How It Works: Contribution Rates & Investments

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I recently had the chance to speak with the board of a prospective employer, and a common question came up about the relationship between investment performance and contribution rates.  Coincidentally, I planned to share this blog post and video explaining the relationship between LAGERS investment performance and employer contribution rates.

Investment performance and employer contribution rates are closely related. However, before we can dig into the specifics, it is important to understand how actuarial funding works. When an employer contribution rate is calculated by LAGERS' actuary, a number of economic and employee group assumptions are placed used when calculating what the employer should contribute. For example, LAGERS assumes employers' total covered payroll will increase 3.25% annually. If the employers' total covered payroll increases less than 3.25%, this is considered an actuarial gain and will put downward pressure on employers' contribution rate. There are several assumptions, just like this one, used to calculate an employer's contribution rate.

The same is true with regards to investments and employer contribution rates. LAGERS' assumed rate of return is 7.25%. When LAGERS' portfolio out performs the assumed rate of return, LAGERS' employer contribution rates trend down and vise versa. Check out the video to learn more about this process and recent performance from LAGERS Executive Secretary, Bob Wilson and LAGERS Chief Investment Officer, Brian Collett.

 

 

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Tagged Contribution Rates, Funding, pensions, Pre-Funding, Sound Funding

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