SamCERA - Funding
SamCERA - Funding
SamCERA
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Funding SamCERA is responsible for the actuarial soundness of San Mateo County’s and the Mosquito Abatement District’s defined benefit pension programs for their permanent employees. SamCERA’s Board of Retirement retains the services of an independent actuary, Mercer Human Resources Consulting. Mercer evaluates SamCERA’s actuarial assets and liabilities and makes recommendations that assure that SamCERA will be able to pay all earned benefits to our members at an optimum cost to their employers. The actuary uses statistical and econometric tools to construct a three-dimensional model of SamCERA’s Actuarial Assets, Liabilities and Future Contributions. The actuary studies The actuary takes all of this information and, like the alchemists of old, stirs it up in a big computerized kettle. The sum of SamCERA’s Pension Promises minus SamCERA’s Assets equals Future Contributions. When the actuary is done, he recommends what the next year’s Contribution Rates should be in order to keep SamCERA actuarially sound. You may view Mercer’s latest reports prepared for SamCERA in PDF format.
The Actuarial Valuation is dated June 30, 2003 but it includes the actuary’s calculations of the costs associated with the County’s new benefit formulas and the contribution rates that will go into effect in July 2004. In other words, the June 30, 2003 liabilities incorporate the benefit enhancements formally approved by the Board of Supervisors on June 10, 2004. A Word About Defined Benefits vs. Defined Contributions: The term “defined benefit” means that the County and Mosquito Abatement District guarantee that they will pay their eligible employees the full amount of each plan’s defined benefit in monthly installments for life, as well as a survivor benefit for the life of an eligible spouse, with built in inflation protection as defined in the plan. 100% of the funding risk is borne by your employer. This guarantee differs significantly from the promise made by employers who sponsor a “defined contribution” plan. In a defined contribution plan, the employer only promises to contribute a certain amount or percentage of pay into the retirement plan. A defined contribution plan bases its benefit payments on the actual amount in the member’s account at the time of retirement. The employer does not guarantee that there will be enough in the account to provide for a lifetime benefit, nor that there will be any inflation protection. Many Americans are discovering that their IRC§401(k) plans will not support them in the manner they believe they deserve. In fact, in a defined contribution plan 100% of the risk is borne by the employee. SamCERA does not administer any defined contribution plans. Pension Promises / Pension Liabilities: SamCERA
provides “defined benefits” for the permanent
employees of the County and the Mosquito Abatement District.
These defined benefits represent Pension Promises made by
our employers to their employees. You can estimate the monthly
pension promise your employer has made to you using SamCERA’s
Benefits Calculator. The following graph reflects the growth in SamCERA’s outstanding Pension Promises over the past decade. The graph reflects the present value of the stream of monthly benefit payments that will be made over the lifetimes of all of SamCERA’s current active members, deferred members, retired members and their survivors. These values are known as SamCERA’s Actuarial Liabilities. Each year the actuary recalculates SamCERA’s liabilities. The present value of future benefits jumped in 2002 because of the County’s agreement with its unions for a two-step increase in benefits in 2003 and 2005. You can read more about the benefit changes in PDF format.
SamCERA’s greatest challenge is to assure that the amount of contributions collected from our employers and our members is sufficient to fund the Pension Promises when combined with the projected Investment Earnings on the accumulated contributions. Each year the Board of Retirement collects the contributions the actuary says are necessary to pay for the defined benefits earned by our members during the current year. In theory the member pays for 50% of the Basic Monthly Benefit and the employers pay for the other 50% of the Basic Monthly Benefit. In addition, in SamCERA’s case, the employers pay for 100% of the Cost-of-Living Benefit. The annual contributions are invested along with the rest of SamCERA’s Assets. In a typical pension fund it is estimated that the investment earnings may pay for more than 80% of the total cost of the benefits. The following graph depicts the growth in SamCERA’s Actuarial Assets over the past decade. The amounts reflect the actuarially smoothed value of SamCERA’s actual investments and receivables.
The actuary calculates the value of Actuarial Assets by smoothing the difference between actual investment earnings and the earnings that would have been generated at the assumed actuarial interest rate. The differences are smoothed or amortized over a five-year rolling period. Because of significant differences between recent actual investment losses and the 8.25% actuarial interest rate, SamCERA’s Market Stabilization Account carried a negative balance of $241 million on June 30, 2002. This negative balance represents the difference between the Market Value of the Retirement Fund and the Actuarial Value reflected in the graph. If you compare SamCERA’s Pension Promises with SamCERA’s Actuarial Assets, it is apparent that SamCERA’s Pension Promises exceed SamCERA’s current Actuarial Assets. This shortfall is SamCERA’s Unfunded Actuarial Accrued Liability. Unfunded Actuarial Accrued Liability: Whenever benefits are changed, experience deviates from expectations, assumptions are altered, or legal standards are amended, the actuary recalculates what should already be in the Retirement Fund back to the date an employee entered SamCERA. Consequently, it is not unusual for Unfunded Liabilities to occur. The Unfunded Liability is treated like a mortgage that needs to be amortized or paid off over a specific period of time. SamCERA’s Unfunded Liability is scheduled to be paid off by the June 30, 2022. The graph reflects the dramatic swing in the annual calculation of SamCERA’s Unfunded Actuarial Accrued Liability. The strong investment markets of the last half of the last decade led to a dramatic decline in SamCERA’s Unfunded Liability. Conversely the negative investment returns of the last three years, when combined with the retroactive application of the County’s new benefit formulas, has caused the Unfunded Liability to swell significantly in the 2002 Actuarial Valuation. Approximately half of the 2002 increase is due to a combination of investment shortfalls and improved retiree mortality. The other half of the increase is related to the County’s new benefit improvements.
The Unfunded Liability will be paid off over the next 19 years as a level percentage of pay roll. Payroll growth is a compound function. Consequently, the annual payments to retire the Unfunded Liability escalate rapidly in the later years of the amortization schedule. Future contributions will consist of three major components: Future Member and Employer Contributions to pay for the normal annual benefit accruals, plus Future Employer Contributions to pay-off the mortgage on the Unfunded Pension Promises made in the past.
The graph does not include the negative balance in the Market Stabilization Account. That balance will need to be amortized with investment earnings in excess of the actuarial interest rate or with increases in the employers’ Unfunded Liability contribution. The
Actuarial Valuation contains
a wealth of information regarding SamCERA and its defined
benefit programs. |
