Basic Pension FAQs
How are LASERS pensions funded?
LASERS pensions are funded through a combination of employer and employee contributions and investment earnings during the working life of an employee. Funding is based on liabilities that are being accrued, as determined by an actuarial valuation.
What is an actuarial valuation?
An actuarial valuation is an annual mathematical process to determine a pension plan’s condition, required contributions, and liabilities. LASERS operates on a July 1 through June 30 fiscal year. Annual valuation reports are considered by the LASERS Board of Trustees in September of each year. That valuation must also be approved by the legislatively created Public Retirement Systems’ Actuarial Committee (PRSAC).
What are the responsibilities of the LASERS Board of Trustees?
The LASERS Board of Trustees governs the retirement system and is responsible for overseeing the collection of contributions and the payment of benefits. It provides oversight of the investment of assets. The Board consists of 13 members: six are elected by active members of the system, three are elected by retired members of the system, and four are ex officio members.
Does LASERS operate as a “pay-as-you-go” system, with active members funding benefits for retirees?
No. LASERS is a “prefunded” system which means that benefits are financed with the accumulation of assets during the employee’s working years. Employer contributions provide for any debt related to earned retirement benefits.
How do investment earnings and investment return assumptions affect public pensions?
Over time, investment earnings typically finance a majority of the cost of a pension benefit. When investment performance is less than expected (assumed), employer contribution requirements increase. When investment performance is greater than expected (assumed), employer contribution requirements decrease. When investment return assumptions are set too low, liabilities and costs are overstated. When investment return assumptions are set too high, liabilities will be understated.
What is the investment return assumption used by LASERS?
LASERS operates with a discount rate of 7.25 percent effective July 1, 2021. In order to record an investment experience gain, the actuarial rate of return must exceed the discount rate. The actuarial rate of return, which “smoothes” gains and losses over a five fiscal year period in order to mitigate the volatility of market returns, is used to determine funding requirements and other plan measurements. LASERS average actuarial return over the past 30 years is approximately 7.46 percent.
What is GASB?
GASB is the Governmental Accounting Standards Board responsible for establishing and maintaining standards for accounting and financial reporting by state and local governments in the United States. GASB maintains two sets of standards: one for public pension plans and one for public employers that sponsor pension plans. Find more information on this page of the LASERS website.
For additional information on pension systems, review Public Pension Funding 101 and Public Pension Funding 201 by Keith Brainard, research director for the National Association of State Retirement Administrators (NASRA). Information from Brainard’s articles was used to answer many of these questions.
Benefits for LASERS Members
What is the formula for calculating the amount of a pension?
Average Compensation × Accrual Rate × Years of Service Credit
Average Compensation is based on a member’s highest 36 or 60 months of earnings. Accrual rate is determined by the retirement plan of the member. Details on these terms can be found in the LASERS Member’s Guide to Retirement.
Have retirement benefits under the defined benefit plan for current members become too expensive?
The total “normal cost” for funding benefits has increased over the past several years. The State will pay 3.11 percent of payroll to fund the cost of benefits earned by current employees. Rank-and-file employees pay 7.5 or 8 percent of their salary, depending on their hire date, to fund their future benefits. If State employees were in Social Security, the State and employees would each pay 6.2 percent of salary.
Then why is the employer contribution rate higher than 2.35 percent?
Changes in the employer contribution rate are impacted by many factors. In addition to the “normal cost” to fund benefits, the employer must make amortization payments on the debt it owes to the retirement system, referred to as the “unfunded accrued liability” or “UAL” of the system. Also, the UAL payment is calculated as a percentage of payroll. Because state payroll has decreased in recent years, the percentage of payroll necessary to pay the debt has increased. The reason the employer contribution rate rises as payroll shrinks can be analogized to a family paying a mortgage with less income, as illustrated in this diagram.
Are benefits paid by LASERS to its members overly generous?
As of June 30, 2022, the average rank-and-file LASERS retiree is paid a benefit of $28,056 a year.
Social Security Impact
Are members of LASERS able to draw Social Security benefits?
For their State service, LASERS members do not pay the Social Security tax and are not eligible to draw benefits. The LASERS retirement system is mandatory for most state employees.
State employees who retire with a LASERS pension and who earned a Social Security benefit from private employment will likely see a substantial reduction in their Social Security benefits due to the Windfall Elimination Provision federal offset. Also, a LASERS retiree whose spouse earned a Social Security benefit may completely lose that spousal benefit due to the federal Government Pension Offset.
Click here for additional information on the Social Security Offsets.
Types of Retirement Plans
What is a defined benefit (DB) retirement plan?
A defined benefit (DB) plan guarantees a lifetime monthly benefit to retirees. The benefit is calculated based on a formula that considers the employee’s years of service, the compensation received by the employee, and an accrual rate. Assets in a DB plan are managed by professionals using a long-term investment horizon. Funding for the plans is provided through employee contributions, employer contributions, and investment earnings, with investment earnings funding the vast majority of benefit payments.
What is a defined contribution (DC) retirement plan?
A defined contribution retirement plan, usually in the form of a 401(k), can only pay out those funds that have been paid into the plan, as impacted by the gains or losses of the stock market. The plan defines the contribution to be added to the member’s account. A retiree with only a DC plan who makes poor or overly conservative investment decisions or those who outlive retirement benefits may be forced to rely on public assistance.
What is a Cash Balance Retirement plan?
Cash Balance Plans (CBP) may vary significantly depending on how they are designed. A CBP may be designed as a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan, but retains some benefit guarantees. Typically a CBP defines the promised benefit in terms of a stated account balance. In a typical CBP, a participant’s account is credited each year with a “pay credit” and an “interest credit.”
What is a hybrid retirement plan?
A hybrid retirement plan combines elements of traditional pensions and individual account plans, shifting some risk from the employer to the plan participants.
Unfunded Accrued Liability
I am confused about the terms “Initial Unfunded Accrued Liability” (IUAL) and “Unfunded Accrued Liability” (UAL) as it relates to LASERS. What is the difference?
The IUAL is the debt owed to LASERS by the State of Louisiana from the inception of the system in 1946 through June 30, 1988. LASERS was created with an unfunded liability because benefits were granted but were not fully funded. The IUAL began accruing interest on June 30, 1988, at the rate of 7.5 percent annually; in 1990, the interest rate changed to 8.25 percent. In 1987, a constitutional amendment led to a 40-year amortization schedule for the IUAL, requiring the debt be satisfied by 2029.
The UAL is the initial debt plus any additional unfunded liability accrued since June 30, 1988. The UAL is the total amount by which the retirement system’s liabilities (benefit obligations) exceed the assets of the system. Payments to the UAL are amortized over a specified period of time, much like a mortgage.
How much is LASERS UAL?
As of June 30, 2022, the UAL of LASERS was approximately $7.0 billion.
How will the legislatively mandated UAL payment schedule reduce LASERS debt over time?
The existing payment schedule is projected to result in a $3.3 billion reduction to the LASERS $7 billion debt in 10 years and a $6.4 billion reduction in 22 years. The UAL balance will continue to decline as long as the state continues to make the debt payments.
What steps have been taken to address the UAL?
Legislative reforms adopted since 2005 are expected to reduce costs for LASERS by $3 billion. LASERS has supported many legislative and constitutional changes to reduce the UAL. Act 75 of 2005, relating to Rank and File members hired after July 1, 2006, increased employee contribution rates, limited retirement eligibility to 10 years of service at age 60, increased the Final Average Compensation (FAC) from three to five years, and reduced the salary spiking cap from 25 to 15 percent. Act 992 of 2010, consolidated plans for new hires, consolidated Hazardous Duty plans and adjusted benefits for consistency, modified survivor benefits, and applied components from Act 75 to other groups. A third new Rank and File plan was adopted in 2014 which increases the retirement age for certain new hires to age 62. Acts 497 of 2009 and 399 of 2014 prioritize more investment experience gains to reducing the UAL. Act 94 of 2016 required direct funding of administrative expenses, rather than allowing these expenses to impact the UAL.