Thursday, August 17, 2017

Unfunded Liability — What You Need to Know

Quick Links:

Experience Study Overview
Experience Study Full Report
Summary of Assumption Changes
2015 AAV Assumptions
Amortization Policy
Experience Study FAQs
Experience Study Panel Discussion (Video)
Managing UAL Publication
Understanding Defined Benefit Pensions (Video)

In a defined benefit pension plan or retiree health care plan, unfunded liability is the difference between the estimated cost of future benefits, and assets that have been set aside to pay for them.

Municipalities can find their pension funded level and unfunded liability in their Annual Actuarial Valuation, a report provided to them each year. To learn more about your valuation, see our resource page here. In addition to using current membership and financial data, the valuation requires the use of a series of assumptions regarding uncertain future events. The assumptions and methods used in the valuation are those adopted by the MERS Retirement Board, after extensive analysis and recommendation by our actuarial firm, CBIZ.

 

Experience Study
As part of our fiduciary responsibility, MERS and our actuarial firm, perform this study every five years to review the MERS funding policy and compare actual experience with the current actuarial assumptions to determine necessary funding policy and assumption changes.

I Am MERS

Funding Policy Goals
Our primary goal is to ensure that each municipality's plan assets are adequate to provide for the benefits that are expected to be paid and that each plan is making reasonable progress to achieve full funding.

Our secondary goal is to have each generation incur the cost of benefits for the employees who provide service in that generation, rather than deferring those costs to future employees. Our funding policy also supports our overarching organizational goals of transparency and accountability.

Contribution stability has traditionally been the primary goal for many public pension plans, including MERS. We believe that contribution volatility should be balanced with the commitment to ensure plans are properly funded.

Key Findings
From the analysis, MERS is adjusting our mortality table because people are living longer, lowering our assumed rate of return from 8 percent to 7.75 percent, and requiring a shorter fixed amortization period. Click here for the assumptions summary chart.

Amortization Policy
The amortization policy sets the length of time needed to eliminate a pension plan's unfunded liability. Since 2005, MERS has been gradually reducing the amortization period to help ensure that pension costs of current employees do not shift onto future generations. Having a fixed amortization period gives a specific target date to each plan by which all known obligations will be fully funded. Click here for more information on this policy.

Impact
The impact of these changes vary across municipalities because plans have different participant demographics, funded levels and benefit designs. The MERS Board approved a “phase in” for the total impact over the next 5 years (impacting fiscal years 2017 – 2021).

Based on feedback from our customers, we recognize that some municipalities may need additional time in adhering to this best practice. While we strongly suggest groups use the funding policy in place, at your request, we will provide a sustainability analysis to determine if a one-time extension of the amortization schedule for existing UAL is possible. Since each plan is different, it is important that a sustainability analysis is performed to ensure there are enough assets in the plan to pay for the accrued benefits. 

By extending the amortization period the municipality is deferring costs into the future, which will result in higher overall costs in the long-term. Any new UAL will be layered based on the plan's original schedule.

To request an actuarial sustainability analysis, please contact your Regional Manager.

Partnering to Help You Reduce Your UAL
Recognizing that every member has unique needs, we offer a broad range of customizable plans to fit our members' budgets, needs and goals. We also partner with municipalities, helping them set fiscal goals and discussing options. Many are already taking proactive steps to reduce their UAL.

Communicating the Facts
If you are asked to communicate Experience Study information with key stakeholders or the media, we've put together some resources to assist you. Are you presenting to a group? We've created a PowerPoint presentation that you can customize with information specific to your municipality. Contacted by the media to address Experience Study questions? Please review the Media Protocol sheet for tips on how to respond.

 

Reducing UAL

There are several ways a municipality can close its unfunded liability gap, including:

Increase assets to close the funding gap, by either:
Borrowing to fund the gap (for example, bonding, which requires that you close the plan)
 
Paying more than the required minimum contributions

Reduce or eliminate liability moving forward:
Reduce the liability for new hires by offering a lower tier of benefits (either in the Defined Benefit or Hybrid plans) to new hires.
 
Reduce the liability for new hires and existing employees by "bridging" their benefit multiplier to a lower one and freezing final average compensation.
 
Eliminate the liability for new hires by closing the Defined Benefit Plan and offering a Defined Contribution Plan to new hires. Closing the pension plan to new hires won't eliminate the funding gap. The only way to eliminate an unfunded liability is to pay it off. This is because, whether a pension plan is open or closed, the obligation to pay for benefits earned in the past will remain.

 

For more information, click on the managing UAL publication.

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Disclaimer
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).