Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

The Colorado PERA Board of Trustees has wrapped up work on an important periodic study that helps ensure better accuracy of PERA’s financial calculations.



Known as an actuarial experience study, the analysis gives retirement plans like PERA a periodic refinement or more accurate picture of their financial health and future obligations.



<h4 class="wp-block-heading">Planning for the future</h4>



PERA is in the business of providing retirement benefits for as long as a person lives, and that presents a unique challenge: Making sure we have an accurate sense of how much it will cost to pay those benefits over several decades and beyond.



Because a retiree’s benefit in the PERA Defined Benefit Plan is based on their age, years of service, and salary history, we need to be able to predict how certain factors will change over time, such as:



<ul>
<li>Expected lifespan of the retiree population</li>



<li>Expected pay increase patterns over the career of active members</li>



<li>Typical ages at which active members retire</li>



<li>Expected annual investment return, in the long-term</li>



<li>Expected change in the value of a dollar (rate of inflation)</li>
</ul>







Those factors are referred to as actuarial assumptions, and they’re grouped into either economic assumptions (inflation and investment returns) or demographic assumptions (rates of mortality and retirement). Together, the assumptions play a key role in the calculations PERA conducts every year as reported in its actuarial valuations and <a href="https://copera.org/annual-report" target="_blank" rel="noreferrer noopener">Annual Comprehensive Financial Report</a>.



RELATED: <a href="https://www.copera.org/pera-on-the-issues/explaining-the-role-of-actuaries-in-retirement-plans-like-pera" target="_blank" rel="noreferrer noopener">Explaining the Role of Actuaries in Retirement Plans Like PERA</a>



The process of reviewing and refining actuarial assumptions is known as an experience study, so called because it involves comparing the assumptions with what actually happened over a set period of time. For example, if wage growth is much different than expected during the period of study, some adjustments to that assumption are likely needed going forward.



PERA typically conducts an actuarial experience study every four years. This year’s experience study offered additional challenges because the period studied, from January 1, 2020, to December 31, 2023, encompassed effects of the COVID-19 pandemic. Special consideration was needed to ensure the higher mortality and greater number of unreduced retirements were not inappropriately reflected within the revised assumptions.



<h4 class="wp-block-heading">Experience study results</h4>



The PERA Board’s actuarial consultant, Segal, conducted the experience study and provided the Board with recommendations for adjustments to various assumptions as a result.



Segal recommended the following adjustments to demographic assumptions:



<ul>
<li>Salary scale assumptions were altered to better reflect actual recent experience.</li>



<li>Assumed rates of termination, retirement, and disability were revised to more closely reflect actual experience.</li>



<li>Mortality base tables were retained with revised adjustments for credibility and gender, where applicable, and the applied generational projection scale was updated for all groups.</li>



<li>Administrative expense load was increased from 0.40% to 0.45%, as a percentage of covered payroll.</li>



<li>Assumed annual membership growth (for projection purposes only) was decreased for the School, Local Government, and DPS Divisions.</li>



<li>Assumed rates of PERACare participation for both Health Care Trust Funds were reduced to better reflect actual recent experience.</li>
</ul>







Segal recommended retention of the current economic assumptions, including the long-term expected rate of return (7.25%), price inflation (2.3%), and wage inflation (3.0%).



The Board voted unanimously to adopt all recommendations for the five Division Trust Funds and the two Health Care Trust Funds.



<h4 class="wp-block-heading">What the changes mean</h4>



First and foremost, changes in PERA’s actuarial assumptions do not affect the payment of retirement benefits. If you’re a PERA retiree, you’ll continue to receive your monthly benefit payments as expected, and working members can count on PERA providing benefits when they retire.



The main impact of the experience study is on PERA’s current and projected liabilities—which help determine how much money PERA will need to have on hand to pay benefits for its members.



The recent experience review noted over the period studied, that certain assumptions resulted in liability gains while others resulted in liability losses. However, the net result was an actuarial loss overall—meaning, the revised assumptions will likely result in a negative effect on PERA’s funding status.



The exact impact of the updated assumptions won’t be clear until the release of the Annual Comprehensive Financial Report (ACFR), as that will be the first time the revised assumptions are incorporated into PERA’s annual valuation process—assessing plan liabilities and other important actuarial metrics.



The 2024 ACFR will be available following the PERA Board’s June 27, 2025, meeting.

Actuarial Experience Study: Refining the Financial View of the Future

This year, as part of its regular review process, the Colorado PERA Board of Trustees will enlist an outside firm to conduct an audit of the methods and assumptions PERA’s actuaries use in their calculations.



But what is an actuary and what do they do?



Actuaries are highly skilled mathematicians who help pension plans, insurance companies, and other financial organizations plan for the future based on historical and anticipated demographic, trend, and financial data. In short, actuaries aim to predict the future as accurately as possible.



<h4 class="wp-block-heading">What does an actuary do for a retirement system like PERA?</h4>


<div class="wp-block-image">
<figure class="alignright size-large is-resized"><img decoding="async" loading="lazy" src="https://content.copera.org/explaining-the-role-of-actuaries-in-retirement-plans-like-pera/" alt="" class="wp-image-5035" width="205" height="256"/><figcaption class="wp-element-caption">PERA Senior Actuary Koren Holden</figcaption></figure></div>


A retirement system could not function without actuaries. At Colorado PERA, Senior Actuary Koren Holden works with third party actuaries to make sure the Board and PERA leadership have an accurate understanding of PERA’s financial health.



“I act as a liaison between the PERA Board and Executive Team and the Board’s external actuarial service provider,” Holden said. “I am responsible for completion and timely delivery of all the requested actuarial work (i.e., actuarial valuations, special calculations, periodic actuarial studies, etc.) and also responsible for the initial review of all actuarial work to ensure completeness and reasonability.”



In order to pay benefits to retirees for decades to come, retirement plans like PERA need to make predictions about various factors that will determine how much money the plan needs to have on hand to pay those benefits. Actuaries develop those predictions — called actuarial assumptions — and calculate the effects they may have on the plan’s finances.



<h5 class="wp-block-heading">Actuarial assumptions</h5>



Pension plan assumptions fall into two categories: demographic and economic assumptions. Demographic assumptions attempt to accurately anticipate events that occur over the lifetime of plan participants, which can influence the amount and timing of benefits. They include:



<ul>
<li>Life expectancy (how long will plan participants live?)</li>



<li>Rates of retirement (when will plan participants retire?)</li>



<li>Mortality trends (how many participants will die before/after receiving a benefit?)</li>



<li>Salary growth (how quickly and by how much will salaries change for different groups of employees?)</li>
</ul>



Economic assumptions attempt to anticipate financial factors that can impact the cost of future benefits and the rate at which they are funded, such as:



<ul>
<li>Inflation (what will be the rate of consumer inflation in the future?)</li>



<li>Investment rate of return (how much investment income will the fund earn?)</li>
</ul>



Per Colorado statute, all actuarial assumptions recommended by the actuary are subject to approval by the PERA Board. Actuaries make recommendations to the Board, and the Board adopts them or requests further analysis and revised recommendations to be considered later.



<h5 class="wp-block-heading">Annual actuarial valuations</h5>



Actuaries conduct comprehensive studies known as annual actuarial valuations to evaluate funding progress and the impact of year-to-year changes on a pension plan’s finances. A valuation provides a summary of the plan’s funded status, funding period and recommended contribution rates, and often includes accounting information as required under the Governmental Accounting Standards Board (GASB) statements for public pension plans. In order to perform the valuation and provide this information, the actuary takes into consideration contributions, investment returns, demographic changes, retirements, withdrawals, economic factors, deaths, hires, and other system data.



The annual actuarial valuation is the backbone of the Annual Comprehensive Financial Report, a pension plan’s required public report of financial health.



<a href="https://www.copera.org/financial-reports-and-studies" target="_blank" rel="noreferrer noopener">Click here</a> to read the latest Colorado PERA actuarial valuation and Annual Comprehensive Financial Report.



<h5 class="wp-block-heading">Experience analysis</h5>



An experience study compares the actual experience of the plan to the predictions made by the actuarial assumptions, including rates of death, retirement, separation from service, disability and salary increases. The comparison of actual results to predicted results demonstrates to actuaries which assumptions need to be revised to more accurately reflect true demographic and economic conditions. The experience analysis is the foundation for the annual actuarial valuation in that it determines the appropriate assumptions to be applied within the annual actuarial valuation.



PERA <a href="https://peraontheissues.com/2020-experience-study-preparing-for-a-secure-future/" target="_blank" rel="noreferrer noopener">last conducted an experience study</a> in 2020, and the Board adopted several new assumptions as a result. This process will take place again in 2024.



<h5 class="wp-block-heading">Other analyses</h5>



In addition to the pension plan’s annual actuarial valuation and periodic experience analyses, an actuary also performs special studies as needed and/or required by law. For instance, if <a href="https://peraontheissues.com/2022-proposed-legislation-status/" target="_blank" rel="noreferrer noopener">proposed state legislation</a> will be making changes to benefit provisions, an actuarial analysis of the proposed change would be necessary to determine the financial effect of the change.



Actuaries provide invaluable expertise to retirement systems like Colorado PERA, ensuring the Board and stakeholders have an accurate picture of the organization’s financial health and the road ahead.



“I love numbers, but my main passion for the work I perform here at PERA is being part of a dedicated team that serves my community as well as the entire state of Colorado,” Holden said. “I like the feeling that all of us at PERA are helping ensure a stable and dignified retirement for the teachers and many other public servants by promoting, promulgating, and defending a strong defined benefit retirement program (not to mention health care access), as the best means to deliver this vision.”

Explaining the Role of Actuaries in Retirement Plans like PERA

Key points from this story:



<ul><li>The PERA Board selected Empower Retirement as the new recordkeeper for PERA&#8217;s defined contribution (DC) plans</li><li>Nothing will change for PERA members right away</li><li>New actuarial assumptions mean it will take longer for PERA to reach full funding</li><li>An <a href="https://content.copera.org/peras-automatic-adjustment-provision-a-case-study-for-pension-risk-sharing/" target="_blank" rel="noreferrer noopener">automatic adjustment</a> will likely be announced with PERA&#8217;s annual report in June</li></ul>



<hr class="wp-block-separator"/>



PERA’s Board of Trustees convened virtually for its regularly scheduled meeting on March 19. The Board heard updates from PERA staff on a number of aspects of PERA’s operations, and also took action on some items, including selecting a new recordkeeper for PERA’s defined contribution (DC) plans.



The Board also discussed how changes to PERA’s actuarial assumptions — estimates for inflation, rate of hiring and how long people will live, for example — will affect how long it takes for PERA to reach full funding.



<h4 class="wp-block-heading">Defined contribution plans recordkeeper</h4>



Background



PERA members who participate in the PERAChoice DC plan or PERAPlus 401(k)/457 plans know Voya Financial as the company that has been the recordkeeper for those plans since 2011. But recordkeeping needs change over time, so, last year, PERA began the process of reviewing its recordkeeping needs and selecting a recordkeeper who could deliver the best value for members.



Five companies <a href="https://content.copera.org/pera-board-selects-new-dc-plan-administrator-at-march-meeting/" target="_blank" rel="noreferrer noopener">responded to PERA’s request for proposals</a>. At the March 19 meeting, the Board weighed the pros and cons of each company and voted to move forward with Empower.



What that means for PERA members



Nothing will change right away. At some point in the future, all accounts with Voya will be transferred over to Empower. After that happens, participants will be able to access their accounts directly through Empower, either by logging on to Empower’s website or by calling Empower on the phone.



Some of the advantages Empower brings to the table include:



<ul><li>Significant experience with large public plans like PERA</li><li>Expanded call center hours</li><li>Enhanced digital and mobile tools</li><li>Simplified account access</li></ul>



What’s next?



PERA staff will begin contract negotiations with Empower to finalize the details of the partnership and the transition from Voya to Empower.



PERA will be sure to communicate any changes to members before they happen.



<h4 class="wp-block-heading">What new actuarial assumptions mean for PERA</h4>



Background



Every four years, PERA conducts what is called an experience study. The Board uses this study as it reviews actuarial assumptions. Actuarial assumptions are projections about factors, including inflation and life span, that have an effect on PERA’s unfunded liability calculation, among other things.



An experience study compares the projections PERA had been using to the last few years of recorded data, known as “experience.” The Board can then adjust the actuarial assumptions PERA will use for the next four years. This rigorous review process keeps projections as accurate as possible.



Actuarial assumptions are grouped into two categories—economic and demographic. Economic assumptions include information like inflation, salary increases, and the projected growth in the number of employees hired by PERA employers. Demographic assumptions include information like the ages at which PERA members retire and how long people tend to live.



The last experience study took place in 2020. The Board updated its assumptions in November. The changes included revisions to the inflation, payroll growth, and active member growth assumptions, among others. Read more about those changes <a href="https://peraontheissues.com/2020-experience-study-preparing-for-a-secure-future/" target="_blank" rel="noreferrer noopener">here</a>.



What the new assumptions mean for PERA



At the March meeting, representatives from PERA’s actuarial consultant, Segal, <a href="https://www.copera.org/pera-board-selects-new-dc-plan-administrator-at-march-meeting" target="_blank" rel="noreferrer noopener" class="broken_link">provided further information to the Board</a> on how specific assumptions will affect PERA’s calculations.



PERA’s liability — the cost of paying benefits to current and future retirees — changes when actuarial assumptions change. Some of those assumptions have a bigger impact than others. Positive investment returns, for example, can help reduce PERA’s unfunded liability, but lower-than-expected payroll growth and retirees living longer, and therefore receiving benefits longer, can have a bigger effect in the long term and add to PERA’s liability.



In this case, the newly adopted mortality and payroll growth projections will extend the estimated amount of time it will take PERA to achieve full funding. This doesn’t mean PERA is running out of money; rather that it will take longer than expected to reach its funding goals.&nbsp; One result of these changes is that an automatic adjustment, established in <a href="https://www.copera.org/pera-on-the-issues/colorado-pera-provides-roadmap-for-sustainable-public-retirement-plans-3" target="_blank" rel="noreferrer noopener">Senate Bill 18-200</a>, will likely be announced when PERA releases its annual financial report in June, but the changes would not take effect until July 2022. These adjustments help keep PERA a secure benefit for current and future retirees. Read more about how PERA’s Automatic Adjustment Provision works <a href="https://content.copera.org/peras-automatic-adjustment-provision-a-case-study-for-pension-risk-sharing/" target="_blank" rel="noreferrer noopener">here.</a>



PERA’s Board is committed to maintaining this routine and rigorous review to ensure PERA is able to plan for the future and provide a secure retirement for all its members.



The Board’s next meeting is scheduled for June 18.

PERA Board Selects New DC Plan Administrator at March Meeting

Key points from the story:



<ul><li>PERA plans for the long term by projecting how income, assets, and costs will change over time.</li><li>The Board sets actuarial assumptions, which are the underlying factors that affect these projections.</li><li>Every four years, the Board reviews the actuarial assumptions it uses with something called an experience study.</li><li>The Board completed this work in November.</li></ul>



<hr class="wp-block-separator"/>



Imagine you were asked to make a budget. Not just for this year but for the next 30. You know your income today, but you’d need to estimate how much you’ll be making one, two, three decades from now. You’d need to estimate the price of groceries and gas will change. You’d need to project how what you spend your money on changes over time—maybe childcare expenses go down but medical expenses go up.



PERA is in the business of thinking about the long term, too. A 35-year-old PERA member trusts that the contributions sent to PERA today are building a secure retirement 30 years down the line. So how does PERA go about planning for 2050?



<h5 class="wp-block-heading">Budgeting for the Future at PERA</h5>



PERA isn’t exactly creating a household budget, but the analogy is a good place to start.



Instead of income, PERA must project how contributions change over time as staffing levels and salaries fluctuate. It must consider what investment returns to expect over the long term and the many ways in which the long-term interest rate has an impact.



And instead of expenses like gas and groceries, PERA must project the amount retirees—both current and future—will receive during their retirements. 



This might seem like a straightforward task, but it&#8217;s not. Because members and cobeneficiaries can’t outlive their pension, the amount they receive is tied to their lifespan. So PERA must project how long retirees live. Because the amount a member receives depends on length of service, salary, and age, PERA must project how these factors will change as well.



The cost of paying these benefits to current and future retirees is called PERA’s liability. It isn’t all due at once—that 35-year-old still has a few decades before collecting a pension—but it still counts as a liability today.



Calculating these figures far into the future is the first step in sound financial planning.



<h5 class="wp-block-heading">The Language of the Future</h5>



PERA plans for these future changes and conditions using something called actuarial assumptions.



Actuarial assumptions are grouped into two categories—economic and demographic. Economic assumptions include information like inflation, salary increases, and the projected growth in the number of employees hired by PERA employers. Demographic assumptions include information like the ages at which PERA members retire and how long people tend to live.



While most assumptions deal with factors outside PERA’s control, understanding them is essential.



<h5 class="wp-block-heading">Comparing Assumptions to Experience</h5>



Setting actuarial assumptions is not a one-time event. PERA’s Board regularly reviews actuarial assumptions using something called an experience study.



“The Board’s responsibility to set the actuarial assumptions of the plan is a task that’s very important,” said Ron Baker, PERA’s Executive Director. “This is a critical step to make sure PERA is accurately measuring and reporting on our financial status, and that’s a responsibility the PERA Board takes very seriously.”



An experience study compares what actually happened over the last few years against what PERA projected would happen. The Board can then adjust the assumptions PERA will use for the next four years. This rigorous review process keeps projections as accurate as possible. This process is an industry best practice for all pension systems.



PERA’s liability changes when an actuarial assumption changes. It’s as if the person making a household budget for the next 30 years determined that health care would likely cost a different amount in 2050 than originally planned and adjusted his or her retirement plan accordingly. Although those aren’t bills that need to be paid today, having a clearer goal of what those bills will be in the future makes it easier to prepare for when they do come due.



<h5 class="wp-block-heading">2020 Experience Study</h5>



At its November meeting, the Board reviewed the 2020 experience study conducted by their actuarial consultant (Segal) and voted to adopt the recommendations made by Segal on the assumptions PERA will use going forward.



Changes to assumptions include:



<ul><li>Lowering the inflation assumption from 2.4% to 2.3%</li><li>Lowering the payroll growth rate assumption from 3.50% to 3.00%</li><li>Lowering the active member growth assumption for each division. Current growth assumptions range from 1.00% to 1.25%. Recommended growth assumptions range from 0.25% to 1.00%.</li><li>A number of changes to the mortality assumptions.</li></ul>



Assumptions that didn’t change include:



<ul><li>Maintaining the investment return assumption of 7.25%</li><li>Maintaining the administrative expenses assumption of 0.40% of payroll</li></ul>



<h5 class="wp-block-heading">Using New Assumptions</h5>



The actuarial assumptions adopted have an effect on a number of calculations performed by PERA. For example, the calculations for reduced (early) retirement and the cost of purchasing service credit use these assumptions. Those calculations use factors, like longevity, that change when assumptions change.



The benefit checks that current retirees receive are not an actuarial assumption. Retirees won’t see any change to their monthly benefit because of the experience study.



These assumptions will also be used in the 2020 Comprehensive Annual Financial Report, which will be released in June 2021. This report contains a calculation of PERA’s liabilities using the actuarial assumptions adopted by the Board.



The ultimate goal of the experience study is to provide the most accurate portrait of the future possible. The routine and rigorous examination of this portrait enables PERA to prepare for the future and to provide retirement security for all of its members.

Tag Archives:

Actuarial Experience Study: Refining the Financial View of the Future

Explaining the Role of Actuaries in Retirement Plans like PERA

PERA Board Selects New DC Plan Administrator at March Meeting

2020 Experience Study: Preparing for a Secure Future

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