No one can predict the future with absolute certainty, so all of our actuarial measurements rely on assumptions to estimate future events. Given the long-term nature of benefits like pensions, the goal of actuarial assumptions is to estimate future experience over a long-term horizon, sometimes 50 years. Ultimately, the actual costs for benefits will depend on actual experience, but the assumptions we use set the stage and help estimate what those costs will be.
- Why are assumptions important?
- As mentioned above, actual costs for benefits will depend on actual experience, and a reasonable set of assumptions will provide a good framework in helping to understand how much and when benefits will be paid. From there, decisions are made regarding how to pay for these benefits. For the primary state retirement systems, contribution rates are typically adopted every two years as the rates adjust to actual experience that is different than assumed or to reflect a change in assumptions.
- What kind of assumptions are there?
- At a high level, assumptions are divided between economic and demographic assumptions. Economic assumptions typically predict estimate the amount of future benefits while demographic assumptions typically estimate the timing of future benefits.
Key economic assumptions for pension benefits include the discount rate for measuring present values, which is often based on the investment rate of return, and future salary growth. For more information, please see our
Economic Experience Study.
Key demographic assumptions for pension benefits include turnover, which estimates how long employees are expected to work for WA state; retirement, which estimates when they are expected to start collecting their benefit; and mortality, which estimates how long they are expected to live. For more information, please see our
Demographic Experience Study.
- How does OSA set an assumption?
- When performing an actuarial experience study, which is a formal review of assumptions, we rely on historical experience and professional judgment about the future to see if our current assumptions are reasonable. Where appropriate, we collect information from experts, including other state agencies. We must comply with Actuarial Standards of Practice (ASOP) when setting assumptions, which provide professional guidance when preparing actuarial information, including selecting economic (ASOP 27) and demographic (ASOP 35) assumptions.
- How often does OSA review assumptions?
- While OSA reviews all assumptions for reasonableness with each work product, statutes require OSA to perform actuarial experience studies on a regular basis.
RCW 41.45.030 requires a review of long-term economic experience every two years and
RCW 41.45.090 requires a review of demographic assumptions at least once in each six-year period.