​​​​Actuarial Methods - 2014

To calculate the contribution rates necessary to pre-fund the plan’s benefits, an actuary uses an actuarial cost method, asset valuation method, economic assumptions, and demographic assumptions. This section describes the actuarial methods we use in our valuation process. Please see Actuarial Assumptions - 2014 for descriptions of our economic and demographic assumptions. Please see the Actuarial Methods and Assumptions section of the latest Actuarial Valuation Report for a list of frequently changing or new actuarial methods and assumptions. 

Actuarial Cost Methods

The future benefit obligations (or costs of the plan) are spread over the working lifetimes of the plan members based on the actuarial cost method (or funding method) in place for the plan. This produces a future stream of contributions to pre-fund the plan’s benefits. Different cost methods pre-fund plans at different rates. Some put more money in earlier whereas others put more money in later.

Actuarial cost methods generally have two parts, which 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.
  • Amortization of the Unfunded Actuarial Accrued Liability (UAAL) – where the UAAL represents the amount of past service liability that exceeds the value of the plan’s assets.

The Legislature was responsible for the selection of the actuarial cost and asset valuation methods. The actuarial cost methods for the Washington State retirement systems 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 actuarial accrued liability. 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 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.

Law Enforcement Officers’ and Fire Fighters’ (LEOFF) Plan 1: A variation of the Frozen Initial Liability Cost Method is used to determine the normal cost and the actuarial accrued liability for retirement, termination, and ancillary benefits. 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 is reset at each valuation date. The present value of future normal costs is based on the Aggregate normal cost rate for Plan 2 and the resulting UAAL is amortized by June 30, 2024, as a level percentage of projected system payroll. The projected payroll includes pay from Plan 2 as well as projected payroll from future new entrants.

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 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 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. The annual cost of benefits under EAN 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. Comparing the EAN liabilities to the actuarial value of assets on the valuation date provides an appropriate measure of a plan’s funded status and is acceptable according to current Governmental Accounting Standards Board (GASB) Statements 67 and 68.

GASB Statements 67 and 68 became effective after June 15, 2015, replaced the prior GASB Statements, and require use of the EAN cost method for accounting purposes. We begin reporting the EAN funded status with the June 30, 2014, Actuarial Valuation Report.

Until the 2013 actuarial valuation, we used the Projected Unit Credit (PUC) cost method to report the plan’s funded status. The PUC cost method projects future benefits under the plan, using salary growth and other assumptions, and applies the service that has been earned as of the valuation date to determine accrued liabilities. Under prior GASB rules, the PUC method was one of several acceptable measures of a plan’s funded status.

Asset Valuation Method

We use the plan’s assets to calculate contribution rates, unfunded liabilities, and the plan’s funded status. Because the market value of assets can be volatile from one year to the next, an asset valuation method is generally used to adjust the market value of assets and smooth the effects of short-term volatility. The adjusted assets are called the actuarial value of assets, or valuation assets.

We calculate the Actuarial Value of Assets (AVA) using an asset smoothing method. This smoothing method was adopted during the 2003 Legislative Session. Each year, beginning with the application of this smoothing method, we determine the amount the actual investment return exceeds (or falls below) the expected investment return and we smooth that year’s gain (or loss) based on the scale in the table below.

Additionally, to ensure the AVA maintains a reasonable relationship to the Market Value of Assets (MVA), a 30 percent corridor is in place. This means the AVA may not exceed 130 percent nor drop below 70 percent of the MVA in any valuation.

Table 54