Patented Method for Determining Counter-Cyclical Employer Contributions
State and local governments commonly face the difficulty of increasing employer contributions in bad economic times due poor market returns. In response, Ed Macdonald, ASA, MAAA, FCA, president of CMC, has developed a patented method to mathematically determine contributions that are counter-cyclical: higher in good economic times and lower in poor economic times.
The root cause of contribution volatility is actuarial experience that varies from the expected. And the main source of experience swings is actual investment returns compared to the long-term expected rate. Good or great actuarial experience leads to contribution reductions and/or benefit improvements. Bad actuarial experience leads to increased contributions with limited ability to reduce benefits.
With Ed’s patented method for interest rate smoothing, it is possible to:
- Increase contributions during good economic times
- Reduce contributions during bad economic times
- Retain actuarial gains to offset losses
- Maintain actuarial soundness, and
- Comply with Governmental Accounting Standards Board (GASB) and actuarial standards of practice.
Clients who have adopted our interest rate smoothing method have found that their liabilities decrease, their contributions do not increase in bad times, and their average annual investment return actually increases. (It also improves prospects for a bond rating, since they have a comprehensive plan to address funding needs.)
Interest-rate smoothing works by establishing a discount rate and long-term horizon and then smoothing the interest rate used to develop the liabilities and contribution models. The smoothed valuation interest rate is the rate needed over the look-forward period so employers will have the earned discount rate over the time horizon.
It is a reality that public sector employers have little will or ability to increase contributions in poor economic times. Our method enables them to contribute more in good times and less in bad times. For more information about how interest rate smoothing might work for your government entity, please contact Ed at 678-388-1701 or [email protected].