Your contribution rate reflects both the overall experience of LAGERS, such as investment returns, and your employer’s individual experience, such as employee turnover and compensation changes. Contribution rates are designed to remain stable over the long term, but changes in an employer’s compensation practices can affect the employer’s experience and, over time, its contribution rate.
One factor that can create upward pressure on an employer’s contribution rate is a significant increase in employees’ reportable wages near retirement.
Because an employees’ benefit is based, in part, on final average salary, a substantial increase in reportable wages late in your employees’ careers can result in larger benefits. When this occurs, the additional cost of the benefits may create upward pressure on an employer’s future contribution rate.
LAGERS prohibits certain practices that can artificially increase an employee’s final average salary, such as including certain one-time lump-sum payments as reportable wages. However, employers may have legitimate reasons for providing salary increases, overtime, leave payouts, or other forms of compensation that are permitted under LAGERS.
Employers should understand, however, that significant increases in reportable wages near retirement can affect the long-term cost of providing LAGERS benefit.
Examples of compensation changes that may have this effect include:
- Large salary increases shortly before retirement
- Recurring lump-sum payments for accumulated vacation, sick leave or other eligible compensation
- Large or unusual amounts of overtime near retirement
These practices may be appropriate based on an employer’s individual circumstances. The purpose of understanding their potential pension impact is not to discourage employers from making legitimate compensation decisions, rather, to help employers understand how aggregated changes in reportable wages can affect the long-term cost of their LAGERS benefit obligations and potentially their future contribution rate.
If you are considering a significant policy change that impacts employees’ reportable wages near retirement and have questions about its potential impact to your LAGERS cost, contact our office. LAGERS can help you evaluate the potential impact, if any, on future contribution rates which may help you make more informed financial decisions for your employer.
