Impact of 2016 Investment Return on Employer Funding Status, Employer Reserves, and Future Employer Contribution Rates
January 27, 2017
Executive Summary
This preliminary information is based on unaudited investment return data and projected actuarial information. Finalized information will be available in May 2017.
The estimated 2016 investment return for IMRF is 7.71%. This return translates into investment income of approximately $2.584 billion, after investment and administrative expenses. Member and annuitant reserves will be credited approximately $1.903 billion, as required by the Illinois Pension Code. Employer reserve balances will be credited with the balance, approximately $461.8 million. On average, employer accounts will be credited approximately 7.32% of interest and residual investment income on their beginning of the year employer reserve balance. This credit reflects the fact that, as a sponsor of a defined benefit plan, IMRF employers share all the risks and rewards of investment returns.
In April 2017, IMRF will present a series of local Rate Meetings throughout the state. At these meetings, the impact of year-end financial and actuarial data on IMRF as a whole and its estimated impact on individual employers will be discussed. Current topics impacting IMRF and pension plans in general will also be discussed. IMRF will present the same information during an online webinar in May 2017.
Investment Returns
IMRF investment returns reflect financial markets over a calendar year. IMRF reports both a market basis return and an actuarial return. IMRF’s estimated 2016 investment return on a market basis is 7.71%. IMRF’s estimated actuarial return is 6.8%. The actuarial return is used to determine employer contribution rates and actuarial funding status. This technique moderates fluctuation in employer contribution rates, and delays the recognition of market returns that either exceed or fall short of the assumed actuarial return of 7.5%.
Employer Funding Status
IMRF’s 2016 aggregate funding status on a market value basis is projected to increase from 87.4% as of year-end 2015 to 89.3% at year-end 2016.
On an actuarial basis, IMRF’s aggregate funding status is expected to increase from 88.4% as of year-end 2015 to 88.7% at year-end 2016.
Absent any significant changes in actuarial experience, most individual employers can expect the funding status of their plan to slightly increase on both an actuarial and market value basis.
In April 2017, IMRF will furnish each employer its annual GASB 50 footnote information as well as GASB 68 information for 2016. This information will disclose both the actuarial and market-based funding status for all plans for their active and inactive members.
Impact on Employer Reserves
By statute, IMRF must credit member and retiree reserves with 7.5% interest (approximately $1.903 billion for 2016) and pay approximately $151.1 million in administrative and direct investment expenses.
On average, employers will be credited approximately 7.32% based on their beginning-of-the-year employer reserve balance. This credit reflects the fact that, as a sponsor of a defined benefit plan, IMRF employers share all the risks and rewards of investment returns. The actual amount credited to individual employers will vary from the average due to differences in employer and annuitant reserve amounts.
Over the last ten years, IMRF employers have been credited or (charged) the following amounts: $461.8 million in 2016; ($2.62) billion in 2015; $719.6 million in 2014; $3.973 billion in 2013; $1.927 billion in 2012; ($1.436) billion in 2011; $1.713 billion in 2010; $3.461 billion in 2009; ($7.100) billion in 2008; and $871 million in 2007.
Employer Contribution Rates
Employer contribution rates consist of as many as six parts:
- Normal retirement costs
- Death in service benefits
- Temporary disability benefits
- Supplemental retirement benefits (the 13th payment)
- Amortization of over- or underfunding
- Early Retirement Incentives (employer option)
The ongoing cost of the IMRF benefit package for the regular plan covering normal retirement costs, death in service benefits, temporary disability benefits, and supplemental retirement benefits was 7.60% of payroll in 2016. Put another way, for each dollar of service an employee renders, the employer also incurs a pension cost of 7.60 cents. If an employer is overfunded, the 7.60 cents is reduced and IMRF draws from the surplus. If an employer is underfunded, the 7.60 cents is increased to collect the shortfall.
The average employer rate was 11.73% in 2016. The rate for 2017 is 11.34%, and the projected rate for 2018 is estimated to be 11.84%. The 11.73% rate reflects the fact that the plan was less than 100% funded in the aggregate on an actuarial basis as of December 31, 2016.
The impact of 2016 investment returns on individual employer 2018 contribution rates is difficult to forecast, since each employer has a unique rate affected by its own demographics and funding status as well as its mix of Tier 1 and Tier 2 members.
IMRF Meetings
To discuss the potential impact on individual employers in 2017 and beyond, IMRF will conduct a series of Employer Rate Meetings throughout the state, beginning in April 2017. Current topics impacting IMRF and pension plans in general will also be discussed. In May, IMRF will present a webinar that will also discuss this information.
Additional details and registration information for the Rate Meetings and the webinar will be available on IMRF’s website, www.imrf.org, and in upcoming editions of Employer Digest e-newsletter.
Questions
If you have any questions regarding the information presented in this General Memo, please call or email Mark Nannini, Chief Financial Officer, at (630) 368-5345 or mnannini@imrf.org.