Quadrennially, the consulting actuary retained by the Legislative Commission on Pensions and Retirement is required by statute and contract to prepare an experience study for each of the three largest Minnesota public employee pension plans, namely the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), and the Teachers Retirement Association (TRA). The consulting actuary, Milliman USA (formerly Milliman & Robertson, Inc.) completed work on the most recent set of quadrennial experience studies for the three retirement plans on May 29, 2001. Also, under a separate agreement with the various Minnesota retirement plans, Milliman USA competed a study on February 23, 2001, on the liability impact of the Combined Service Annuity portability provisions. Additionally, the three first class city teacher retirement fund associations (the Duluth Teachers Retirement Fund Association (DTRFA), the Minneapolis Teachers Retirement Fund Association (MTRFA), and the St. Paul Teachers Retirement Fund Association (StPTRFA)) have independently contracted with Milliman USA to prepare special experience studies for each plan for the period 1994-2000. This memorandum summarizes those six experience studies, the Combined Service Annuity liability study, and the probable or actual recommendations by Milliman USA for changes in actuarial assumptions.

The Legislative Commission on Pensions and Retirement is required under Minnesota Statutes, Section 3.85, to contract with an established actuarial consulting firm to prepare annual actuarial valuations of fourteen statewide or major local Minnesota public employee pension plans and to prepare experience studies for the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), and the Teachers Retirement Association (TRA) on a quadrennial basis. Minnesota Statutes, Section 356.215, specifies the content requirements of both the annual actuarial valuation reports and quadrennial experience studies. The quadrennial experience study is required to contain an actuarial analysis of the experience of the plan and a comparison of that plan experience with the actuarial assumptions in force for the most recent annual actuarial experience. The standards for actuarial work, issued by the Commission, specify the detailed contents and format requirements for both the actuarial valuation reports and the experience studies.

The purpose of the quadrennial experience studies is to provide the Commission with a periodic opportunity to review the accuracy of the current actuarial assumptions, compared to the experience for the most recent period and to revise those actuarial assumptions based on the recommendation for the Commission’s consulting actuary and on input from plan administrators, their actuarial consultants, and others.

Minnesota public pension plan actuarial assumptions are specified in part in statute (interest/investment return, individual salary increase, and payroll growth) and specified in part with Commission approval (the balance of all actuarial assumptions).

Table 1 summarizes the recent experience studies prepared by Milliman USA for the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), the Teachers Retirement Association (TRA), the Duluth Teachers Retirement Fund Association (DTRFA), the Minneapolis Teachers Retirement Fund Association (MTRFA), and the St. Paul Teachers Retirement Fund Association (StPTRFA). The table summarizes the experience of each plan in comparison to seven actuarial assumptions:

• Interest/Investment Return (Market Value)

• Salary Increase

• Payroll Growth

• Retirement

  • Under Age 65

  • Over Age 65

• Disability

  • Male

  • Female

• Terminations

  • All Terminations

    • Male

    • Female

  • Terminations With Over Three Years Of Service

    • Male

    • Female

• Mortality

  • Annuitants

    • Male

    • Female

  • Disabilitants

    • Male

    • Female

  • Active Members

    • Male

    • Female

Based on the percentage comparison of the actual occurrences with the expected occurrences under the actuarial assumptions, the experience is either favorable from the plan’s perspective (reduces liabilities) or unfavorable from the plan’s perspective (increases liabilities), as follows:

Interest/Investment Return: Investment earnings in excess of the actuarial assumption are an actuarial gain and reduce accrued liabilities, offsetting the need for contributions.

Salary Increase: Individual salary increases in excess of the actuarial assumption are an actuarial loss and increase accrued liabilities, because a larger salary produces a larger future projected retirement annuity, creating a need for contributions.

Payroll Growth: Total payroll growth in excess of the actuarial assumption relates to the amortization of the unfunded actuarial accrued liability of the plan, with a greater total payroll providing greater base over which to spread the associated amortization contribution.

Retirement: Retirement before age 65, the general normal retirement age, generally produce actuarial losses. Retirement after age 65, the general normal retirement age, produces actuarial gains for the pension plan.

Disability: Because disability benefits are a full accrued retirement benefit paid at an early age, disabilities in excess of the disability assumption produce an actuarial loss.

Terminations: Because a terminating employee releases more liability than the person takes in a refund, terminations in excess of the actuarial assumption will produce an actuarial gain unless the terminating member ultimately qualifies for a combined service annuity.

Mortality: Mortality (the number of deaths) greater than assumed produces an actuarial gain with respect to annuitants, with respect to disabilitants, and, unless a substantial survivorship benefit is involved, with respect to active members.

Upon the request of the executive directors of the Minnesota State Retirement System (MSRS), the Public Employees Retirement Association (PERA), and the Teachers Retirement Association (TRA), and at their expense, Milliman USA competed a study of the actuarial liability shifts under the Combined Service Annuity provision, Minnesota Statutes, Section 356.30.

The Combined Service Annuity provision was enacted in 1975 and permits most Minnesota public pension plan members with service credit in more than one plan to vest with their multiple service and to receive retirement annuities in total that would essentially match the benefit payable by any one of the plans for the total service. For the pension plan or plans covering early periods of service credit, the Combined Service Annuity provision results in incurring greater actuarial accrued liabilities in fact because of the new salary figure that the plan or plans anticipated without knowledge of the subsequent service credit and average salary.

In preparing the Combined Service Annuity study, Milliman USA combined the active and inactive member databases of the Minnesota public pension plans covered by the Combined Service Annuity provision, determined the additional actuarial liability for all members potentially able to benefit from the portability provision, and allocated the additional actuarial liability back to the various plans based on the proportion of total service credit in each plan. The analysis produced the following results:

 

Prior or Current Service in:	PERA General	PERA P&F	PERA Local Correctional	MSRS State Employees	MSRS State Patrol	MSRS Correctional	MSRS Legislators	MSRS Elected	MSRS Judges	TRA	Duluth Teachers	St. Paul Teachers	Minneapolis Teachers	MERF	Subtotal
PERA General	220	177	94	1,753	2	43	4	0	1	1,353	3	48	52	97	3,847
PERA P&F	1,946	0	59	65	14	26	2	0	0	53	3	0	3	3	2,174
PERA Local Correctional	2,088	54	0	23	0	16	0	0	0	14	0	0	0	0	2,195
MSRS State Employees	2,817	32	14	0	3	233	6	0	0	501	1	22	11	12	3,652
MSRS State Patrol	73	173	2	27	0	5	0	0	0	10	0	0	0	0	290
MSRS Correctional	192	17	45	622	1	0	0	0	0	55	0	0	0	0	932
MSRS Legislators	27	0	0	7	0	0	0	0	0	18	0	0	0	0	52
MSRS Elected	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
MSRS Judges	68	0	0	8	0	0	8	0	0	6	0	0	0	0	90
TRA	5,430	11	8	582	2	18	9	0	0	0	97	327	526	6	7,016
Duluth Teachers	87	0	0	20	0	0	0	0	0	294	0	7	2	0	410
St. Paul Teachers	546	1	4	72	0	2	0	0	0	838	0	0	205	1	1,669
Minneapolis Teachers	612	0	7	78	0	3	0	0	0	1,011	0	99	2	8	1,820
MERF	20	0	0	11	0	0	0	0	0	3	0	0	0	0	34
Subtotal	14,126	465	233	3,268	22	346	29	0	1	4,156	104	503	801	127	24,181

 

Prior or Current Service in:	PERA General	PERA P&F	PERA Local Correctional	MSRS State Employees	MSRS State Patrol	MSRS Correctional	MSRS Legislators	MSRS Elected	MSRS Judges	TRA	Duluth Teachers	St. Paul Teachers	Minneapolis Teachers	MERF	Subtotal
PERA General	22	23	0	284	0	6	3	0	0	226	0	30	32	15	641
PERA P&F	52	0	0	3	0	2	0	0	0	0	0	0	0	0	58
PERA Local Correctional	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
MSRS State Employees	282	6	0	0	0	16	4	0	0	55	0	5	4	2	374
MSRS State Patrol	0	1	0	1	0	0	0	0	0	0	0	0	0	0	2
MSRS Correctional	0	0	0	7	0	0	0	0	0	0	0	0	0	0	7
MSRS Legislators	3	0	0	1	0	0	0	0	0	3	0	0	0	0	7
MSRS Elected	0	0	0	1	0	0	2	0	0	1	0	0	0	0	4
MSRS Judges	2	0	0	1	0	0	0	0	0	0	0	0	0	0	3
TRA	475	3	0	71	0	0	3	0	0	0	0	38	137	0	727
Duluth Teachers	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0
St. Paul Teachers	13	0	0	1	0	0	0	0	0	30	0	0	4	0	48
Minneapolis Teachers	12	0	0	4	0	0	0	0	0	23	0	7	0	0	46
MERF	1	0	0	1	0	0	0	0	0	2	0	0	0	0	4
Subtotal	862	33	0	375	0	24	12	0	0	340	0	80	177	17	1,921

Arising out of the six experience studies and the Combined Service Annuity study recently competed, Milliman USA has formulated or will be developing specific actuarial assumption change recommendations.

The following compares the likely actuarial assumption change recommendations (for the General State Employees Retirement Plan of the Minnesota State Retirement System (MSRS-General), the General Employee Retirement Plan of the Public Employees Retirement Association (PERA-General), and the Teachers Retirement Association (TRA)) and the actual actuarial assumption change recommendations (for the Duluth Teachers Retirement Fund Association (DTRFA), the Minneapolis Teachers Retirement Fund Association (MTRFA), and the St. Paul Teachers Retirement Fund Association (StPTRFA)) formulated by Milliman USA:

Additionally, for the statewide and major local retirement plans which were not covered by the experience studies, Milliman USA has formulated load factor recommendations arising out of the Combined Service Annuity Provisions study, as follows:

Because changes are contemplated for both individual salary increase and total payroll assumptions, which are statutory assumptions, the total package of assumption changes can not be accomplished until the next legislative session. The recommended changes for the three major retirement plans still need to be fully developed by Milliman USA in consultation with the various plan administrators and the plan actuarial consultants, so Commission action on at least some of the potential actuarial assumption changes will need to be delayed until early in the 2002 Legislative Session.