Impact of 2022 Investment Return on Employer Funding Status, Employer Reserves, and Future Employer Contribution Rates
February 9, 2023
Executive Summary
This preliminary information is based on unaudited investment return data and projected actuarial information. Finalized information will be available in May 2023.
The estimated 2022 investment return for IMRF is (12.8)%. This return translates into investment loss of approximately $(7.6) billion, after investment and administrative expenses. On average, employer accounts were charged approximately (48.5) % of net interest and residual investment loss on their beginning of the year employer reserve balance. This charge reflects the fact that, as a sponsor of a defined benefit plan, IMRF employers share all the risks and rewards of investment returns.
In the second quarter of 2023, IMRF will present a series of Employer Rate Meeting webinars. At these meetings, we will discuss the impact of year-end financial and actuarial data on IMRF as a whole, as well as the estimated impact on employers.
Investment Returns
IMRF’s investment returns reflect financial markets over a calendar year. IMRF reports both a market basis return and an actuarial basis return. IMRF’s estimated 2022 investment return on a market basis is (12.8)%. IMRF’s estimated actuarial return is 7.2%, due to five-year smoothing. The actuarial return is used to determine employer contribution rates and actuarial funding status. The actuarial return smooths the recognition of market returns that either exceed or fall short of the assumed annual actuarial return of 7.25%. Doing this minimizes large fluctuations in employer contribution rates due to market volatility.
Employer Funding Status
In April 2023, IMRF will provide each employer its annual GASB 68 information as well as GASB 50 footnote information for 2023. This information will disclose both the actuarial and market-based funding status for all plans, for their active and inactive members. Annuitant information is included in the GASB 68 report.
Given the negative market returns in 2022, employers should expect the funding status of their plan to decrease on both an actuarial and market-value basis, and consequently, 2024 employer contribution rates will more than likely increase.
Impact on Employer Reserves
By statute, IMRF must debit member and annuitant reserves with 7.25% interest annually on their opening reserve balance amounts (approximately $2.6 billion for 2022).
On average, employers will be charged approximately (48.5)% based on their beginning-of-the-year employer reserve balance. This charge 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 charged to individual employers will vary due to differences in employer and annuitant reserve amounts.
Over the last 10 years, IMRF employers have been credited or (charged) the following amounts:
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 overfunding 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 6.07% of payroll in 2022. Put another way, for each dollar of service an employee renders, the employer also incurs a pension cost of 6.07 cents.
Average employer rates for the regular plan over the past five years:
| Year | 2023 | 2022 | 2021 | 2020 | 2019 |
|---|---|---|---|---|---|
| Rate | 6.55% | 8.59% | 10.62% | 10.91% | 9.06% |
Individual employer contribution rates vary from the average for multiple reasons. Each employer has a unique rate affected by its own demographics and funding status, and each has a different percentage of Tier 1 and Tier 2 members. Employer rates for 2019 and beyond were impacted by lowering the assumed rate of return to 7.25% as of January 1, 2019.
IMRF Meetings
To discuss the potential impact on individual employers in 2023 and beyond, IMRF will conduct a series of Employer Rate Meeting webinars in the second quarter of 2023. Current topics impacting IMRF and pension plans in general will also be discussed.
Additional details and registration information for the Employer Rate Meeting webinars 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.