Board Adopts 7.25% Rate of Return
On June 1, 2017, the Board of Fire and Police Pension Commissioners approved the Plan actuary’s recommendation to lower the investment return assumption from 7.50% to 7.25%. This action will help ensure the long-term viability of the Plan to properly fund the benefits for members. Additionally, this change more closely aligns with the Plan’s expected returns based on the current asset allocation and capital market outlook.
Segal Consulting, 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 7.25%, primarily due to a continued decline in inflation over the past two decades. (The assumption was previously lowered in 2014 from 7.75% to 7.50%.)
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 also lowered from 3.25% to 3.00% due to the low inflationary economic environment. The “across-the-board” salary increase assumption was also reduced from 4.00% to 3.50% to be consistent with the recommended inflation assumption.
In addition to the economic assumptions, the Board considered the findings and recommendations detailed in Segal’s triennial Actuarial Experience Study covering July 1, 2013 through June 30, 2016. The 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, termination rates, and disability incidence rates. The Board also adopted changes to the mortality rate assumptions based on staff’s analysis of Segal’s recommendations. As industry approaches to developing mortality rates continue to evolve, staff and the Plan actuary will continue to monitor this assumption (and all others) in future studies.
Adoption of the economic and non-economic assumption changes is estimated to have a 5.7% impact on the City’s contribution rate 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.
The current actuarial experience study as well as historical studies can be found on our website at https://lafpp.ddsandbox.net/financials.