Strong investment performance increases funding level, but future post-retirement benefit restoration may bring additional General Plan contribution increases.
(Published Aug 25, 2014)
The Public Employees Retirement Association (PERA) General Plan and Police and Fire Plan are seeing a marked improvement in funding levels due to strong investment returns and also the positive effects of the recently enacted contribution increases taking effect on Jan. 1, 2015.
This is according to a preliminary report on the estimated 2014 valuation result for the two plans, which the PERA Board of Directors received during its Aug. 12 meeting. The report covers fiscal year (FY) 2014, which ended on June 30, 2014.
According to the report, the return on the market value of PERA pension assets for FY 2014, was approximately 18.5 percent, well above the statutory assumed annual investment return of 8 percent.
As a result, the funded ratio on an actuarial basis for the PERA General Plan is projected to increase from 72.8 percent for FY 2013 to 77.5 percent for FY 2014. (On a market value basis, the ratio increases from 77.8 percent to 86.2 percent.)
The funded ratio on an actuarial basis for the PERA Police and Fire Plan is projected to increase from 81.2 percent to 85.8 percent from FY 2013 to FY 2014. On a market value basis, the plan’s funding ratio increases from 86.9 percent to 95.6 percent.
The strong investment returns—along with the pending Jan. 1, 2015, contribution increases of 0.25 percent of salary for both employers and employees—may have an additional impact on the PERA General Plan and the Police and Fire Plan. Under the 2010 pension stabilization bill, the Minnesota Legislature reduced the annual post-retirement benefit increase for the General Plan from 2.5 percent to 1 percent until the market value of assets equals or exceeds 90 percent of the actuarial accrued liabilities for two consecutive years. Based on projections in the preliminary valuation report, the PERA General Plan will exceed the 90 percent funded level trigger and would, under current law, be required to resume paying retirees the annual post-retirement adjustment of 2.5 percent per year beginning Jan. 1, 2027.
Similarly, under the 2010 pension stabilization legislation, the PERA Police and Fire Plan post-retirement benefit increase was reduced to 1 percent, but will increase to the rate of inflation as measured by the Consumer Price Index up to 2.5 percent annually when the plan’s funding ratio reaches 90 percent for two consecutive years. The report projects that the 90 percent level will be reached and the higher benefit increase will be triggered by January 1, 2024.
When the actuarial and market valuations for the PERA General Plan and the PERA Police and Fire Plan are recomputed with the 2.5 percent annual post-retirement benefit increase, the funded ratios are significantly reduced. For the General Plan, the funded ratio for FY 2014 drops back to 73.3 percent on an actuarial basis and 81.4 percent on a market value basis.
However, the assumed resumption of the 2.5 percent annual benefit increase for the General Plan on Jan. 1, 2027, has an even more pronounced impact on a separate section of law that triggers recommendations for employer and employee contribution increases for the PERA General Plan. (This law triggered the most recent contribution increases discussed above.) Under that section of law, if the actuarial required contribution (employer plus employee) exceeds the current total employer and employee contribution, the contribution rates could be increased to cover the contribution deficiency.
The Police and Fire Plan does not have an automatic contribution increase trigger.
Based on the report’s analysis, the actuarial contribution deficiency in the PERA General Plan with the 2.5 percent benefit increase beginning on Jan. 1, 2027, would be 2 percent of salary, which could trigger up to a 0.5 percent of salary increase in both the employer and employee contribution rates beginning on Jan. 1, 2016. These increases would be in addition to the contribution increases of 0.25 percent from the employer and 0.25 percent from the employee that will go into effect on Jan. 1, 2015.
The PERA Board will be reviewing the effects of reinstatement of the 2.5 percent post-retirement adjustment this fall, and it is possible that the Board will consider legislative recommendations that could include modifications to the contribution adjustment provisions or to the post-retirement adjustment.
The League’s Human Resources and Data Practices Policy Committee will consider pensions and possible League responses to these PERA system issues.
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Contact Gary Carlson
(651) 281-1255 or (800) 925-1122