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IPERS' Investment Board adopts new economic assumptions

March 24, 2017

Today the Iowa Public Employees’ Retirement System’s (IPERS) Investment Board voted to approve changes to economic assumptions used in calculating IPERS’ liabilities. This action followed an economic assumption study presentation by the consulting actuarial firm of Cavanaugh Macdonald of Bellevue, NE.

The new assumptions are:

  • Inflation drops from 3 percent to 2.6 percent
  • Interest on member accounts drops from 3.75 percent to 3.5 percent
  • Investment return drops from 7.5 percent to 7 percent
  • Wage growth drops from 4 percent to 3.25 percent
  • Payroll growth drops from 4 percent to 3.25 percent

The study applied these assumptions to the 2016 data to illustrate their impact on key funding measurements. The funded ratio is a “snapshot in time” and indicates the financial health of a pension system. Using the new assumptions, with the 2016 data, IPERS’ funded ratio dropped from 84 percent to 80 percent.

These assumptions will first be applied in the June 30, 2017 valuation, which will be used to determine the contribution rates effective July 1, 2018.

The net result of these changes will be a lower funded ratio and an increase in liabilities of $1.4 billion. Even though these changes will have a negative impact on IPERS’ funded ratio, the Investment Board believes that these modifications will provide a more accurate valuation of future liabilities. Each year an investment return is less than the assumed return adds to the liability and increases the needed return in future years which can lead to even higher contribution rates.   

Today, as expected in a mature retirement system, IPERS pays out more in benefits than it collects in contributions. Therefore, IPERS relies to a great extent – nearly 70 percent – on investment returns to pay current benefits. This also makes the System’s funding more sensitive to market downturns.

IPERS, established in 1953, is the largest public pension system in Iowa with 350,000 members. Over 114,000 retirees and beneficiaries receive IPERS retirement benefits. IPERS paid $1.8 billion in retirement benefits during the last fiscal year, with $1.6 billion paid in Iowa. IPERS is a prefunded system which means contributions from employees and employers are pooled and invested over the member’s career. The average IPERS member retires after 22 years of services, earning an annual pension of $16,000.

Visit the About Us page of IPERS’ website to learn more.

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