Saturday, August 17, 2019

Unfunded Liability — What You Need to Know

Quick Links:

Experience Study
Annual Actuarial Valuations (AAV)

Managing UAL Publication
Amortization Policy
Understanding Defined Benefit Pensions
Understanding Investment Return Assumption

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 view the valuation resource page. 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, Gabriel Roeder Smith & Company.

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 (pdf).

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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).