IMRF's Funding Policy Webinar

for IMRF Employers
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IMRF's Funding Policy Webinar Video
View the December 6, 2017, program presented by IMRF Executive Director Louis Kosiba and Chief Financial Officer Mark Nannini.

IMRF's Funding Policy Webinar

On Wednesday, December 6, 2017, Louis W. Kosiba, Executive Director, and Mark Nannini, Chief Financial Officer, presented the webinar program, "IMRF's Funding Policy." This program provided a general overview of IMRF's actuarial funding policy, assessed key funding objectives, and reviewed the components that affect IMRF's funding policy. A question-and-answer session followed the presentation.

Refer to this resource page to download the presentation's slides, view the complete webinar program in its entirety, and review the questions and answers submitted during the presentation.

Question and Answer Presentation

Webinar attendees were invited to submit a diverse range of questions during the presentation. The presenters' in-depth answers follow each question.

Q.: Wouldn’t the 62 cents from investments earnings include prior contributions from employers and employees?

A.: LK –The funding approach we use is entry age normal and what we’re trying to do is pre-fund benefits—we’re setting aside money to insure the benefits are payable. So the question becomes how big a role does the additional money that’s been contributed play in funding these retirement benefits. You can contrast that with Social Security, which is pay as you go. With Social Security, the employer and employee both contribute the same amount of money but there are no investment earnings because every dime that goes into Social Security is immediately paid out. There was a time in the 1980s and early 1990s that surpluses in contributions were invested in Federal IOUs but those monies were already spent by the federal government. So there was no intent to pre-fund those retirement benefits.

If we look at our Comprehensive Annual Financial Report for a 35-year period, and we look at our income streams, we’ll see how much money we made on investments, how much employers contributed, and how much employees contributed. That’s how we developed the IMRF dollar.

In one sense, all the money we ever have comes from employers and employees but we need to remember we need a well-run investment program to hold down costs for employers.

Q.: Does the 100% funding target include the nearly 3,000 member district's funded liabilities? On average, what is the member district's funded liability?

A.: LK – When IMRF talks about funding levels, we usually talk in the aggregate. We have 2,987 different units of government—each has a different funding level, each has a unique employer contribution rate—and we’re trying to get everyone to that 100% funding level.

If you’re a new employer to IMRF, you’re starting to build assets over time. The funding levels differ from employer to employer—we’re always aiming to be 100% funded.

MN – As of the end of 2016, the aggregate funding level was 89%. Currently, if the market stays strong through the end of the year, we will be well over 90% by the end of the year.

With 2,987 different employers, we also have over 3,250 different plans when you consider Regular, SLEP, and ECO. All of that enters into the factors for the 100% funding target.

LK – When it comes to the employee reserve, the 4.5% that is contributed by regular employees—7.5% contributed by SLEP and ECO—is always 100% funded. Those monies receive 7.5% interest to remain 100% funded. The annuitant reserve is also always 100% funded. It’s the employer reserve that becomes the balancing account, which we utilize to pre-fund retirement benefits when a person retires.

Q.: What is the current average career (in years) of an employee in IMRF? And, for comparison purposes, what is the investment rate of return for IMRF over that same period of time?

A.: MN – The average career in years for a retiree is roughly around 20 years. If you look back on the IMRF dollar, it states the average retirement age of 63.1 years old after 20 years of service. Looking back to 1982, the investment rate of return was 9.38%.

LK – The last 20 years has been challenging with the “dot com” bubble burst and the real estate bubble burst, but over time, being long-term investors, we’re getting close to achieving that 7.5% return.

Q.: We are within striking distance of 100% funding with an extra payment this month. The resulting rate would take effect January 1, 2019. When should I get a hard number to hit 100%? After December 15th? Also, can I overfund (>100%) and expect the normal annual return on the amount over 100%?

A.: LK – 2017 results, which are looking strong, will be determined on December 31st which is our measurement date. That data will then go to the actuaries. The actuaries will look at what’s been happening with your employer’s workforce over the past year and then calculate your employer contribution rate for 2019.

If you’re close to 100% funding now, we have to determine what the returns are for 2017. If something happens at your employer—such as providing incentives for people to leave—your liabilities may increase faster than your investment returns. If you have a sudden surge in employee retirement, it may also affect your funding level.

Q.: Our organization had an ERI (Early Retirement Incentive) several years ago, and as a result our contribution percent increased significantly. Are there any "extra" strategies for reducing that percentage?

A.: LK – There is a breakdown of normal cost, death, disability, the 13th Payment, and over- and underfunding on your employer rate notice. There is also an additional number there for your Early Retirement Incentive. If your employer paid off the ERI, that cost would effectively go away. For example, if you had an ERI cost of $200,000 and you decided to pay off $100,000, that would cut a portion of the ERI cost down.

Q.: What is the liability to the government agency for employees that take advantage of the Voluntary Additional Contribution?

A.: MN – First, if IMRF hits its target 7.5% return each year, everything is even. If we go over the 7.5% and we earn more than that, the difference goes into the employer reserves. If we do not reach 7.5%, then the difference is a reduction of the amount that will be allocated to the employer reserve. There are some positives and some negatives to it.

Q.: Do IMRF investment earnings include member contributions funded by rate adjustments due to market investments being less than 7.5%?

A.: LK Member contributions are invested along with employer contributions and past earnings so all of this is pooled when we invest our money. If we make less than our assumption, employers would need to contribute more money to replenish their own reserves to pre-fund retirement benefits. Member contributions are never adjusted; they’re fixed by statute. However employer rates are adjusted due to market adjustments being less than 7.5%.

Q.: Is IDOT (Illinois Department of Transportation) part of IMRF?

A.: MN– No, IDOT is not a part of IMRF.

LK: IDOT is covered by the State Employee Retirement System.

Q.: When IMRF speaks to its unfunded liability, are they just speaking about the amount of funds needed to pay the annuitants who are now retirees under the IMRF pool?  Or does the unfunded liability include the IMRF “big” pool for retirees, as well as the unfunded liability of all of the member districts? My district has a roughly $5 million unfunded liability…is my district’s $5 million unfunded liability also part of IMRF’s $5 billion UAAL, or are these separate unfunded liabilities? 

A.: LKThinking in terms of circles is the correct approach. When IMRF refers to an unfunded liability, we are talking about the difference between assets in-hand and the total value of all the benefits promised. Because the member account and annuitant reserve are always 100% funded, the unfunded liability reflects the underfunding of the employer reserve accounts. In the aggregate, the $5 billion dollars in unfunded liability is the total of the unfunded liability for each employer (note that some employers are over 100% funded). Your employer’s $5 million in unfunded liability is part of the larger amount–$5 billion–but it remains attributable to your district.