You may know how your benefit is calculated and you may even know how your employer pays for the benefit. However, you may not know how the LAGERS system is structured to ensure your monthly benefit will be sustainable for you and generations to come.
The system is structured in such a way that you have the peace of mind knowing you will receive a monthly benefit for the remainder of your life. To understand how this works, we need to discuss how the employer funds your benefit throughout your career. There is a portion of an employer’s contribution rate that is pre-funding your benefit. So that, by the time you retire, the funds necessary to pay for your benefit are in place.
While you are working, your employer makes monthly contributions to the system based on your gross wages. The contributions are then invested to generate a return; therefore making the prefunding affordable for the employer. Historically, LAGERS investments have paid for approximately 60 cents of every dollar needed to pay for your monthly benefit. What this means for you is that the investments made having a defined benefit pension more feasible for your employer. In fact, it may have allowed your employer to increase benefit level(s) to provide you with a larger benefit.
When you retire, a transfer of the expected amount needed to pay for your lifetime benefit occurs from your employer’s assets to LAGERS’ Benefit Reserve Fund (BRF). The purpose of this fund is to pay all LAGERS retirees’ monthly benefits. So, in essence, LAGERS pools all of the assets needed to pay for all of the retirees’ monthly benefits. This is a strong plan design feature because it then pools the life expectancy of the retirees.
Let me explain, when the asset transfer occurs LAGERS assumes that a person is going to live until a certain age and calculates the funds needed to pay the benefit until the member passes away. However, there are times when the retiree passes away before or after the system expects them to. This is where pooling all of the retirees’ funds into the BRF is such a strength of the system. For example, when retirees pass away later than the system projected, the funds are available because there are some retirees who did not live as long as the system projected.
Strong system design, consistent contributions, and sound investment policy are what make a pension system prosperous and able to provide you and the generations to come a dependable, modest retirement benefit. The LAGERS system is designed to accomplish all of these and is constantly striving serve you in the best manner possible.