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TO: |
Board of Trustees |
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THROUGH: |
Jay Fox, Executive Director |
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FROM: |
Kim Shanklin, Chief People Officer |
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PRESENTER(S): |
Jeff Acerson, Trustee and Pension Committee Chair |
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Kim Shanklin, Chief People Officer |
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Ann Green-Barton, Director of Total Rewards |
TITLE:
title
R2023-10-02 - Resolution Establishing an Employee Retirement Plan Contribution Rate Policy
end
AGENDA ITEM TYPE:
Resolution
RECOMMENDATION:
Adopt the resolution establishing a four-year actuarial smoothing of investment returns and amortizing all unfunded liability over a closed twenty-year period.
BACKGROUND:
The Board of Trustees adopted the retirement plan contribution rate policy in 2013 to reduce the pension plan’s unfunded liability. In September 2021, a sub-committee of the Pension Committee, including Jeff Acerson, Bill Greene, and Rod Dunn, worked with Milliman to review the previously established funding rate. From the review, the Pension sub-committee recommended the Board continue funding at the rate of 16%. The updated funding resolution was adopted by the Board of Trustees in December 2021.
Since the adoption of the updated funding policy in 2021, the pension fund has experienced volatility due to macro events (COVID surge, inflation rates, recession, and global uncertainties), which have caused market difficulties and downturn in investment returns.
In the Pension Committee meeting on July 6, 2023, Matt Larrabee, Milliman Actuary, presented the preliminary 2023 Actuarial Valuation Results. Larrabee overviewed the unfunded actuarial liability (UAL) under several scenarios, highlighting the UAL on a market value of assets basis compared to asset smoothing basis. Larrabee explained the annual funding actuarial valuation does not calculate UTA’s actual contribution rate. Rather, the funding actuarial valuation is used to assess the soundness of the contribution rate. Despite market volatility and downturn in investment returns, Larrabee concluded that UTA’s 16% contribution rate is sound.
DISCUSSION:
During the Pension Committee Meeting on July 6, 2023, Mr. Larrabee made the following recommendations for setting UTA’s contribution rate and for calculating the target actuarially determined contribution (ADC) for 2023 and later funding valuations:
• Maintain UTA’s 16% of payroll contribution rate to the UTA Employee Retirement Plan.
• Incorporate a four-year actuarial smoothing of investment returns rather than the fair market valuation of assets.
• Amortize all unfunded actuarial liability over a closed 20-year period (rather than stating a target year of 2033).
Larrabee explained smoothing of investment returns is used by most pension plans, as it systematically recognizes returns differing from assumption over several years. Larrabee also explained amortization over closed periods of 20 years or less is considered best practice.
The Pension Committee made a motion to recommend the Board of Trustees adopt the actuarial funding valuation recommendations outlined by Larrabee. The motion passed the Pension Committee by unanimous consent.
ALTERNATIVES:
The Board of Trustees could continue under the previous 2021 funding resolution.
FISCAL IMPACT:
Despite market volatility and downturn in investment returns, the 2023 actuarial valuation concludes that UTA’s 16% contribution rate remains sound. The current actuarial assumptions at +6.75% investment return remains sound, as the +6.75% investment return assumption is conservative to the current outlook models.
The funded percentage is projected to reach 100% funded status in 20 years if investment returns match the +6.75% actuarial assumption. If investment returns exceed the assumption by 0.50%, 100% funded percentage is projected in 17 years. If investment returns fall short of the assumption by 0.50%, the unfunded actuarial liability (UAL) is still projected to decrease by 40% over 20 years.
ATTACHMENTS:
Resolution R2023-10-02