Iowa Public Employees' Retirement System Information

IPERS Recap from the 2011 Legislative Session

Contact IPERS - 515-281-0020 or 1-800-622-3849, 7:30 a.m. – 5 p.m. CT, Monday–Friday 

Information shared at the Jan. 4 IPERS Benefits Advisory Committee meeting:

IPERS' pension fund faces shortfall of nearly $5.7 billion                                             1/4/12

Headlines are intentionally sensational in order to sell more papers. This headline, from the Des Moines Register (12/1/11), is no exception. With limited space and attention spans, news stories tend to gloss over the details and offer quick, easy sounding solutions. Let's see what the story is behind the headline.

What the press calls a shortfall is what actuaries call an unfunded actuarial liability (UAL); meaning that there are not sufficient assets on hand today to meet all the projected benefit payments (Actuarial Liability) promised for the next 50+ years. Having a UAL is not unusual for a pension system. In fact, it's even expected.

Projecting liabilities or benefit payments for members (retirees and active members) involves a number of assumptions. A few of the major assumptions are:

  • Investment returns (which pay 60-70 percent of the benefits)
  • Life expectancy (because we promise to pay a life-time benefit)
  • Career length (years of service is part of the benefit formula)
  • Salary growth
  • Payment of sufficient contribution rates

If actual experience matches assumed experience and adequate funding has been paid, there would be no shortfall or UAL. However, that rarely, if ever occurs. When it does not, a UAL is created. Why? Here are some of the main contributing factors:

  • Longer life spans -as a society, we are living longer!
  • Underfunding the benefits by not paying the actuarial rate

IPERS' actuary stated that the Trust Fund is 79.9 percent funded and that the "shortfall" — or UAL as we discussed above — can be amortized over 34 years. She called this outlook "positive" and said that IPERS is headed in the right direction.

While this may not be the kind of news that sells more papers, it does portray an accurate picture of the state's largest public pension system's funding status.

 

Purchasing Service

Late last month, (12/28/11), USA Today published a front-page article on public employees buying "air time" into their pension plan and implied that this practice creates added expense to the pension system and to taxpayers as well. IPERS worked extensively with journalist Tom Frank to provide accurate, detailed information about its service purchase options for members and encouraged him to use IPERS as a "best practices" example. Since none of this information was included in the article, IPERS is providing it below.

What is a service purchase?

A service purchase allows a vested member to buy service credits in IPERS that have not been earned through IPERS-covered employment. A service purchase increases IPERS benefits during retirement or allows a member to retire earlier.

Service purchase facts:

  • Service purchases allow for portability of benefits into IPERS.
     
  • All service purchases are at actuarial cost. This means there is no added liability to IPERS. Pricing service at the actuarial cost is the fairest and most prudent method possible.

o The price is relative to the increase in benefits provided by the service purchase. It is much more than simply the sum total amount of contributions over the service period being purchased.

o Calculations for a service purchase are complex. The cost of the increased benefit applies all the actuarial assumptions used in calculating the liability of all benefits.

o If the purchase is made prior to applying for retirement, the cost of a service purchase is calculated with the additional following assumptions:

                  1. The member will continue to work until a normal retirement rule is met.

                  2. The member's wages will increase 4 percent each year until reaching the first normal                               retirement eligibility.

 

Covered Wage Ceiling

BACKGROUND

In 1996, the Iowa Legislature removed the covered wage ceiling of $44,000. The wage cap then became the federal limit of $160,000 in 1997. Today that amount is $250,000. Recently it's been suggested that larger salaries are responsible for a funding shortfall — that if the covered wage ceiling were rolled back, it would help to alleviate the Trust Fund's unfunded actuarial liability (UAL). This is not true and in fact, rolling it back could actually increase the liability.

LOWERING THE CEILING WOULD LEAD TO INCREASED CONTRIBUTIONS

The contribution rate is figured each year by combining two percentages: the amount needed to pay for normal cost1, plus the amount needed to pay for amortization (paying down) of the UAL. The UAL amortization portion of the contribution rate is being paid as a level percent of payroll. If the covered payroll is reduced, this will result in fewer dollars coming into the System to payoff the UAL. This will lead to a longer amortization period for the UAL, requiring higher contributions on all members.

NORMAL COST IS BEING PAID ON ALL COVERED WAGES

Covering all wages up to the federal limit is not currently adding to the underfunding because the normal cost is also being paid as a level percent of payroll. This percentage is sufficient to fund all ultimate retirement benefits to be paid.

INSIGNIFICANT SAVINGS

Approximately 11 percent of IPERS members currently have salaries above $65,0002. Changes to such a small portion of the membership would not produce significant savings, if any. Assuming the wage ceiling increases yearly by the amount of inflation would have little impact on IPERS' funding. Not assuming the wage ceiling will increase with inflation could result in artificially understating IPERS' future liabilities. When the legislature is pressured to raise the ceiling, an unanticipated jump in liability would occur. This has happened in the past.

POTENTIAL LEGAL ISSUES

Contributions collected on wages above the ceiling, but benefits not calculated on wages above the ceiling, would result in legal challenges.

1Normal cost is the amount certified by the actuary to fund all future benefits being promised each year.

2The last wage ceiling set by IPERS was $44,000 in 1996. If this amount is indexed based on the CPI, the current amount would be about $65,000.