How are Employer Contribution Rates Determined?

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As a part of LAGERS coverage, an employer has a monthly contribution rate that may change annually.  This rate is what is needed fund the employer’s current level of LAGERS benefits. Several factors go into the calculation of these rates. For this blog, we will discuss 4 driving factors that may have an effect on an employer’s contribution rate.

Before we discuss 4 driving factors that affect an employer’s contribution rate, let’s generally discuss the process performed by LAGERS’ actuary to calculate an employer’s contribution rate(s). Annually on the last day of February, LAGERS’ actuary ‘stops the clock’ and compares what happened in the last year versus LAGERS’ actuarial assumptions. The difference between the assumptions and what actually happened create actuarial gains or losses. Actuarial gains result in downward pressure on the employer’s rate(s) and the opposite for actuarial losses.

An employer’s group of employees have an effect on an employer’s rate(s). For example, if the employer has a lower increase in payroll than expected, this is considered an actuarial gain and could result in downward pressure on an employer’s rate(s). However, larger than anticipated payroll increases would create an actuarial loss.  The number of retirements and employee turnover may also impact the contribution rate. These are a few of the ways the  group of employees may effect a contribution rate.

The higher the benefits, the higher the cost to the employer. Each employer individually elects what level of benefits it would like to provide for its employees. Generally, the higher the benefits an employer provides, the higher the contributions needed to fund the benefits. Also, when an employer makes an upgrade, there is an increase in the monthly contributions. And, since upgrades to the benefit program are retroactive, a portion of the additional monthly contribution is for previous service.

Investment return of the overall system has a significant impact on an employer’s rate(s). LAGERS has an assumed investment rate of return of 7.25% per year. In general, if LAGERS’ investment portfolio meets the assumed rate of return this will help to keep employer rates level. However, if the LAGERS’ investment portfolio exceeds the assumed rate, this is an actuarial gain and will put downward pressure on all employers’ contribution rates. The opposite is true if LAGERS investment portfolio does not meet or exceed the assumed rate of return.

Another caveat of investment returns that plays into the determination of employer rates is that all of LAGERS’ investments gains / losses are smoothed over a 5 year period. This creates a bit of rate stability because instead of realizing gains and losses all at once, they are smoothed and create less drastic rate changes.

One final factor that could cause rate fluctuations is changes to the plan design or assumptions being used to calculate rates. If an assumption that is being used to calculate an employer’s rate(s) is changed going forward, this may cause a rate decrease / increase. Every 5 years, LAGERS does an experience study to ensure the assumptions being used are aligned with the system’s actual experiences.  This may or may not cause an adjustment to the actuarial assumptions for the next 5 years. For example, a change in the number of disability retirements may require an adjustment in the disability cost.

LAGERS is designed to keep employer rates as level as possible. However, when there is a change in contribution rates, it can more than likely be attributed to one of the above 4 factors or to unusual employer experience.

Jeff Pabst, CRC Public Relations Specialist

Jeff Pabst, CRC
Public Relations Specialist

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