Public pension plans that are well-funded share some common characteristics, according to the National Association of State Retirement Administrators (NASRA). And since LAGERS ranks in the top ten in terms of funding among U.S. plans, you may guess that these characteristics would be found in our practices. And you would be right.
Keeping a pension fund on solid financial ground doesn't just happen. Many factors must come together to ensure retirement benefits will be paid to the people that have earned them. Here are four factors identified by NASRA that can be found in plans that are well-funded.
1. Policies and practices that reduce the unfunded liabilities in a timely manner while minimizing volatility.
LAGERS' funding policy and practice spells out how unfunded liabilities will be paid off. For a new employer, their unfunded liability is paid for over a closed 30-year period. It may be paid off sooner, but it will definitely be paid off in 30 years. An employer making a benefit enhancement will pay for that enhancement over no more than 20 years. These are reasonable time frames that enable local government employers manageable entry into LAGERS and greater flexibility in designing a retirement plan for their employees.
LAGERS also uses a couple funding methods to minimize the volatility of the contributions required from employers. First, there is a 1% cap on annual contribution rate increases. Second, LAGERS' smooths annual gains and losses from investments over a future five-year period. Both of these methods are essential in helping our employers budget for their future pension expense.
2. Regular receipt of required contributions.
Perhaps the most important factor in maintaining a financially healthy pension fund is ensuring that the full contributions from employers and employees are being deposited into the plan. LAGERS takes in contributions from employers, members, and receives income from investments in order to fund benefits for our members. Missouri state law requires the employers to make their full, required contribution each and every month. Since LAGERS employers have been so diligent in keeping up with their payments, LAGERS remains one of the most fiscally sound pension funds in the U.S.
3. Actuarial assumptions that align with experience.
Making assumptions about future events is required in order to fund pension payments for current and future retirees. Pension funds hire actuaries to use assumptions set by the pension fund trustees to come up with the amount of contribution required to pay for the benefits. An actuary is a professional that is trained to analyze uncertain events and make recommendations about how to deal with those events. LAGERS’ policy is to review its assumptions at least once every five years and compare those assumptions to actual events. The assumptions need to be reasonably aligned with the actual experience of the plan. If the assumptions and experience are not reasonably aligned, the LAGERS Board of Trustees has shown they will make changes to ensure our members’ benefits are properly funded.
4. Flexibility in plan design and/or financing.
One of LAGERS’ greatest strengths is the flexibility allowed in the benefit structure. Each participating employer is enabled to set up a pension program under LAGERS that best aligns with their budgets and compensation goals. A LAGERS employer may choose from around 100 different combinations of benefits and may change those benefits once every two years, if desired. This flexibility places the benefit decisions where they should be-at the local level.
LAGERS employers may also choose to finance their benefits at an accelerated rate in order to retire the unfunded liability faster. LAGERS has multiple time frames for paying off an unfunded liability, depending on the type of liability being funded. However, employers may make additional contributions in order to lower the monthly contribution required from the employer and to help get the local government out of pension debt faster.
It is no accident that LAGERS is toward the top among public pension plans in terms of financial solvency. The diligence of LAGERS participating employers, LAGERS Board of Trustees, and LAGERS staff are all contributing to this success. However, we are not complacent. We are striving to do better every day so that the local government employees of Missouri will always have a sustainable pension plan that they can rely upon.