Health Benefits Update:
By Tom Moutes, RLACEI Director
One of the most important things the LACERS Board does is to make sure the demographic and economic actuarial assumptions it is making about our plan are as accurate as possible. Accurate demographic and economic assumptions help ensure the City’s annual contribution to LACERS is sufficient for the long-term funding of our pension plan.
Demographic assumptions, which are based on the LACERS membership, include such things as how many people will terminate City service prior to retirement; when employees will retire (only a small percentage of eligible employees retire each year); and how long will they tend to live after retirement.
Reviewing demographic assumptions is fairly straightforward. Typically, the actual numbers of terminations, retirements and deaths over the prior three years are compared with the previously assumed numbers, and necessary adjustments are recommended to the LACERS Board. For example, if significantly more people choose to retire than were expected to retire, the rate of retirements and the associated costs will need to be adjusted. Sometimes, additional factors are taken into consideration – like if people generally are living longer and LACERS needs to prepare to pay Retirees over a longer period of time.
Economic assumptions include items such as inflation, pay increases and LACERS investment return. Unlike the backward-looking demographic assumptions, the economic assumptions generally are forward-looking. This makes the economic assumptions less certain than the demographic assumptions.
The rate of investment return assumption is an extremely important economic assumption. For many years, LACERS assumed it would make 8 percent per year on average on its investments. In 2011, the Board voted to decrease the assumed rate of investment return to 7.75 percent. The LACERS Board further lowered its investment return assumption to 7.5 percent in 2014; 7.25 percent in 2017; and 7 percent at its June 23 meeting.
The Impact of Actuarial Assumptions on LACERS
So, how important is it to assume an investment return as close to reality as possible? LACERS investment returns between 2001 and 2019 averaged about 7 percent, with the assumptions listed above. It doesn’t seem like that is a huge difference, but on the retirement side alone (not including Retiree healthcare), the difference between what LACERS expected to earn and what it actually earned accounted for a $2.7 billion liability for the pension fund.
The bad news is that adjusting demographic and economic assumptions costs money. For example, if LACERS assumes it will make less on its investments, that assumption costs the City additional contributions as well. The changes in demographic and economic assumptions between 2002 and 2019 created a $2.8 billion liability for LACERS on the retirement side and caused a reduction in the LACERS funding level to 73.1 percent.
The good news is that more accurate assumptions establish a more realistic funding level – you are not fudging numbers to make the plan look better than it really is – and it helps ensure adequate annual contributions from the City and sufficient long-term funding for the health of the pension plan on which we all rely.