Jeff Kempker, CEBS, CRC
When LAGERS employers were notified in July of their 2016 contribution rates, most received good news. Seven out of ten employer contribution rates are either decreasing or remaining the same in the upcoming year. This marks the fourth straight year that the majority of employer rates are going down or staying level.
The fact that rates are trending in a favorable direction is mainly due to the great investment returns the LAGERS portfolio has enjoyed over the last few years. LAGERS is a non-profit system, so when the returns of the portfolio are more than we expect, the excess funds are credited back to employers. This helps to put downward pressure on rates. So, many LAGERS employers will be paying less for the same benefits in 2016.
With the cost of LAGERS benefits trending down for employers, this has led many organizations to look into upgrading LAGERS benefits for their employees. This is a great thing to consider since better benefits help to attract and retain good workers, who in turn provide high-level service to citizens. However, it is important for local policy makers to take a long term perspective when thinking about upgrading LAGERS benefits. Here are a few items to consider:
The markets have provided great returns the last few years, but that won’t always be the case. Just as the markets provide good investment returns that drive down employer contribution rates, the opposite can happen as well. For example, in 2008 and 2009, LAGERS portfolio had losses of -2.3% and -18%, respectively. Because of these investment losses, the majority of employer contribution rates increased in 2010 and 2011, and some increases extended longer. LAGERS plan design does include a couple features that provide protection so employer rates don’t skyrocket from one year to the next, but rates can and will fluctuate with the markets. LAGERS’ portfolio has fully recovered and then some, which is why it is important to focus on the long term returns of LAGERS. Over a 20-year period LAGERS’ portfolio has earned a return of 9.4%.
Benefit upgrades increase an employer’s liabilities. Switching to a higher benefit program (multiplier) is a retro-active upgrade. This means that not only will the employees’ service going forward be upgraded to the higher level, but also the service they have already earned. This creates an additional liability for the employer because it now must pay for the current employees’ past and future years at the higher program. The good news is that LAGERS does not require an employer to fund this all at once, but rather, amortizes the additional liability over a future 20 year period and a portion of the regular, monthly contribution goes toward paying off the upgrade. LAGERS fully discloses this increase in liability to the employer along with the new monthly contribution rates and 10 year cost projections before an employer can make a benefit change. And keep in mind that new pension accounting and reporting standards may make and employer’s liabilities more visible than before since they will be reflected on an employer’s balance sheets.
Focus on what you are trying to accomplish with your LAGERS benefits related to your organization’s overall compensation philosophy. All organizations have a philosophy on how they will compensate their employees. Some offer lower salaries with higher benefits, others pay more money to their workers and provide less benefits, and a few employers provide both good pay and benefits. LAGERS benefits are part of an overall compensation package for employees. It is important to focus on the goals of the benefits programs before making the leap to upgrade your LAGERS plan. Keep in mind that the main purpose of LAGERS is to provide steady monthly income during the member’s retirement years. Does increasing that income make sense for the employees, employer, and taxpayer?
Here is the case for upgrading to a higher LAGERS plan. Retirement benefits are a vital tool in attracting and retaining a quality workforce and the better your plan is, the more likely employees will be to stay through their most productive years and then be able to retire at an appropriate age. This keeps the lines of promotion open so the younger workers are encourage to stay as well which ultimately makes our communities better because we have experienced, well-trained, and motivated public servants.
Overall, upgrading LAGERS benefits will provide more income during retirement and can have a positive impact for the workforce, the employer, and the taxpayer. It is important to take a long term perspective when considering any benefit change, and your LAGERS plan is no different. Make sure the change makes sense in terms of your organization’s overall compensation philosophy and contact me for any questions or concerns.
Jeff Kempker, Manager of Member Services