Actuarial methods

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. A plan’s funding policy produces a future stream of contributions to pre-fund the plan’s benefits. 

Contribution allocation procedures rely on the actuarial cost methods and a plan’s funding policy to:

• • Prepare actuarially determined contributions.
  • 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.

There are two parts of an actuarial cost method:

• • The Normal Cost – the value of future benefits allocated to the current plan year under the actuarial cost method.
  • 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, including the length of a UAAL amortization period.  

The Legislature is responsible for the contribution allocation procedures, including the selection of the actuarial cost method, asset valuation method, and the funding policy. These may be selected based on advice from an actuary and 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: Consistent with state law, we use a variation of the Entry Age Normal (EAN) Cost Method to determine the Base UAAL. Under this method, the Base UAAL is equal to:

• • The actuarial present value of projected benefits,
  • Minus the actuarial value of assets,
  • Minus the present value of future employer contributions due to past unfunded benefit improvements,
  • Minus the actuarial present value of future normal costs for all active members,
  • Minus 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 and 3 and the resulting UAAL is amortized over a rolling 10-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. This is a non-standard amortization method since it includes payroll outside Plan 1.

We find this method reasonable and appropriate given the limited remaining future salary in Plan 1. Furthermore, Plan 1 member normal cost rates are fixed in statute at 6% and the use of the Plan 2 and 3 employer normal cost for Plan 1 allows the Legislature to charge all employers the same contribution rate regardless of the plan in which employees hold membership (except for LEOFF).

The contribution allocation procedure uses a rolling 10-year amortization of the Base UAAL to support the Legislature’s goals under the Revised Code of Washington (RCW) 41.45.010(3) to “… balance needs for increased benefit security, decreased contribution rate volatility, and affordability of pension contribution rates.” In recognition of the expected impact of an ongoing, rolling amortization period on plan funding, the procedure includes minimum Base UAAL contribution rates to support the Legislature’s desire to fully amortize the PERS 1 and TRS 1 UAAL. The procedure also relies on a 15-year fixed amortization of benefit improvements enacted after 2009 to support the goals under RCW 41.45.010(3) and recognize the shorter duration of expected future benefit payments in PERS 1 and TRS 1. The Legislature may need to revisit the length of this amortization period for future enacted benefit improvements as the duration of expected future benefit payments becomes shorter.

Law Enforcement Officers’ and Fire Fighters’ (LEOFF) Plan 1: No contributions are currently required for this plan since the plan’s assets exceed the plan’s present value of future benefits.  If an unfunded liability exists, the plan’s current funding policy requires it to be fully amortized by state contributions over a reasonable period. The specifics of this will be addressed if a UAAL returns.

Plans 2 and Plans 3: Consistent with state law, 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% 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% plus 50% 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 (i.e., odd year) Actuarial Valuation Report for a table showing the current TRS Plan 2 maximum member contribution rates.

Washington State Patrol Retirement System (WSPRS): Consistent with state law, 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% plus 50% 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 (i.e., odd year) Actuarial Valuation Report for a table showing the current WSPRS Plans 1 and 2 maximum member contribution rates.

Minimum Contribution Rates for Open Plans: The Legislature modified the original contribution allocation procedure for the open plans to add minimum normal cost contribution rates. These minimum contribution rates ensure the plans receive adequate long-term funding and reduce the risk of the plans collecting inadequate contributions during short-term periods of significantly, better-than-expected experience.

Methods for Reported Funded Status: Consistent with Actuarial Standards of Practice, 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.

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 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 for that valuation year. We then smooth that year’s gain (or loss) based on the scale in the table below, which is centered around the adopted investment return assumption, as well as recognize another year of prior gains and losses.

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.

The following table contains the investment gain/loss recognition schedule used in the June 30, 2025 valuation. We calculated the investment gains or losses using the investment return assumption corresponding to the time investment returns were realized.