Back By Popular Demand: How are Employer Contribution Rates Determined?

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This post was originally published in June 16, 2015. Annual 2019 rates, as well as your annual valuation are now posted on eclipse, and it's a good time to refresh your knowledge on contribution rates and how they work. Download your annual valuation from eclipse to learn more.

Each LAGERS employer has a monthly contribution rate for its employee group that may change annually. This contribution the employer makes ensures proper funding of its pension benefits.  There are many driving factors that play into calculation of LAGERS' employers contribution rates, and we will discuss the top three in this blog. 

Before we discuss the factors that may affect an employer’s contribution rate, let’s generally discuss the process performed by LAGERS’ actuary to calculate an employer’s contribution rate(s). On the last day of February every year, LAGERS’ actuary ‘stops the clock’ and compares what happened in the last year versus LAGERS’ actuarial assumptions. The difference between the assumptions and what actually happened create actuarial gains or losses. Actuarial gains result in downward pressure on your employer's contribution rate and the opposite happens when realizing actuarial losses. The adjustments to contribution rates are issued in July and will go into effect at the beginning of the employer's next fiscal year. 

An employer’s benefits and group of employees have an effect on an employer’s rate(s). 

If your employer has a lower increase in total payroll than assumed, this is considered an actuarial gain and could result in downward pressure on your employer's contribution rate. However, larger than anticipated payroll increases would create an actuarial loss. As well, the number of retirements and employee turnover can impact the contribution rate. 

Additionally, your employer individually elects the level of benefits it would like to provide for its employees. Generally, the higher the benefits your employer provides, the higher the contributions needed to fund the benefits. 

Investment return of the overall system has a significant impact on an employer’s rate(s). . In general, if LAGERS’ investment portfolio meets the assumed rate of return, it will help to keep employer rates level. However, if the LAGERS’ investment portfolio exceeds its assumed rate, this is an actuarial gain and will put downward pressure on all employers’ contribution rates. The opposite is true if LAGERS investment portfolio does not meet or exceed the assumed rate of return. LAGERS assumed rate of return is 7.25%. 

Another caveat of investment returns that plays into the determination of employer rates is that all of LAGERS’ investments gains / losses are smoothed over a 5 year period. This creates a bit of rate stability because instead of realizing gains and losses all at once, they are smoothed over a 5 year period creating less drastic rate changes.

Changes to the plan design or assumptions being used to calculate rates. If an assumption that is being used to calculate an employer’s rate(s) is changed by the LAGERS Board of Trustees, this may cause a rate decrease / increase. Every 5 years, LAGERS board and staff complete an experience study to ensure the assumptions being used are aligned with the system’s actual experiences. Periodically, these experience studies cause an adjustment to the actuarial assumptions. 

Keep in mind, LAGERS contribution rates are designed to remain level and ensure proper pre-funding. However, when there is a change in contribution rates, it can more than likely be attributed to one of the items above.

If you need more information or have questions about your rate, contact us.

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Tagged Defined Benefit, Contribution Rates, Employer Cost, Members

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