Media Releases

IPERS reports improved funding from 16.29% investment return

(DES MOINES)—Iowa’s largest public pension plan has released its fiscal year (FY) 2007 performance summary, concluding a 16.29 percent return on investments improved funding of future retirement benefits.

The Iowa Public Employees’ Retirement System (IPERS) paid more than $1 billion in benefits during FY2007, with over 88 percent of the payments made in Iowa. IPERS prefunds benefits, which means current public employees and their employers are contributing now for their own future retirements.

While investment returns were strong, the percent of wages employees and their employers contribute to IPERS has lagged behind the rate needed to cover projected benefit costs. Contribution rate increases approved by the Iowa Legislature should further improve IPERS’ long-term funding status as the contribution rate set in law catches up to the rate necessary to prefund benefits fully. The first of four 0.5 percentage point rate increases took effect July 1, 2007. IPERS is asking the legislature for the authority to set future contribution rates with a 0.5 percentage point annual limit on changes.

Report highlights with explanations follow. IPERS’ 2007 Annual Summary and Comprehensive Annual Financial Report for the fiscal year ended June 30, 2007, are at www.ipers.org/publications/index.html.

Report Highlights

Behind the numbers

• Benefits paid include pensions, disability payments, and death benefits for survivors.
• IPERS benefits work with Social Security and personal savings by replacing a percentage of preretirement wages (65% maximum for most members; benefits accrue faster for public safety members, whose careers are shorter due to the physical demands of their jobs).
• The average IPERS retiree contributed to IPERS for nearly 22 years, with IPERS benefits replacing about 44% of wages.
• IPERS pays benefits for life. Although IPERS members do not have to worry about outliving their retirement benefits, IPERS’ liabilities increase as life spans increase.
• Benefits are prefunded—today’s workers contribute for their own future retirements.
• For public safety members, IPERS has the authority to set contribution rates to the level needed to prefund benefits. Their earned benefits are fully funded.
• The FY2007 actuarial valuation takes into account the phased-in increase in the statutory contribution rate for regular members that began in FY2008.
• The statutory contribution rate set by the Iowa Legislature for regular members (about 96% of the total membership) is below the actuarial contribution rate.
• The actuarial contribution rate is the rate needed to cover the cost of benefits earned during the year and make a payment on the unfunded actuarial liability (UAL).
• The UAL is a measure of the extent that actuarial liabilities, which include the benefits that IPERS must pay in the future, exceed the actuarial value of assets.
• The UAL is only part of the story and, taken alone, is not a concern. It is a sign the cost of benefits being earned is more than the money coming in to pay these future benefits. It becomes a concern if future contributions do not include enough to “catch up” and pay down the UAL.
• The funded ratio is the ratio of actuarial assets to actuarial liabilities. It is a measure of the extent to which benefits are prefunded.
• A funded ratio of 90% is considered healthy. According to the Public Fund Survey Summary of Findings for FY2006 (National Association of State Retirement Administrators, October 2007), the aggregate funded ratio of public plans was 85.8% in FY2006.
• Because of the volatility of the stock market, a one-year investment return is no indicator of future returns. In fact, IPERS’ actuary distributes investment gains and losses over five years when completing the annual valuation. IPERS is an institutional investor that looks forward at least 30 years. IPERS’ annualized return since 1981 is 11.59%.