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1P3 Actuaries you can
understand
Review of Actuarial Methodology Issues
November 8, 2006
P
2P3 Actuaries you can
understand
Overview
• Determination of Member COL Contributions for Settlement
• Cost Allocation among Tiers– Employer– Member COL Contributions
3P3 Actuaries you can
understand
Member Contributions
BASIC
Regular
COLA
BASIC
Settlement
COLAValuation Based
Statutory Nature
4P3 Actuaries you can
understand
Basic
• Accumulation toward target benefit at target retirement age
• Based on:– Benefit structure– Salary increase assumption– Life expectancy at retirement– Rate of Return assumption
• Varies by Age at Entry
5P3 Actuaries you can
understand
Basic – General MembersTier 1
• 31621.5. … the normal rate of contribution … shall be such as will provide an average annuity at age 60 equal to one 200th of the final compensation of members …
BASIC31621.5
6P3 Actuaries you can
understand
Basic – General MembersTier 2 and 3
• 31621.4. … the normal rate of contribution … shall be such as will provide an average annuity at age 60 equal to one 240th of the final compensation of members …
BASIC31621.4
7P3 Actuaries you can
understand
Basic – Safety MembersTier 1 and 2
• 31639.5. The normal rate of contribution shall be such as will provide an average annuity at age 50 equal to one 200th of the final compensation…
BASIC31639.5
8P3 Actuaries you can
understand
Supplemental Contribution
• …to the extent undistributed earnings are unavailable in the future to make additional contributions on members’ behalf…then the employer and employee contribution rates shall be increased …
BASIC31627
9P3 Actuaries you can
understand
Settlement Contribution
• Lawyers not yet in agreement
• Look to proposed legislation for guidance
• Members in Tier 2 or 3 would not make Settlement Contributions
BASIC31627
10P3 Actuaries you can
understand
AB 2063 – General Members
• …the normal rates of contribution… shall be rates that provide an average annuity at age 55 years equal to the fraction of one 160th of the final compensation …
BASICAB 2063
11P3 Actuaries you can
understand
AB 2063 – Safety Members
• The normal rates of contribution… shall be rates that will provide an average annuity at age 50 years equal to the fraction of one 160th of the final compensation …
BASICAB 2063
12P3 Actuaries you can
understand
COL Contributions
• 31873. Any increases in contributions shall be shared equally between the county or district and the contributing members …
COLA
13P3 Actuaries you can
understand
Regular COL Contributions
• Determine total Basic contributions projected for year– General and Safety together– All tiers together
• Determine total COL contributions required for year
• Allocate COL contributions proportional to Basic
14P3 Actuaries you can
understand
Settlement COL Contributions
• Prior Methodology– Allocate COL contributions proportional to
Basic using same proportion as Regular Benefits
15P3 Actuaries you can
understand
Settlement COL Contributions
• Proposed Methodology– Determine total Basic Settlement
contributions projected for year• General and Safety together
– Determine total COL Settlement contributions required for year
– Allocate COL Settlement contributions proportional to Basic
16P3 Actuaries you can
understand
COL Contributions
• FCERA Board previously decided that “Any increases in contributions” means contributions for both Normal Cost and Unfunded Actuarial Accrued Liability.
17P3 Actuaries you can
understand
Settlement COL Contributions
• Proposed Methodology– Need to allocation Settlement Reserves
for calculation purposes• Basic vs COL – Propose allocating proportional
to liabilities each valuation• Employers vs Members – Propose using
approach similar to allocation of Regular COL Contributions
– Allocate POB contributions, amortized, to Employer– Remaining reserves get split 50/50
18P3 Actuaries you can
understand
Cost Allocation Between Tiers
• Employer
• Members
19P3 Actuaries you can
understand
Employer Cost Allocation Between Tiers
• Total required contribution will be the same each year
• Employer previously stated they preferred receiving a single contribution rate for each Classification (General and Safety)– Easier calculation– No need for separate reserves / recordkeeping
20P3 Actuaries you can
understand
Member Cost Allocation Between Tiers
• Regular Contributions– Basic is statutory– COL requires allocation decision
• Settlement– Members in Tier 2 or 3 would not make
Settlement Contributions
21P3 Actuaries you can
understand
Calculating COL Contributions
• Proposed Principles– Tier 1 + Tier 2 + Tier 3 contributions
= half COL cost– Fair to all employees– Doesn’t require unreasonable recordkeeping
22P3 Actuaries you can
understand
Alternative Approaches
• Same for both tiers
• Calculate and track tiers separately
• Other approaches could be developed if requested
23P3 Actuaries you can
understand
Same for Both Tiers
• Current approach
• Simpler recordkeeping
• Consistency between tiers
24P3 Actuaries you can
understand
Same for Both Tiers
• Example (simple numbers not based on this year’s rates)
• Tier 1– Basic Rate: 4.0%– COL load factor: 90%– COL Rate: 3.6%
– Settlement Basic: 1.0%– COL load factor: 80%– COL Rate: 0.8%
– TOTAL RATE: 9.4%
25P3 Actuaries you can
understand
Same for Both Tiers
• Example (simple numbers not based on this year’s rates)
• Tier 2 and 3– Basic Rate: 3.0%– COL load factor: 90%– COL Rate: 2.7%
– Settlement Basic: 0.0%– COL load factor: 80%– COL Rate: 0.0%
– TOTAL RATE: 5.7%
26P3 Actuaries you can
understand
Calculate and Track Separately
• Alternate approach for discussion• Would allocate past UAAL to Tier 1.• Would require additional tracking of COL
contribution and benefit payments by tier.• Relationship of Tier 1, Tier 2, and Tier 3 rates
will vary in the future based on experience, investment return, demographic makeup of groups.
27P3 Actuaries you can
understand
Calculate and Track Separately
• Example (simple numbers not based on this year’s rates)
• Tier 1– Basic Rate: 4.0%– COL load factor: 100%– COL Rate: 4.0%
– Settlement Basic: 1.0%– COL load factor: 80%– COL Rate: 0.8%
– TOTAL RATE: 9.8%
28P3 Actuaries you can
understand
Calculate and Track Separately
• Example (simple numbers not based on this year’s rates)
• Tier 2 and 3– Basic Rate: 3.0%– COL load factor: 50%– COL Rate: 1.5%
– Settlement Basic: 0.0%– COL load factor: 80%– COL Rate: 0.0%
– TOTAL RATE: 4.5%
29P3 Actuaries you can
understand
Recommendation
• Retain current allocation methodology
30P3 Actuaries you can
understand
Questions