On April 20, the Virginia Retirement System (VRS) Board of Directors met and reviewed economic and demographic assumptions, actuarial methods, and funding policies providing gain/loss analysis over the prior four years as well as cost impact analysis of any proposed changes. The VRS plan actuary, Cavanaugh Macdonald Consulting, LLC, presented the provided recommendations and cost impacts associated with the proposed changes. The Actuary recommended, and the VRS Board adopted, changing the mortality assumption from a margin approach on a headcount weighted basis to a generational mortality approach on a benefits weighted basis. Overall, this change will likely result in increased liabilities and higher expected contribution rates, which will be updated later this year and could lead to increased costs to local government employers participating in the system.
The Code of Virginia requires a revision of VRS assumptions every four years. According to the Actuary, over the short term, employer contributions are determined by the annual actuarial valuation based on estimated benefits, expenses, and investment return using Assumptions and Funding Methods recommended by the actuary and adopted by the VRS Board. Over the long term, employer contributions are adjusted to reflect actual benefits, expenses, and investment return. Selection of assumptions and methods that are too optimistic can result in costs being pushed to future generations, while assumptions and methods that are too pessimistic can put undue pressure on current resources.
The biggest change in assumptions pertains to employee mortality. The new assumption uses a generational approach to employee mortality, which is an explicit assumption that future generations live longer than the current generation. As beneficiaries live longer, the period in which they receive benefits also increases, which in turn leads to higher liability for VRS plans and the need for increases in contributions to offset these liabilities. Line of Duty Act (LODA) contributions also may be impacted due to an increase in liabilities for LODA eligible deaths and disabilities. These changes will likely be reflected when VRS calculates and proposes updated employer contribution rates later this year for the next biennium. The full VRS Board packet from the April 20 meeting may be found here. VACo staff will continue to provide updates on the rate setting process as it progresses.
VRS also recently released their May Issue of the Employer News Bulletin, which details their guide to retirement, updates from the 2021 General Assembly session, deadlines for LODA coverage lists, and much more. The Bulletin may be accessed here.
VACo Contact: Jeremy R. Bennett