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City Rates and Actuarial Issues
2007 Annual Training Seminar
2007, Texas Municipal Retirement System.
Pension Funding
Actuarial Funding MethodActuarial Cost Methods: Unit Credit Compared to Projected Unit Credit
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30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64
Age
Per
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Unit Credit Cost Method Projected Unit Credit Cost Method
Actuarial Assumptions…Economic Assumptions
These were developed in the 2003-2006 study using the “building block” approach: Inflation: recommended at 3.00% Investment Rate of Return: 5.5% based on
current investment allocation Salary Scale: projects the increase to be
expected in future years Payroll Growth: recommended to be equal to
inflation component of salary scale Interest Credit Rate: 5%
Actuarial Assumptions…Mortality Rates
Mortality Rates: Tables that contain, for each age, the probability of a person dying between that age and the next.
Four sets of mortality tables are currently in use for TMRS.
Three sets are used for liability calculations: For members before retirement For service retirees and beneficiaries For disabled retirees
The fourth set is used to generate the annuity purchase factors to convert deposits into monthly benefits.
Actuarial Assumptions…Pre-Retirement Mortality
This table is used to estimate the number of individuals who will eventually be eligible for service retirement and thereby estimate the liability for benefits.
The death of a member before retirement may result in a benefit being paid to a beneficiary, and the liability for these benefits must be calculated.
Also, cost of providing Supplemental Death Benefits must be calculated.
Recommended: Gender-distinct RP 2000 Combined Healthy Mortality Table, with male rates set back one-year and female rates unadjusted.
Actuarial Assumptions…Service Retiree and Beneficiary Mortality
Mortality experience among TMRS retirees and beneficiaries determines the duration over which retirement benefits are paid.
Lower rates (lower probability of death) mean longer payment periods and thus higher benefit costs.
Recommended: Gender-distinct RP 2000 Combined Healthy Mortality Table with no adjustment for males and on-year set forward for females.
Actuarial Assumptions…Disability Annuitant Mortality Rates
Mortality experience among disabled annuitants is studied separately from service retirees because of characteristically high levels of mortality exhibited by disability retirees.
Recommended: RP 2000 Disabled Retiree Mortality table with four-year set back for males and no adjustment for females.
Actuarial Assumptions…Mortality Rates for Annuity Purchase Factors
This assumption should be set with an adequate margin for future improvement so that it does not need to be adjusted very often, as there are significant issues associated with a transition to new annuity purchase factors.
Updating this mortality table results in higher annuitization factors, directly leading to lower benefits.
Recommended: No change.
Actuarial Assumptions…Disability Rates
Disability rates function in the same way as mortality rates. The rate at each age indicates the probability of becoming disabled before the next age.
Disability rates add liability for the value of the disability benefit, but lessen the value of retirement benefits ultimately payable.
Recommended: Based on experience, the actuary recommends that the disability rates be reduced.
Actuarial Assumptions…Withdrawal Rates
These rates project the percentage of employees at each age or service duration who will withdraw their deposits and interest and terminate membership before retirement.
These rates take into account possible terminations for all causes other than retirement, death, or disability.
Forfeitures resulting from turnover are anticipated in advance and help finance benefits that become payable to other TMRS members.
Turnover rates have slowed during this study period.
Actuarial Assumptions…Turnover Rates
If the Board of Trustees elects to change to the Projected Unit Credit actuarial funding method, a turnover rate assumption will have to be created to project the probability of leaving employment for reasons other than death, disability or retirement.
These new turnover rates will predict the number of members who terminate employment after vesting, but who leave their deposits with TMRS, and who are thereby entitled to retirement or death benefits in the future.
Actuarial Assumptions…Retirement Rates
An accurate prediction of the ages at which members will retire is essential in order to obtain a realistic assessment of the System’s liabilities for retirement benefits.
Over this 4-year period the age remained roughly level.
Employees under age 60 were retiring earlier, while retirees over age 60 were retiring later.
Example of Valuation Results
Source: TMRS Comprehensiv
e Annual Financial Report (CAFR).
City Rate Letter
Sent annually, usually in late April
Calculations are based on the prior year’s activity
Contains information about the rate for next year and reconciliation from current year
Example rate summary from letter(7%, 2 to 1 plan)
City Rate Letter, cont.
Statutory Maximum Contribution Rates
Example reconciliation table from letter
City Rate Letter, cont.
www.tmrs.com City Services GASB Letters 2006 Your City
Data from Footnote Disclosure for City Financial Statement
Example Plan Improvement Study
Questions & Answers
HOW TO CONTACT TMRS:Toll-free: 800-924-8677Web: www.TMRS.comE-mail: [email protected]