Dear Customer,
In today's ever-changing world, it is a fiscal best practice to review economic assumptions more frequently so Defined Benefit Plans can make incremental changes on an ongoing basis. At MERS, part of our fiduciary responsibility is providing this analysis.
As you know, required contributions in a Defined Benefit Plan are calculated by an accredited actuary using assumptions about future events. These assumptions fall into two broad categories; economic and demographic. As we've communicated previously (click here to see prior communications), MERS began to review our economic assumptions last year. We've heard your feedback that having advanced notification of these changes is important to you.
At their meeting last week, the MERS Retirement Board, acting on the recommendations of our independent actuary, Gabriel Roeder & Smith, updated key economic assumptions (investment return and wage inflation assumptions). Public retirement systems, like MERS, follow a process for establishing economic assumptions that consider various financial, economic and market factors, and is based on a long-term view. When determining these assumptions, the actuary factors in future economic conditions based on current market data, expert opinions and investment consultant expectations. In addition, the actuaries must follow guidelines set forth by the Actuarial Standards Board in Actuarial Standards of Practice (ASOP).
Investment Return Assumption
While MERS has historically met our assumed rate of return over the long-term (click here for additional information), expected future investment returns are forecasted to be considerably lower due to historically low interest rates and high equity market valuations. Based on this expectation, MERS will be reducing our investment assumption from 7.75% to 7.35%. This adjustment reflects a change in long-term trends, and will continue to be monitored closely.
Wage Inflation Assumption
Wage inflation is often confused with pay or salary increases. However, wage inflation is an assumption that considers large-scale economic factors and is made up of both price inflation (2.50%) and real wage growth (0.50%). In other words, wage inflation reflects overall payroll growth over the long-term. MERS will be reducing our wage inflation assumption from 3.75% to 3.00%.
When will you know the impact to your plan?
You will be provided information on these changes in your Annual Actuarial Valuation that will be delivered by the end of June 2019. It's important to note that these changes won't impact required contributions until 2021. We are providing you this information now to help you plan ahead. While assumption adjustments typically mean higher contributions, it also means you are adequately funding the benefits promised.
In addition, the review of our demographic assumptions will begin later this year. It is still a best practice to review these assumptions with a standard of five years of data in order to ensure the information is statistically sound. Based on industry trends, we are forecasting continued increases in participant longevity. Any changes to the demographic assumptions will be announced in 2020, with an impact to required contributions in 2022.
I understand these changes may affect your local unit of government financially, and I want you to know we are here to help. We have proven strategies to address unfunded liability and a broad range of customizable plans that can meet your needs. In the coming months there were will be additional information and resources shared with you. In the meantime, I encourage you to reach out to your Regional Manager with any questions at 800.767.MERS (6377).
Sincerely,
MERS CEO
Chris DeRose
ChrisDeRose@mersofmich.com
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