Why do I have an unfunded liability?

This page offers several reasons why an IMRF employer might have an unfunded liability.

You may ask—why do I have an unfunded liability? If the actuary has made all these complex calculations which are supposed to accurately predict the future, why is the unfunded so high? The reasons are many and differ from employer to employer. Some of the most common are explained below.

Prior Service

This is a common reason for employers who have joined IMRF in the last 40 years. Prior service is service credit granted to employees for employment prior to the date the employer joined IMRF. An example may clarify it. Assume an employer joins IMRF in 1960. When it joined it had employees already working. These employees were given pension credits (at no additional cost to them) for the period of employment prior to 1960. The employer did not make any additional contributions at that time for this service. The cost was added to the unfunded liability.

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Benefit Improvements

granted after a member joins IMRF increase the unfunded liability. Remember when we discussed entry age normal, we said that the actuary calculates the expected cost of a member’s benefit and spreads it evenly over the expected career of the member. Well, if benefits change during the member’s career, the actuary’s original calculation will be inaccurate. The actuary can adjust the normal cost for future years to reflect the new benefits. The additional cost for years for which service was already granted is added to the unfunded liability.

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Past Service Adjustments

are another item that increases the unfunded liability for an employer. The pension code defines circumstances under which a member may establish retroactive or omitted service credit by paying the member contributions plus interest. When the service is established, the employer is not asked to make any contributions. The employer’s cost for this service is added to the unfunded liability.

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Changes in Actuarial Assumptions

can cause the unfunded liability to increase or decrease depending on how the assumptions change. As mentioned before, every three years the actuary compares the estimates we use to project future costs to our actual experience. We change our assumptions to match our experience.

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The Employer's Demographics

compared to the demographics of the Fund as a whole can have a significant effect on its unfunded liability. We calculate the normal cost on IMRF as a whole. To the extent that an employer’s employees differ from the average IMRF member, that employer’s unfunded liability will vary to make up the difference. The average IMRF member is 45.7 years old, with an annual income of $29,709, and 8.8 years of service.

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less than or greater than 7.50% will have an affect on the unfunded liability. Obviously, if returns are greater than 7.50% the unfunded will decrease. If returns are less than 7.50%, the unfunded will increase. Because residual investment income is distributed proportionately based on employer assets and existing annuities, the effect is greater for employers with more assets and more annuitants (members receiving a pension.) In most years we have distributed more than the interest assumption.

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Based on the employer’s structure, the amortization period determines how much must be paid in a given year. This factor is determined by the actuary based on the previous year’s contributions, interest rate assumption, payroll growth, and amortization period and may vary from employer to employer.

Because the actuary assumes that payrolls will increase for inflation each year, the factor is not 1/27th as you might expect. The amount to be paid is divided by the expected payroll of the employer to determine the unfunded amortization rate.

An unfunded amortization rate is separately calculated for each employer based on its payroll and unfunded obligation. For this reason it is difficult to compare rates among employers.

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Go back to How Rates are Calculated page	Go on to how the unfunded liability contribution rate is calculated