Each month, employers make contributions to LAGERS to fund retirement benefits for their employees. Your monthly contribution amount is calculated by multiplying your LAGERS-covered payroll by your employer’s monthly contribution rate. Making this required contribution each month ensures your employees’ benefits are being properly funded.
LAGERS is designed to fund employer liabilities through your monthly contributions. An unfunded liability is not something that requires immediate payoff or should automatically be a cause for concern. Rather, your monthly contribution rate includes an amount specifically designed to pay down any liability over time.
However, employers have additional financial tools available if they choose to pay down an unfunded liability more quickly. Employers may make a voluntary lump-sum payment or voluntarily pay a higher contribution rate. While these additional payments are never required, they can be useful tools for employers who want to take a proactive approach to managing their pension liability.
Why Consider Paying Down a Liability More Quickly?
There are a variety of reasons an employer may choose to make an additional payment. In some circumstances, changes in an employer’s experience, such as significant increases in employee salaries, can cause an unfunded liability to be higher than originally anticipated. When that happens, it may be financially beneficial for an employer to evaluate its liability and consider whether making an additional payment makes sense for its financial circumstances.
Paying additional amounts toward an unfunded liability can:
- Accelerate the payoff of the liability
- Reduce the amount of liability that will need to be funded through future contributions
- Potentially lower future contribution rates
- Help provide greater stability and predictability in future contribution rates
- Give employers another tool for managing their long-term financial obligations
A voluntary lump-sum payment can have an immediate impact on your unfunded liability and may also positively affect future contribution rates. You can make an additional lump-sum payment to LAGERS at any time. You can also voluntarily pay a higher contribution rate each month, allowing your employer to gradually pay down its liability faster than required under the standard funding schedule.
These options are voluntary financial management tools, not requirements. Because an unfunded liability is incorporated into the regular contribution rate, employers are already making progress toward paying it down. However, when an employer’s financial circumstances allow, making additional payments can be a strategic way to manage that liability and potentially improve the stability of future contribution rates.
If you would like to discuss your employer’s current liability or learn more about the options available for paying it down more quickly, please contact Melissa Rackers at [email protected] to schedule a call.
