If you have ever read a story in the news on the health of a pension fund, you’ve most likely already heard about funded statuses (or ratios). This measurement of pension health is obviously important, but for many, it can seem a bit abstract. Trying to decipher what the number means, is the number good, should I be worried, are all overwhelming questions to say the least.
Simply put, a funded status is the measurement of assets versus liabilities, or how much a pension fund has on hand today to pay for benefits promised in the future. For example, let’s say LAGERS promised $100 worth of benefits to be paid in the future, but only currently had $90 in the bank. At that point in time, you could say LAGERS is 90% funded.
So why do we talk about funded status? At some point, members of a pension fund are going to retire and begin drawing monthly retirement checks. A system with low funding levels may not have the funds available in the future to pay for all its promised benefits, which is a big problem. A well-structured pension fund should always be working toward achieving 100% funding to ensure they can pay for promised benefits in the future.
There are many factors that can affect how well a plan is funded. For LAGERS, it starts with ensuring that we’ve calculated employer contribution rates appropriately. LAGERS’ actuaries re-calculate these rates every single year to ensure that employers are funding benefits at the appropriate level over time. The next step is to require that every employer makes their full contribution each month. LAGERS statutes mandate employers to do this, leaving no wiggle room for an employer to not pay simply because they choose to budget less than the required amount.
With that said, you may still be wondering if you should be concerned that LAGERS isn’t 100% funded. A funding ratio is a snapshot measurement of the system’s assets and liabilities at one point in time. While this alone can give insight to a pension’s financial solvency, perhaps an even better measure would be to look and at how the funded status has trended over the past several years.
The rate that LAGERS’ employers pay is based on many assumptions, for example, investment return. If we hit every assumption exactly each year, LAGERS would eventually reach and stay exactly 100% funded. The fact of the matter is that no matter how smart our actuaries are (and they are pretty smart), no one can completely predict the future. That’s why the funded ratio can fluctuate. The important thing to remember is that as long as employers are making their required contributions, LAGERS funded ratio should generally trend toward 100% over time, and that’s a great thing! In the meantime, remember that not all LAGERS retirees are going to retire on the same day, meaning LAGERS won’t ever have to pay out all promised benefits at once.
At almost 92% funded, LAGERS continues to show steady improvement toward 100%. Amazingly enough, LAGERS partners with new employers every year who enter the system with no assets (0% funded). Despite this, LAGERS’ strong plan design, with the help of outstanding investment returns over the past several years have helped place LAGERS as one of the top-preforming pension funds in the nation. What does this mean for you? Hopefully the peace of mind in knowing that your retirement benefit is secure and will be there for you when you retire, whether that’s tomorrow or 30 years from now.