LACERA - The Los Angeles County Employees Retirement Association LACERA Home Disclaimer Links My LACERA FAQs Contact Us LACERA Home


Search by Topic

Brochures & Forms


BENEFITS


CONTRIBUTION RATES AND UNDERSTANDING INTEREST

General Plan Contribution Rates Safety Plan Contribution Rates

Our retirement fund (Fund) relies on three sources of funding:

  • Investment earnings
  • Employer (Los Angeles County) contributions
  • Employee contributions (with the exception of Plan E, which receives no employee contributions)

Historically, investment earnings have accounted for approximately three-quarters of the money necessary to pay the promised benefits.

Under the law, LACERA is obligated to monitor the Fund and make strategic adjustments, as needed. These adjustments serve to strengthen the Fund, as well as ensure we fulfill our legal duty to pay the promised benefits.

Important Rates

Two important rates affect active LACERA members: the Assumed Rate of Investment Return (also referred to as the Interest Rate) and Contribution Rates. These rates play a critical role in keeping the Fund properly funded to pay the benefits promised today, tomorrow, and for decades to come.

To ensure the long-term health and viability of the Fund, both rates must be regularly monitored and prudently adjusted, as needed. This is a complicated and ongoing process. The County Employees Retirement Law of 1937 (CERL) and the Public Employees’ Pension Reform Act of 2013 (PEPRA), the laws governing LACERA, provide the rules for the establishment and adjustment of these rates.

Assumed Rate of Investment Return

What is an Assumed Rate of Investment Return?

An assumed rate of investment return refers to the minimum rate of earnings the retirement fund must average over 30 years in order to provide the funds needed to pay the promised benefits. This rate is also known as the interest rate.

Why is the Assumed Rate of Investment Return also known as the interest rate?

This is in recognition of the interest earned (or assumed will be earned) on Fund investments, the interest LACERA applies semiannually to member contributions, and the interest LACERA charges on purchase contracts.

How is the Interest Rate determined?

According to section 31453 of CERL, no less than every three years a system valuation must be conducted under the supervision of an actuary. The valuation shall cover the mortality, service, and compensation experience of the members and beneficiaries and evaluate the assets and liabilities of the retirement fund. Based on that valuation, the actuary shall recommend any necessary interest rate changes to the Board of Investments for approval. Rate changes approved by the Board must be presented to the Board of Supervisors for approval at least 45 days prior to the beginning of the next fiscal year (which begins July 1).

Additionally, in 2009 the Board of Investments adopted a Retirement Benefit Funding Policy requiring the plan actuary to conduct annual valuations of plan liabilities and assets to measure the progress of the pension plan's funding and make strategic recommendations as needed. Such recommendations may include proposals for changes to the interest rate and/or employee and employer contribution rates.

Actuaries and System Valuations

What is an actuary and what services do actuaries perform?

An actuary is a statistician who calculates probability. Actuaries use mathematics and statistics to determine the probability of the occurrence of an event such as death or disability. Actuaries who work with administrators of defined benefit plans like LACERA, study the actual experience of the pension plan to create assumptions (known as actuarial assumptions) regarding each member’s future salary increases, age at retirement, and life expectancy. They also apply those assumptions to assess the level of pension contributions required to help ensure pension plans are maintained on a sound financial basis.

What is a system valuation?

A system valuation is an examination of the pension plan performed by actuaries to determine whether contributions are being accumulated at a rate sufficient to provide the funds needed to pay the benefits promised by law.

Actuaries formulate economic and demographic assumptions that forecast the probability of future events that affect the outcome and duration of pension benefits. Based on these assumptions, actuaries project the expected cash flow required to fund future benefit payments.

Economic and Demographic Assumptions

Demographic assumptions deal with factors affecting when benefits will become payable and the amount of those benefits. This type of assumption includes projections on the likelihood of a member’s termination of employment, retirement, disability, or death at each age.

Economic assumptions deal with factors affecting how assets grow and how salaries increase; such factors include inflation, investment returns, plan expenses, and salary schedules. Actuaries use economic assumptions to determine the present value of future liabilities (promised benefits) and salary increases.

When changes in some or all of the actuarial assumptions occur, interest and contribution rates are adjusted accordingly.

Contribution Rates

Both member and employer (Los Angeles County) contribution formulas are established by law and are based in part on actuarial assumptions.

Member contributions are structured as a percentage of the member’s monthly earnings and are collected from contributory plan members through automatic payroll deductions. In LACERA retirement plans introduced prior to 2013, the percentage is based on the member’s LACERA entry age. Plans introduced in 2013 feature flat-rate contribution percentages that are not affected by entry ages.

A decrease in the interest rate signifies an expectation of lower investment earnings by the Fund. Therefore, typically, when the interest rate is lowered, member, as well as employer, contributions are increased and vice-versa.

50/50 Cost-sharing: general plan g and safety plan c

PEPRA, which took effect January 1, 2013, requires 50/50 cost-sharing between the employee and the employer. In accordance with this law, LACERA members with 2013 membership dates are enrolled in new plans — General Plan G or Safety Plan C — which are structured for 50/50 cost-sharing.

The cost referred to under 50/50 cost sharing is the retirement system’s Normal Cost, which is the present value of the pension benefits accrued in the current year. In determining 50/50 cost-sharing, the actuaries determine the total amount of contributions needed in a year to fund the benefits accrued in that year. That cost is split evenly between employer and employee. Contribution rates in 50/50 cost-sharing plans are based on a flat rate; members of each respective plan pay the same contribution rate, regardless of their entry ages. Rate negotiations between the employer and employee groups are not permitted under PEPRA.

1/23/17