In part one of the contributions component of the oversight formula, we discussed the two key components of the employer’s contribution rate:
1. the normal cost and
2. the unfunded liability.
Now the question is, how are the normal cost and the unfunded liability calculated? This is the job of the actuary. Actuaries are trained to evaluate financial risks related to the probability and timing of certain events occurring.
As previously discussed, employer contributions are based on a funding policy established by the Board of Trustees, which relies heavily on the recommendations of an actuary. The actuary makes a number of educated guesses about the details of covered members such as salary, length of career, life expectancy, and so on. The actuary uses these factors to arrive at a value of the benefits promised.
These guesses (i.e., projections) are rarely precise, and that is something that is expected by those who use an actuary’s services. The projections must, however, be reasonable enough to rely upon, or the funding of the system would be at risk. In order to verify these projections, an experience study is conducted at least every five years. An experience study compares the actuarial guesses to the System’s actual experience. When there is sufficient disparity, the projections are modified accordingly.
Another important control for the actuarial process is an actuarial audit, which is usually completed every 7 to 10 years. MPERS’ most recent actuarial audit was completed in 2020 and affirmed the process used by MPERS’ actuary is reasonable and reliable.
To add some context regarding the oversight formula, as the C increases or decreases, the I must do the opposite to maintain the long-term balance of the formula. This concept will become clearer as we continue our MPERS’ Matters series over the coming months.
If you would like to learn more about the actuary or view any of the actuarial reports, please select a link below.
