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Review of Actuarial Methodology Issues

This review discusses key issues in actuarial methodology, including cost allocation among tiers and COL contributions, for employer and member costs. Proposed principles and alternative approaches are also explored.

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Review of Actuarial Methodology Issues

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  1. P Review of Actuarial Methodology Issues November 8, 2006

  2. Overview • Cost Allocation among Tiers • Member COL Contributions • Employer

  3. Cost Allocation Between Tiers • Members • Employer

  4. Member Cost Allocation Between Tiers • Regular Contributions • Basic is statutory • COL requires allocation decision • Settlement • Only Tier 1 Members would make Settlement Contributions

  5. Calculating COL Contributions • Proposed Principles • Tier 1 + Tier 2 + Tier 3 contributions = half COL cost • Fair to all employees • Doesn’t require unreasonable recordkeeping

  6. Alternative Approaches • Same for both tiers • Calculate and track tiers separately • Other approaches could be developed if requested

  7. Same for Both Tiers • Current approach • Simpler recordkeeping • Consistency between tiers

  8. Same for Both Tiers • Example (simple numbers not based on this year’s rates) • Tier 1 • Basic Rate: 4.0% • COL load factor: 90% • COL Rate: 3.6% • Settlement Basic: 1.0% • COL load factor: 80% • COL Rate: 0.8% • TOTAL RATE: 9.4%

  9. Same for Both Tiers • Example (simple numbers not based on this year’s rates) • Tier 2 and 3 • Basic Rate: 3.0% • COL load factor: 90% • COL Rate: 2.7% • Settlement Basic: 0.0% • COL load factor: 80% • COL Rate: 0.0% • TOTAL RATE: 5.7%

  10. Calculate and Track Separately • Alternate approach for discussion • Would allocate past UAAL to Tier 1. • Would require additional tracking of COL contribution and benefit payments by tier. • Relationship of Tier 1, Tier 2, and Tier 3 rates will vary in the future based on experience, investment return, demographic makeup of groups.

  11. Calculate and Track Separately • Example (simple numbers not based on this year’s rates) • Tier 1 • Basic Rate: 4.0% • COL load factor: 100% • COL Rate: 4.0% • Settlement Basic: 1.0% • COL load factor: 80% • COL Rate: 0.8% • TOTAL RATE: 9.8%

  12. Calculate and Track Separately • Example (simple numbers not based on this year’s rates) • Tier 2 and 3 • Basic Rate: 3.0% • COL load factor: 50% • COL Rate: 1.5% • Settlement Basic: 0.0% • COL load factor: 80% • COL Rate: 0.0% • TOTAL RATE: 4.5%

  13. Recommendation • Retain current allocation methodology

  14. Employer Cost Allocation Between Tiers • Normal Cost • UAAL

  15. Normal Cost • Alternative Approaches • Single rate for all employees • Calculate separately by tiers • Other approaches could be developed if requested

  16. Normal Cost • Primarily an accounting / cost allocation issue • Total remains the same • Does not require additional recordkeeping for FCERA • Separate calculation gives clearer, more accurate picture of true cost

  17. UAAL • Alternative Approaches • Single rate for all employees • Calculate separately by tiers • Other approaches could be developed if requested

  18. UAAL • Issues • Fairness • Allocation of retiree UAAL • Cost • GASB requires faster amortization if no new employees • Accuracy

  19. Questions

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