ACTUARIAL ASSUMPTIONS AND COST METHOD
* This page provides information on the assumptions used by the actuaries to value the Retirement Plan.
Valuation Methods
Actuarial Cost Method - Normal cost and the allocation of benefit values between service rendered before and after the valuation date were determined using an Individual Entry-Age Actuarial Cost Method having the following characteristics:
(i) the annual normal cost for each individual active member, payable from the date of employment to the date of retirement, is sufficient to accumulate the value of the member’s benefit at the time of retirement;
(ii) each annual normal cost is a constant percentage of the member’s year by year projected covered pay.
Actuarial gains/(losses), as they occur, reduce (increase) the Unfunded Actuarial Accrued Liability.
Financing of Unfunded Actuarial Accrued Liabilities - Unfunded Actuarial Accrued Liabilities (full funding credit if assets exceed liabilities) were amortized by level (principal & interest combined) percent-of-payroll contributions over a reasonable period of future years.
Actuarial Value of Assets - The Actuarial Value of Assets was written down to Market Value as of September 30, 2009.
Effective October 1, 2009, the Actuarial Value of Assets phases in the difference between the expected and actual return on actuarial value of assets at the rate of 20% per year. The Actuarial Value of Assets is further adjusted to the extent necessary to fall within the corridor whose lower limit is 80% of the Market Value of plan assets and whose upper limit is 120% of the Market Value of plan assets. During periods when investment performance exceeds the assumed rate, Actuarial Value of Assets will tend to be less than Market Value. During periods when investment performance is less than assumed rate, Actuarial Value of Assets will tend to be greater than Market Value.
Valuation Assumptions
The actuarial assumptions used in the valuation are shown in this Section.
Economic Assumptions
The investment return rate assumed in the valuation is 7.8% per year, compounded annually (net after investment expenses).
The Wage Inflation Rate assumed in this valuation was 2.5% per year. The Wage Inflation Rate is defined to be the portion of total pay increases for an individual that are due to macroeconomic forces including productivity, price inflation, and labor market conditions. The wage inflation rate does not include pay changes related to individual merit and seniority effects.
The assumed real rate of return over wage inflation is defined to be the portion of total investment return that is more than the assumed wage inflation rate. Considering other economic assumptions, the 7.8% investment return rate translates to an assumed real rate of return over wage inflation of 5.3%.
The active member population is assumed to remain constant. For purposes of financing the unfunded liabilities, total payroll is assumed to grow at 3% per year, limited to the average growth over the last ten years, which is 2.99%.
Pay increase assumptions for individual active members are shown below. Part of the assumption for each age for merit and/or seniority increase, and the other 2.5% recognizes wage inflation, including price inflation, productivity increases, and other macroeconomic forces.
The rates of salary increase used are in accordance with the following table. This assumption is used to project a member’s current salary to the salaries upon which benefits will be based.
AGE % INCREASE IN SALARY
Merit & Seniority Base (Economic) Total Increases
20 5.0% 2.5% 7.5%
25 5.0% 2.5% 7.5%
30 4.8% 2.5% 7.3%
35 3.7% 2.5% 6.2%
40 1.7% 2.5% 4.2%
45 1.7% 2.5% 4.2%
50 1.7% 2.5% 4.2%
55 1.7% 2.5% 4.2%
Demographic Assumptions
The mortality table was the RP-2000 Combined Healthy Participant Mortality Tables for males and females. Future mortality improvements are projected to all future years from the year 2000 using Scale AA (on a fully generational basis).
Sample Attained Ages
(in 2015)
Probablity of Dying Next Year Future Life Expectancy (years)
Men Women Men Women
50 0.16% 0.13% 34.35 35.68
55 0.27% 0.24% 29.23 30.71
60 0.53% 0.47% 24.29 25.93
65 1.03% 0.90% 19.68 21.44
70 1.77% 1.55% 15.48 18.32
75 3.06% 2.49% 11.68 13.59
80 5.54% 4.13% 8.45 10.28
This assumption is used to measure the probabilities of each benefit payment being made after retirement. For active members, the probabilities of dying before retirement were based upon the same mortality table as members dying after retirement (75% of deaths are assumed to be service-connected).
For disabled retirees, the regular mortality tables are set forward 5 years in ages to reflect impaired longevity.
The rates of retirement used to measure the probability of eligible members retiring during the next year were as follows:
Annual Rate of Retirement for Those Eligible for Normal or Early Retirement
SERVICE AGE
42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
10 0 0 0 0 0 2 2 2 2 2 2 25 25 25 100 100 100 100 100
11 0 0 0 0 0 2 2 2 2 2 2 25 35 35 100 100 100 100 100
12 0 0 0 0 0 2 2 2 2 2 2 25 35 35 100 100 100 100 100
13 0 0 0 0 0 2 2 2 2 2 2 25 35 35 100 100 100 100 100
14 0 0 0 0 0 2 2 2 2 2 2 25 35 35 100 100 100 100 100
15 0 0 0 0 0 2 2 2 2 2 2 25 35 35 100 100 100 100 100
16 0 0 0 0 0 2 2 2 2 2 2 25 35 35 100 100 100 100 100
17 0 0 0 0 0 2 2 2 2 2 2 25 35 35 100 100 100 100 100
18 0 0 0 0 0 2 2 2 2 2 2 25 35 35 100 100 100 100 100
19 0 0 0 0 0 2 2 2 2 2 2 25 35 35 100 100 100 100 100
20 50 50 50 50 60 60 60 60 60 75 75 75 75 75 100 100 100 100 100
21 15 15 15 15 15 15 15 15 15 15 15 15 15 100 100 100 100 100 100
22 15 15 15 15 15 15 15 15 15 15 15 15 15 100 100 100 100 100 100
23 40 40 40 40 40 40 50 50 50 50 50 50 50 100 100 100 100 100 100
24 40 40 40 40 40 40 50 50 50 50 50 50 50 100 100 100 100 100 100
25 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
Rates of separation from active membership were as shown below (rates do not apply to members eligible to retire and do not include separation on account of death or disability). This assumption measures the probabilities of members remaining in employment.
SAMPLE AGES % of Active Members
Separating Within Next Year
20 6.0%
25 5.7%
30 5.0%
35 3.8%
40 2.6%
45 1.6%
50 0.8%
55 0.3%
Rates of disability among active members (75% of disabilities are assumed to be service-connected).
SAMPLE AGES % of Active Members
Separating Within Next Year
20 0.14%
25 0.15%
30 0.18%
35 0.23%
40 0.30%
45 0.51%
50 1.00%
55 1.55%