The future benefit obligations (or costs of the plan) are spread over the working lifetimes of the plan members based on the plan’s actuarial cost method. This, along with the plan’s funding policy, produces a future stream of contributions to pre-fund the plan’s benefits. Different cost methods allocate costs at different rates. Some allocate costs evenly as a level percentage of pay over a member’s career, while others allocate costs as an increasing percent of pay.
Actuarial cost methods, along with a plan’s funding policy, serve to: - Fund future benefits in a consistent manner from year to year.
- Make up for any shortfalls in prior funding, including differences in funding when experience differs from assumptions.
The two parts of an actuarial cost method are: -
The Normal Cost – the value of future benefits allocated to the current plan year under the actuarial cost method.
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The Unfunded Actuarial Accrued Liability (UAAL) – the amount of past service liability that exceeds the value of the plan’s assets. A funding policy helps define how a UAAL will be addressed in future contributions.
The Legislature is responsible for the selection of the actuarial cost and asset valuation methods as well as the funding policy. The actuarial cost methods and funding policies vary across the Washington State retirement systems and are as follows.
Public Employees’ Retirement System (PERS) Plan 1 and Teachers’ Retirement System (TRS) Plan 1: We use a variation of the Entry Age Normal (EAN) Cost Method to determine the UAAL. Under this method, the UAAL is equal to the unfunded actuarial present value of projected benefits less the actuarial present value of future normal costs for all active members and the present value of expected contributions between the measurement date of the valuation and the effective date of contribution rate collection. The UAAL is reset at each valuation date. The present value of future normal costs is based on the Aggregate Normal Cost rate for Plans 2/3 and the resulting UAAL is amortized over a rolling ten-year period, as a level percentage of projected system payroll. The projected payroll includes pay from Plan 2 and Plan 3 as well as projected payroll from future new entrants.
As a result of this hybrid method, employers are charged the same contribution rate, regardless of the plan in which employees hold membership.
The method is subject to maximum contribution rates prior to 2015 and minimum contribution rates thereafter. Please see
RCW 41.45.150 for more information.
Law Enforcement Officers’ and Fire Fighters’ (LEOFF) Plan 1: No contributions are currently required for this plan. This plan has an undefined funding policy in the unlikely event contributions are required in the future since all UAAL would need to be amortized by June 30, 2024.
Plans 2 and Plans 3: We use the Aggregate Cost Method to determine the normal cost and the actuarial accrued liability. Under this method, the unfunded actuarial present value of fully projected benefits is amortized over the future payroll of the active group. Plan 2 members pay 50 percent of the normal cost. The entire contribution is considered normal cost and no UAAL exists.
For TRS Plan 2, the maximum employee contribution rate is 6.59 percent plus 50 percent of the contribution rate increases from benefit improvements effective on or after July 1, 1996. The employer picks up any employee cost sharing that exceeds the employee rate maximum. Please see the
Actuarial Exhibits section of the latest rate-setting
Actuarial Valuation Report for a table showing the current TRS Plan 2 maximum member contribution rates.
Washington State Patrol Retirement System (WSPRS): We use the Aggregate Cost Method to determine the normal cost and the actuarial accrued liability. The entire normal cost is divided equally between the employee and the employer. The maximum employee contribution rate is 7 percent plus 50 percent of the contribution rate increases from benefit improvements effective on or after July 1, 2007. The employer picks up any employee cost sharing that exceeds the employee rate maximum. Please see the
Actuarial Exhibits section of the latest rate-setting
Actuarial Valuation Report for a table showing the current WSPRS Plans 1/2 maximum member contribution rates. We use the Entry Age Normal (EAN) cost method to report the plans’ funded status. This method defines the normal cost as a level percentage of pay from a member’s plan entry date to retirement.
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