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.
As part of our fiduciary responsibility and fiscal best practices, these assumptions are checked regularly and adjusted as needed to ensure plans are properly funded. These reviews are conducted by an independent actuary, Gabriel Roeder & Smith (GRS), and follow guidelines set forth by the Actuarial Standards Board in Actuarial Standards of Practice (ASOP).
MERS Funding Policy
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.
Our final goal is to balance contribution stability with the commitment to ensure plans are properly funded.
Economic assumptions are based on forward looking trends. 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. 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.
Updated Assumptions Impacting FY 2021 Contributions
The following economic assumptions were updated effective with your 2019 Annual Actuarial Valuation (AAV) and impact your FY 2021 contributions.
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The investment return assumption is used to determine how much funding is expected to come from investment earnings, and is one of the most impactful assumptions on employer contribution rates. While MERS has historically met our assumed rate of return over the long-term, lower expected future investment returns due to historically low interest rates and high equity market valuations led MERS to reduce the investment return assumption from 7.75% to 7.35%.
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 reduced the wage inflation assumption from 3.75% to 3.00%.
Review of Economic Assumptions
Part of our fiduciary duty is to check assumptions at least every five years. In today’s ever-changing world, there is a need and growing trend to review economic assumptions more frequently and with incremental changes.
With that in mind, we are working with GRS to review our funding policy approach to support a more frequent review of the economic assumptions within the Defined Benefit Plan. This approach should contribute to an iterative process for establishing assumptions that are within a range of reasonableness while working to mitigate large influxes in required contributions to the plan.
When a decision is made regarding a change to this assumption, we remain committed to providing you as much advance notice as possible. There are volatility scenario projections within your Annual Actuarial Valuations that provide contribution and funded ratio examples when using lower rates of return expectations.
Demographic assumptions look back at the actual experience of the plan. As a best practice, MERS performs an “Experience Study” at least every five years to check key assumptions against the real world and make adjustments if necessary. Our most recent five-year Experience Study (covering years 2014-2018) was completed in February 2020.
Review of Demographic Assumptions
As a result of this Study, the MERS Retirement Board approved adjustments to several assumptions, including updates to mortality rates, mortality improvement rates, and retirement and withdrawal rates. One key change is that we have implemented a fully-generational mortality improvement assumption, which better positions plans for future life expectancy changes. In theory, a fully-generational assumption should need fewer significant adjustments in the future.
Updated Assumptions Impacting FY 2022 Contributions
Updated demographic assumptions were previewed in your 2019 AAV and are effective with your 2020 AAV. It’s important to note that the updated demographic assumptions won’t impact required contributions until fiscal year 2022.
Partnering to Help You Reduce Unfunded Accrued Liability (UAL) & Contribution Relief Options
Required contributions will be based on the full impact of these assumption changes, which is in keeping with our goal of helping you achieve and maintain adequate funding. Based on feedback from our customers, we understand that some of you may need flexibility to prepare for projected increases. Your Regional Manager is available to discuss plan design strategies that may reduce your projected liability, as well as options to phase-in the impact over a longer period.
In addition, while we strongly recommend groups use the funding policy in place, you may request an analysis to determine if an extension of the amortization schedule for existing UAL is possible. By extending the amortization period, you are deferring costs into the future, which will result in higher overall costs over the long-term. Any new UAL will be layered based on the plan’s original schedule.
For more information on your options, see our Managing UAL Page.
Communicating the Facts
If you are asked to communicate information about your plan with key stakeholders or the media, our Regional Teams are here to partner with you. In addition, 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? Please review the Media Protocol sheet (pdf) for tips on how to respond.