Office of the State Actuary glossary

Defines acronyms, actuarial, and pension related terms commonly used in OSA publications and reports.

Retirement system acronyms

HERP - Higher Education Retirement Plan

JRA - Judicial Retirement Account

LEOFF - Law Enforcement Officers and Fire Fighters

PERS - Public Employees' Retirement System

PSERS - Public Safety Employees' Retirement System

SERS - School Employees' Retirement System

TRS - Teachers' Retirement System

VFF - Volunteer Fire Fighters

WSPRS - Washington State Patrol Retirement Systems

Actuarial and pension terms

Actuarial Accrued Liability (AAL)

Computed differently under different funding methods, the Actuarial Accrued Liability generally represents the portion of the Present Value of Fully Projected Benefits attributable to service credit earned (or accrued) as of the valuation date.

Actuarial Assumptions

Factors used to estimate cost. Examples include the rate of return on plan investments, mortality rates, and the rates at which plan participants are expected to leave the system because of retirement, disability, termination, etc.

Actuarial Cost Methods

An actuarial method that defines the allocation of costs (and contributions) over a member's working career. All standard actuarial cost methods are comprised of two components: normal cost and the unfunded actuarial accrued liability. An actuarial cost method determines the cost of benefits only, not the ultimate cost of the plan, which is determined by offsetting actual benefit payments by plan assets.

Actuarial Equivalent

When two or more benefits have the same present value.

Actuarial Gain or Loss

A plan incurs actuarial gains or losses when the actual experience of the plan does not exactly match assumptions. For example, an actuarial gain would occur if assets earned 10 percent for a given year and the assumed rate of return in the actuarial valuation was 8 percent.

Actuarial Present Value

The value of an amount or series of amounts payable or receivable at various times, determined as of a given date by the application of a particular set of actuarial assumptions (i.e., interest rate, rate of salary increases, mortality, etc.).

Actuarial Standards of Practice (ASOP)

Guidance on the techniques, applications, procedures, and methods that reflect appropriate actuarial practices.

Actuarial Valuation Report (AVR)

Actuarial valuations are technical reports providing full disclosure of the financial and funding status of a plan.

Actuarial Value of Assets (AVA)

The value of plan investments and other property used by the actuary for the purpose of an actuarial valuation (sometimes referred to as valuation assets). Actuaries often select an asset valuation method that smooths the effects of short-term volatility in the market value of assets.

Actuarially Reduced

The method of adjusting a benefit received at an early date so that the expected total cost to the plan is equivalent to the cost if the benefit did not begin until later.

Affordability Risk

Affordability risk measures the chance that pension contributions will cross certain thresholds with regards to the general fund and contribution rates.

Aggregate Funding Method

The aggregate funding method is a standard actuarial funding method. Under this method, all annual plan benefit costs (for past and future service credit) are included under the normal cost. Therefore, the method does not produce a separate unfunded actuarial accrued liability component.

Amortization

Paying off an interest-bearing liability by gradual reduction through a series of installments, as opposed to paying it off by one lump sum payment.

Annuitant

One who receives periodic payments. For example, service and disability retirees, and their survivors.

Annuity

A series of periodic payments, usually for life, payable monthly or at other specified intervals. The term is frequently used to describe the part of a retirement allowance derived from a participant's contributions. Compare with "pension".

Anti-Selection

The tendency of a person to recognize his/her health status in selecting an option which is most favorable to him or herself.

Average Final Compensation (AFC)

A calculation that averages a person's highest earning months over a period of time to determine their pension amount.

Cash Balance Pension Plan

A hybrid defined benefit plan that has some of the features of a defined contribution plan. The most distinguishing feature of a cash balance pension plan is the use of a hypothetical account for each participant. The plan sponsor is responsible for investment decisions. Investment risk is borne by the plan sponsor, not the participant.

Cash-Out

A lump sum payment of the member's contributions prior to retirement.

Commingled Trust Fund (CTF)

An investment fund in which the manager pools the assets of several accounts to permit more efficient management and to reduce administrative costs. (Source: WSIB)

Contributory Plan

A plan to which participants, as well as the employer, contribute. Under certain contributory plans participants may be required to contribute as a condition of eligibility.

Cost-of-Living Adjustment (COLA)

An adjustment applied to retirement income to counteract cost changes in the economy (inflation).

Credited Service

A period of employment which is recognized as service for purposes of determining the eligibility for, or magnitude of, benefits.

Current Law Scenarios

Pension projection scenarios that exclude assumptions regarding future benefit improvements or funding shortfalls. In other words, this scenario models full funding of required contributions and no changes to benefits.

Death Benefit

A benefit payable by reason of a member's death. The benefit can be in the form of a lump sum, an annuity or a refund of the member's contributions.

Deferred Annuity

An annuity for which payments do not commence until a designated time in the future.

Deferred Compensation

Considerations for employment that are not payable until after the regular pay period. The most common form of deferred compensation are pension plans, but private employers may also offer bonuses, incentive clauses, etc.

Defined Benefit Plan (DB)

A pension plan providing a definite benefit formula for calculating benefit amounts - such as a flat amount per year of service; a percentage of salary; or a percentage of salary, times years of service.

Defined Contribution Plan (DC)

A pension plan in which the contributions are made to an individual account for each employee. The retirement benefit is dependent upon the account balance at retirement. The balance depends upon amounts contributed during the employee's participation in the plan and the investment experience on those contributions.

Disability Retirement

A termination of employment involving the payment of a retirement allowance as a result of an accident or sickness occurring before a participant is eligible for normal retirement.

Dollar-Weighted Rate of Return (ROR)

The internal rate of return. This signifies the rate of return during a period with respect to the beginning balance and cash flows that occur during the period. Dollar-Weighted Returns measure the actual impact the pension plan experiences during the period, which includes returns based on the timing of the cash flows during the period.

Early Retirement

A termination of employment involving the payment of a retirement allowance before a participant is eligible for normal retirement. The retirement allowance payable in the event of early retirement is often lower than the accrued portion of the normal retirement allowance.

Early Retirement Factor (ERF)

An actuarial factor used to reduce a monthly retirement benefit when that payment begins before the member has qualified for normal retirement based on age and service.

Entry Age Normal Cost Method (EANC)

The EANC funding method is a standard actuarial funding method. The annual cost of benefits under EANC is comprised of two components: normal cost, plus amortization of the unfunded liability. The normal cost is most commonly determined on an individual basis, from a member’s age at plan entry, and is designed to be a level percentage of pay throughout a member’s career.

401(k), 403(b), and 457 Plans

These defined contribution plans allow employees to save for retirement on a tax-deferred basis. 401(k) plans are found in the private sector and the public sector in some states. 403(b) plans are for employees of public educational institutions and certain non-profit tax-exempt organization. 457 plans (also known as deferred compensation plans) are for governmental employees and non-church-controlled tax-exempt organizations.

Fiduciary

Indicates the relationship of trust and confidence where one person (the fiduciary) holds or controls property for the benefit of another person.

Anyone who exercises power and control, management or disposition with regard to a fund's assets, or who has authority to do so or who has authority or responsibility in the plan's administration. Fiduciaries must discharge their duties solely in the interest of the participants and their beneficiaries, and are accountable for any actions that may be construed by the courts as breaching that trust.

Funded Ratio/Status

The ratio of a plan’s current assets to the present value of earned benefits. There are several acceptable methods of measuring a plan’s assets and liabilities. In financial reporting of public pension plans, funded status is reported using consistent measures by all governmental entities. According to the Government Accounting Standards Board (GASB), the funded ratio equals the actuarial value of assets divided by the actuarial accrued liability calculated under the allowable actuarial methods.

Non-Contributory Plan

A retirement system in which no contributions are required of its members to aid in its financing.

Normal Cost (NC)

Computed differently under different funding methods, the normal cost generally represents the portion of the cost of projected benefits allocated to the current plan year.

Normal Retirement Age (NRA)

The age, as established by a plan, when unreduced benefits can be received.

Optimistic Projections

A measurement of the pension system under favorable conditions (above expected investment returns, for example). Optimistic refers to the 75th percentile, where there is a 25 percent chance of the measurement being better and 75 percent chance of the measurement being worse. Very optimistic refers to the 95th percentile.

Other Post-Employment Benefits (OPEB)

Refers to benefits offered to retirees besides a pension and includes, among other benefits, prescription drug insurance, dental insurance, and long-term care insurance.

Past Practices Scenarios

Pension projection scenarios in which assumptions regarding Legislative behavior are introduced. These assumptions include actual contributions below what are actuarially required and improving benefits over time. These scenarios are meant to project past behavior into the future.

Pay-Go

A method of recognizing the costs of a plan only as benefits are paid. For Washington plans, pay-go would occur when the trust fund doesn’t have enough assets to pay current benefits so some or all benefit payments must come from the general fund.

Pension

A series of periodic payments, usually for life, payable monthly or at other specified intervals. The term is frequently used to describe the part of a retirement allowance financed by employer contributions. Compare with "annuity".

Pessimistic Projections

A measurement of the pension system under unfavorable conditions (below expected investment returns, for example). Pessimistic refers to the 25th percentile, where there is a 75 percent chance of the measurement being better and 25 percent chance of the measurement being worse. Very pessimistic refers to the 5th percentile.

Pop-Up Benefit

A provision of some joint and survivor options whereby if the retiree's named beneficiary predeceases him or her, the amount of the retirement benefit increases (pops up), to the amount payable for a life-only payment option.

Portability

The ability of an employee who changes jobs and joins a different retirement system to become a dual member, maintaining membership in both systems. Dual members may combine service for benefit eligibility. They may also use their highest salary from either system for benefit calculation.

Pre-Funding

To accumulate a reserve fund in advance of paying benefits. This is the opposite of "pay-as- you-go."

Present Value

The current worth of an amount or series of amounts payable in the future, after discounting each amount at an assumed rate of interest and adjusting for the probability of its payment or receipt.

Present Value of Fully Projected Benefits (PVFB)

Computed by projecting the total future benefit cash flow from the plan, using actuarial assumptions (i.e., probability of death or retirement, salary increase, etc.), and discounting the cash flow to the valuation date using the valuation interest rate to determine the present value (today’s value).

Present Value of Future Salaries (PVFS)

The value of future expected salaries discounted with interest to the valuation date.

Projected Benefits

Pension benefit amounts which are expected to be paid in the future taking into account such items as the effect of advancement in age as well as past and anticipated future compensation and service credits.

Replacement Ratio

A calculation of the degree to which retirement income replaces a pre-retirement member's "take home" pay, less working expenses. To determine this ratio, several factors must be taken into account: a retiree's pre-retirement earnings; changes in tax liabilities after retirement; changes in Social Security tax liability; the elimination of work-related expenses - including contributions to the retirement system; and savings.

Reserve

A collection of assets set aside to meet future liabilities.

Risk

Measures the risk metrics of the Washington State pension systems, including the chance that the pension systems will exhaust its assets (chance of pay-go) and the chance that the funded status will cross a certain threshold.

Risk Tolerance

The amount of risk an individual or group is willing to accept with regards to the likelihood and severity of unfavorable outcomes.

Roth IRA

A retirement account which an individual can make after-tax contributions according to annual limits that are specified by the IRS.

Service Retirement

Retirement dependent upon completion of a specified period of service. In some usages, the term has the same meaning as "normal retirement".

Supplemental Cost

A separate element of actuarial cost which results from future normal costs having a present value less than the present value of the total prospective benefits of the system. Such supplemental cost is generally the result of assuming actuarial costs accrued before the establishment of the retirement system. A supplemental cost may also arise after inception of the system because of benefit changes, changes in actuarial assumptions, actuarial losses, or failure to fund or otherwise recognize normal cost accruals or interest.

Time-weighted Rate of Return (ROR)

The geometric average rate of return. This signifies the rate of return during a period without respect to cash flows that occur during the period. Investment manager performance is typically based on time-weighted returns since they have no control over when the cash flows occur.

Total Allocation Portfolio (TAP)

A diversified portfolio that is intended for long-term investors.

Unfunded Actuarial Accrued Liability (UAAL)

The excess, if any, of the Actuarial Accrued Liability over the Actuarial Value of Assets. In other words, the present value of benefits earned to date that are not covered by current plan assets.

Unfunded Liability

The excess of the total benefit cost (past and future) over the Actuarial Value of Assets. In other words, this is the portion of all benefits that are not covered by plan assets.

Unfunded EAN Liability

The excess, if any, of the Present Value of Fully Projected Benefits calculated under the EAN cost method over the Valuation Assets. This is the portion of all benefits earned to date that are not covered by plan assets.