Experience Study Overview
Experience Study Full Report
Experience Study Timeline
Experience Study FAQs
Experience Study Panel Discussion
Understanding Defined Benefit Pensions
Understanding Investment Return Assumption
Required contributions in a defined benefit plan are calculated by an accredited actuary using assumptions about future events. These assumptions fall into two broad categories; economic and demographic. Even the best plans need to be checked regularly to ensure they continue to work in a dynamic landscape. As part of our fiduciary responsibility and fiscal best practices, we perform an "Experience Study" at least every five years to check key assumptions against the real world and make adjustments if necessary.
In today's ever-changing world, it is a fiscal best practice to review economic assumptions more frequently so plans can make incremental changes on an ongoing basis. The MERS Retirement Board, acting on the recommendations of our independent actuary, Gabriel Roeder & Smith, updated key economic assumptions (investment return and wage inflation assumptions) at their February 2019 meeting. Public retirement systems, like MERS, follow a process for establishing economic assumptions that consider various financial, economic and market factors, and is based on a long-term view. When determining these assumptions, the actuary factors in future economic conditions based on current market data, expert opinions and investment consultant expectations. In addition, the actuaries must follow guidelines set forth by the Actuarial Standards Board in Actuarial Standards of Practice (ASOP).
The review of our demographic assumptions will begin in 2019. It is still a best practice to review these assumptions with a standard of five years of data in order to ensure the information is statistically sound. Based on industry trends, we are forecasting continued increases in participant longevity. Any changes to the demographic assumptions will be announced in 2020, with an impact to required contributions in 2022.
This Experience Study Timeline (pdf) illustrates the process of the economic and demographic assumption reviews and when the results of those reviews will impact required contributions.
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.
From the analysis of the Experience Study completed in 2015, MERS adjusted our mortality table because people are living longer, lowered our assumed rate of return from 8 percent to 7.75 percent, and required a shorter fixed amortization period.
View Summary of Plan Provisions, Actuarial Assumptions, and Actuarial Funding Method
At the February 2019 board meeting, the MERS Retirement Board adopted new economic assumptions effective with the December 31, 2019 annual actuarial valuation.
Investment Return Assumption:
While MERS has historically met our assumed rate of return over the long-term (click here for additional information), expected future investment returns are forecasted to be considerably lower due to historically low interest rates and high equity market valuations. Based on this expectation, MERS will be reducing our investment assumption from 7.75% to 7.35%. This adjustment reflects a change in long-term trends, and will continue to be monitored closely.
Wage Inflation Assumption
Wage inflation is often confused with pay or salary increases. However, wage inflation is an assumption that considers large-scale economic factors and is made up of both price inflation (2.50%) and real wage growth (0.50%). In other words, wage inflation reflects overall payroll growth over the long-term. MERS will be reducing our wage inflation assumption from 3.75% to 3.00%.
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. More information on this amortization policy (pdf).
The impact of actuarial changes vary across municipalities because plans have different participant demographics, funded levels and benefit designs.
Local units of government will be provided information on the Economic Assumption changes in their Annual Actuarial Valuation that will be delivered by the end of June 2019. It's important to note that these changes won't impact required contributions until 2021. MERS is providing information now to help customers plan ahead. While assumption adjustments typically mean higher contributions, it also means you are adequately funding the benefits promised.
Partnering to Help You Reduce UAL & Contribution Relief Options
Based on feedback from our customers, we recognize that some municipalities may need additional time in adhering to assumption changes. 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.
We also partner with local units of government, helping them set fiscal goals and discussing options. In fact 79% of our customers have taken additional action to reduce their unfunded liability in the last 5 years. For more information on your options, see our Managing UAL Page.
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 (pptx) 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 (pdf) for tips on how to respond.