Why Contribution Rates Rise And Fall
The 1937 Act (Gov. Code Section 31453) requires retirement systems to review the financial security of the fund. These studies research the number of retirements, salary increases, marriages, deaths, and the performance of investments. Based on these factors, actuaries make recommendations to the Board of Retirement on employer and employee contribution rates. The retirement board votes 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 effects on contribution rates.
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 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.