothing Works" video.

In the projection scenarios table, data for the 7.75% phase-in rate has been removed, due to the assumption change. Only the full impact rates are shown.

Note that the Risk Characteristics of DB Plans section has been moved to the end of your report. For more information, see the Risk Characteristics section below.
The 2018 report includes a 6 year budget projections and graphs.

The Alternate Scenarios to Estimate the Potential Volatility of Results ("What if Scenarios") added 7.35% as a scenario option, and removed the 6.75% scenario option. The Retirement Board has adopted a change to the Investment Return Assumption from 7.75% to 7.35%, and the wage inflation from 3.75% to 3.00%. This change will be effective in the December 31, 2019 valuation which will impact the Fiscal Year 2021 contribution. The scenario shown using these assumptions as of December 31, 2018 is illustrative only. The actual impact of this change when reflected in the 2019 valuation will be different.

You will continue to see different investment return assumptions along with added data showing any assets you have in the surplus division. You will also note that the charts have been expanded until the year 2042. These graphical projections show your plan's funded ratio and computed employer contributions under the actuarial assumptions used in the valuation and alternate assumed long-term investment return scenarios. Your projection scenarios also now include lines to indicate the 60% funded level to assist with PA 202 reporting.


AAV frequently asked questions

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The information contained in this Web site is being made available as a public service. The information is not intended to constitute legal or investment advice, or to replace official versions of that information. Benefit Estimates or Service Credit Purchase estimates requested through this Web site are not official descriptions of any benefits, and do not represent a promise by MERS to provide any benefit(s) to any person(s). No one can detrimentally rely upon the information provided in, or requested through this Web site. MERS reserves the right to correct any errors, and presents this information without warranties, express or implied, regarding the information?s accuracy, timeliness or completeness. If you believe the information is inaccurate, out-of-date, or incomplete, or if you have problems accessing or reading the information, please call MERS at 800.767.MERS (6377).