LAPERS Presentation
September 15, 2013
Gary S. Curran, FCA, MAAA, ASA, EA
CONSULTING ACTUARY
G. S. Curran & Company, LTD.
10555 N. Glenstone Place
Baton Rouge, LA 70810
(225) 769-4825
Abbreviations
• NC = Normal Cost
• AL = Accrued Liability
• UAL = Unfunded Accrued Liability
Funding Methods
General Principles
Present Value of Benefits
Assets
Present Value of
Future
Contributions
• Benefits are funded with:
• Money the plan has now
• Money the plan will collect in the future
Present Value of Benefits
Assets
Present Value of
Future Normal
Costs
UAL
• Money that will be collected in the future can either be in the
form of future normal costs or payments on the unfunded
accrued liability
Present Value of Benefits
Assets
Current Year Normal
Cost
Present Value of
Future Normal Costs
UAL
Amortization
Payment
• This year’s allocated share of future normal costs is in fact the “Normal Cost”
as given in the valuation
• This year’s allocated share of future UAL payments is in fact the
“Amortization Payment” as given in the valuation
Funding Methods
• “No Free Lunch”
• Pay less now / Pay more later
• Pay more now / Pay less later
Funding Methods
• 2 cost elements
• Normal Cost
• Payments on Unfunded Accrued Liability
Funding Methods
• 2 types of methods
• Use assets to determine UAL
• Use assets to determine Future Normal Costs
Funding Methods
• Type I : Use assets to determine UAL
• Projected Unit Credit
• Entry Age Normal
Funding Methods
• Projected Unit Credit
• NC is based on “Credited Projected Benefits” for the year
• AL is the accumulated “Credited Projected Benefits”
• UAL = Accrued Liability – Assets
Funding Methods
• Entry Age Normal
• NC is based on payments as level percentage of pay
• AL is based on accumulated Normal Cost
• UAL = Accrued Liability – Assets
Funding Methods
• Type II : Use assets to determine Future Normal Costs
• Aggregate
• Frozen Entry / Attained Age Normal
Funding Methods
• Aggregate
• NC is based on allocated share of the difference
between Present Value of Benefits and the assets
• AL is set equal to assets
• UAL = 0
Funding Methods
• Frozen Attained / Entry Age Normal
• NC is based on allocated share of the difference
between Present Value of Benefits and sum of assets &
UAL
• AL is set equal to UAL + Assets
• UAL is the unamortized portion of a prior UAL
determined under Projected Unit Credit or Entry Age
Normal
Funding Methods
• All funding methods, when properly applied, will accumulate
sufficient assets over the working career of members to
provide for retirees benefits
• The ultimate cost of a plan is independent of the funding
method selected and depends on benefit levels and investment
earnings
• Only to the extent that some methods accumulate assets more
rapidly than others and these produce greater investment
earnings do different cost methods affect total contributions
• Cost methods which only fund the “earned” benefit each year
(i.e. Projected United Credit) will see costs rise on an
individual basis as members get nearer to retirement
Funding Methods
• The objective of the Entry Age Normal Cost Method is to
produce normal costs which are level as a percentage of
payroll
• All gains and losses under Entry Age Normal and Projected
Unit Credit will produce additional Unfunded Liability credits
or debits
• Gains or losses under the Aggregate or Frozen methods will
not affect the unfunded accrued liability but will increase or
decrease normal costs
• Cost methods with lower current costs will have higher future
costs