Under a defined benefit retirement
program, the pension benefit to be received by employees after
retirement is predetermined by a formula that is based on years
of service credit and salary history. This benefit is funded through
investment earnings on
Employees contribute to these
plans at a fixed rate that varies by system.
The rate of employer contributions
are variable from year to year. The determination of an employer's
annual contribution to this type of plan is a complex procedure
in which the system actuary plays a vital role. Essentially,
the employer is responsible for filling the gap between the
funds needed to meet the retirement system obligations and those
available from employee contributions and investment earnings
on system assets.
Each year, the actuary issues
a comprehensive valuation report for each of the State's defined
benefit plans. The report shows the financial condition of the
plan as of the valuation date and gives the basis for determining
the appropriations payable by the participating employers for
the plan year. This report is generated using a set of actuarial
assumptions to forecast the pension systems' liabilities and
the employers' annual funding requirement. These assumptions,
which cover such things as mortality, expected salary increases,
and rates of retirement and withdrawal from the system, are
approved by the Boards of Trustees and updated every three
years based on actual system experience.
of Employer Contributions
According to State law,
annual employer contributions to the State's defined benefit plans
are determined using the projected unit credit actuarial
cost method. The funding objective is to accumulate enough assets
over a member's active service life to sufficiently fund the total
retirement benefits due a member at the time of retirement. The
employers' annual normal cost represents the present value
of benefits that have accrued on behalf of the members during
the valuation year. In addition to an annual normal cost, an employer
may also be required to make payments toward the pension system's
unfunded actuarial liability. An employer accrued liability contribution
consists of the employer's share of the pension system's total
unfunded actuarial liability amortized over a 30 to 40 year period.
The unfunded actuarial liability of a retirement system at any
time is the excess of the system's actuarial liability over the
value of its assets. An unfunded actuarial liability can either
be generated or increased in a number of ways, including enhancements
to the pension benefits payable or the occurrence of actuarial
losses. Actuarial gains or losses occur when actual experience
of the system differs from the actuarial assumptions used to project
the pension system funding requirements. An example of an actuarial
loss would be if aggregate members' salaries increased considerably
above the actuarially assumed levels during the valuation period.
An employer's contribution
to one of the State's defined benefit plans covers not only the
cost of basic pension allowances, but also future cost-of-living
adjustments (COLA). Additionally, an employer's normal cost includes
premiums for group life insurance coverage for their employees.
The State's normal contribution to the PERS and TPAF also includes
premiums for post-retirement-medical coverage.
Benefit Program (ABP)
Under the State's defined contribution
retirement plan, the ABP, both employer and employee contribution
rates to the plan are fixed as a percent of the member's salary,
at 8% and 5%, respectively. The employee may make additional voluntary
after tax contributions to the retirement account, as well. The
pension benefits received by employees after retirement are dependent
upon the cumulative contributions made plus earnings that have
accrued on the contributions while they were invested in the plan.
The employee is responsible for directing the investment of both
employer and employee contributions into a number of investment
options available to ABP participants.
Since the employer contribution rate
is fixed, an employer's annual contribution is determined simply
by applying the employer contribution rate to the employees' pensionable