Jeff Kempker, CEBS, CRC
Have you ever been not been picked for the kickball team? Or maybe your invitation to that wedding got lost in the mail? That’s how I feel right now.
A recent report published by the Center for State and Local Government Excellence outlined success strategies for well-funded pension plans. The report looked at five US public pension plans that have a history of fiscal solvency and identified traits these plans share that explain their amazing track records.
The authors of the report identified the employers’ commitment to funding, recent lowering of the annual investment return assumption, adjustment of contributions, and benefit adjustments as the common characteristics that have made the plans in the report well-funded success stories.
After reading this report, I couldn’t help but ask why LAGERS wasn’t one of the plans referenced in this study?! After all, LAGERS shares all of the same traits of the plans that were included. In fact, the average funded rate of the five featured plans is 92.1%, and LAGERS currently sits at 91.7%! So why not use this post to point out all of the reasons why LAGERS could have easily been the sixth public pension plan portrayed in the report?
Commitment to Funding
What is the #1 secret to a well-funded pension plan? Commitment to making the full contribution necessary to fund the benefits promised to the members.
Think about your mortgage. What would happen if you failed make your monthly payment or decided to only pay a fraction of the actual amount due each month? It doesn’t take a math genius to figure that one out. The same applies to pensions. Pension benefits are designed to be funded over decades of time by contributions from employers and employees as well as the investment return generated from those contributions. If the funding of the benefits is not a pension plan’s #1 priority, it will eventually run into problems.
This is not an issue for LAGERS or its members. Each month, participating employers contribute the full amount that is due, which is required by Missouri State Law. Our member employers are extremely dedicated to funding their employees’ benefits, but if an employer falls behind, LAGERS Board of Trustees has the authority to work with the state treasurer’s office to obtain the necessary funds.
Recent Lowering of the Annual Investment Return Assumption
LAGERS investment return assumption was lowered from 7.5% to 7.25% in 2010. This decision was based on historical returns as well an asset liability study projecting returns 30 years into the future. All of the plans featured in the report had conservative assumptions of 7.5% or lower.
The annual investment return assumption is referring to the return that pension plans assume they will make on their investments. Investment income matters, as investment earnings account for a majority of pension funding. A shortfall in long-term expected investment earnings must be made up by higher contributions or reduced benefits.
Funding a pension benefit requires the use of projections, known as actuarial assumptions, about future events. One actuarial assumption is the investment experience. This must be a realistic figure to ensure that members and employers (the other sources of funding) are not being undercharged or overcharged. If the assumption is too low, member and employer contributions must increase, if the assumption is too high, shortfalls in the investment performance would have to be made up by higher contributions or reduced benefits.
Remember, the #1 priority is commitment to funding. While it is true that slight upward pressure was applied to LAGERS employers’ contribution rates in 2010 as a result of the change in the assumption, it reaffirmed to our commitment to funding.
Adjustment of Contributions and/or Benefit Levels
Participating employer contribution rates are adjusted each year to ensure funding is on track. Each employer may change the contributions required by employees and its benefit levels to meet the needs of its workforce and budget. The flexibility available within the LAGERS plan design is great for participating employers and a major factor in why the system is so well-funded.
Conclusion
The five pension plans featured in the Center’s report are shining examples of public retirement plan excellence because of their commitment to funding, conservative investment assumptions, and the ability to adjust plan provisions. All of these traits are present in LAGERS’ plan structure and have contributed to the fiscal success of our system as well.
Jeff Kempker, Manager of Member Services