Board Adopts 7.50% Rate of Return
On July 17, 2014, the Board of Fire and Police Pension
Commissioners approved the Plan actuary’s recommendation to lower
the investment return assumption from 7.75% to 7.50%. This
action will help ensure the long-term viability of the Plan to
properly fund the benefits for the Plan’s members.
The Segal Company, the Plan’s actuary, presented its findings from its review of the economic assumptions to the Board and recommended that the investment return assumption be reduced to 7.50%, primarily due to a continued decline in inflation over the past two decades. (The assumption was previously lowered in 2010 from 8.00% to 7.75%.)
The investment return assumption is the expected long term rate of return on the Plan’s investments, after expenses. One component of this assumption is the inflation assumption, which was lowered from 3.50% to 3.25% due to the low inflationary economic environment. The “across-the-board” salary increase assumption was also reduced from 4.25% to 4.00% to be consistent with the recommended inflation assumption.
In addition to the economic assumptions, the Board reviewed and adopted the findings and recommendations detailed in The Segal Company’s triennial Actuarial Experience Study covering July 1, 2010 through June 30, 2013. This study compares the Plan’s actual experience to the non-economic (or demographic) assumptions previously adopted by the Board. Based on the Plan’s experience, the Board adopted the actuary’s recommendations to adjust various assumptions such as retirement rates, mortality rates and disability incidence rates.
Adoption of the economic and non-economic assumptions is expected to have less than a 1.0% impact on the City’s contribution to the Plan. Other recent experience may also help mitigate the impact to the City’s contribution rate from lowering the assumed rate of return.
It is important to note that the actuarial assumptions do not determine the “actual cost” of the plan. The actual cost is determined by the benefits and administrative expenses paid, offset by contributions and investment income received. The use of realistic actuarial assumptions is critical in maintaining adequate plan funding, while fulfilling benefit commitments to LAFPP members already retired and to those nearing retirement. Accurate actuarial assumptions aid in achieving equity across generations of taxpayers. The goal is to fund employees’ benefits while they are rendering service and taxpayers are receiving services from those employees.