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. 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).
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.
Economic Assumption Changes
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.
At the February 2019 board meeting, the MERS Retirement Board adopted new economic assumptions effective with your 2019 Annual Actuarial Valuation (AAV).
Investment Return Assumption
While MERS has historically met our assumed rate of return over the long-term, 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 return 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%.
These assumptions are being used in your 2019 AAV, and will impact your fiscal year 2021 contributions.
Demographic Assumption Changes
The full five-year Experience Study (covering years 2013-2018) was completed in February 2020. As a result of this Study, the MERS Retirement Board approved adjustments to the demographic assumptions, which will be used in your 2020 AAV.
Key changes to those assumptions include updates to mortality rates, mortality improvement rates, and retirement and withdrawal rates. One key change we are making to the mortality improvement rates is that we are implementing 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.
Your 2019 AAV will include information about these upcoming demographic assumptions changes, as well as a preview of how these changes may impact future required contributions. It’s important to note that the demographic assumptions changes won’t impact required contributions until fiscal year 2022. 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.
This Experience Study Timeline (pdf) illustrates the process of the completed economic and demographic assumption reviews, as well as when the results of those reviews will impact required contributions.
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 local units of achieve and maintain full funding of their retirement plans. However, based on feedback from our customers, we understand that some local units of government may need flexibility to prepare for projected increases. Your Regional Manager will be able 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 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 a municipality is 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 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.