The 1937 Act (Section 31453.) requires retirement systems to periodically undergo actuarial valuations (study and analysis) to assess the financial security and stability of the fund. These studies research and tally the demographic "experience" of the fund, for example: the number of retirements, salary increases, marriages, deaths, etc., plus the performance of investments and the economy at large. Based on these factors, the actuary makes recommendations to the Board of Retirement on employer and employee contribution rates, and on interest rates the system will pay on accumulated contributions in your account. After careful study, retirement board trustees vote to accept the actuarial recommendations as suggested, revise the recommendations, or defer them for later implementation. These recommendations (assumptions) are designed to safeguard the long-term financial health of the system.
Changing these assumptions can have profound effects on contribution rates. Benefit improvements, cost of living adjustments, members retiring at earlier ages or in greater numbers, are a few of the factors that influence the actuarial assumptions. To simplify: benefit increases cost more money to provide; therefore more money must be contributed to the fund. When possible in the past (when investment returns were high) the retirement board voted to soften the financial blow to members by leaving contribution rates alone, and using surplus investment earnings to pay for benefit cost increases. Unfortunately, investments didn't perform as well as expected (assumed, to use the actuarial term) in recent years. So contribution rates must rise to cover the costs.
Retirement contributions are made up of two components, the Basic rate and the COLA (cost-of-living-adjustment). In the last several years, thanks to transfers of excess investment earnings, your Retirement Board subsidized (paid employees' share) of the COLA component. Last year (July 2003) all employees began paying their full COLA contribution (See Winter 2003 FYI Newsletter on this web site for more detail.) This year, as of July 1, 2004, contribution rates increased again, due to the decrease in the investment return assumption, from 8.3% to 8.0%.
It's never fun to deal with a reduction in take-home pay. As the saying goes, "There's no free lunch," even when it comes to paying for your future retirement benefits. (But it's good to know your pension is safe, and you'll be able to pay for lunch after you retire.) Remember, as a defined benefit pension plan, your future retirement benefits are as safe as ever, regardless of contribution rate fluctuations.
Here are a few definitions you may find helpful:
What is an actuary?
An actuary is a person professionally trained in the technical and mathematical
aspects of pensions and related fields. Actuaries estimate how much money
must be contributed to a pension fund each year to pay for the benefits
as promised.
What is an experience study?
Experience studies are detailed analyses of the historical demographics
of a retirement system, including the number of members, what percentage
of members are retiring at what age, disability statistics, years of service,
salary ranges, investment returns and cost factors. These actuarial studies
enable the Plan's staff and advisors to make educated forecasts about
future trends, based on past experience. For example, this data aids in
the evaluation of contribution rates, interest assumption rates and the
value of future benefit payments.
What is the basic contribution rate?
The basic contribution rate for members
as defined by the 1937 Act: "the rate is . . . that percentage of
compensation which, if paid annually from a member's first year of membership
through the prescribed retirement age would accumulate the amount necessary
to fund a prescribed annuity."
What is an actuarial assumption?
An actuarial assumption is a factor used
in projecting future events that may affect pension costs. These factors
include interest rates, investment earnings, mortality rates, etc.
What is the investment return assumption?
The investment return assumption is the
estimated future net rate of return on current and future assets.
