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Employers

Employer Bulletin

All Employers
Vol. 16, No. 7
April 16, 1999

Bulletin Includes the 1998 WRS Annual Reconciliation Reports, Contribution Statement and Unfunded Accrued Actuarial Liability (UAAL) Explanation

Your final reports of transactions and contributions as part of the 1998 Annual Reconciliation process are included with this Bulletin. The Department of Employe Trust Funds (ETF) has completed 1998 Annual Reconciliation. In addition to reconciliation materials, you also will find your 1998 Employer Annual Contribution Statement and an explanation of Unfunded Accrued Actuarial Liability (UAAL), also known as Prior Service Liability.

It is essential that you review your transaction/contribution material carefully to ensure the accuracy of each employe's 1998 account balance. Please direct questions and any necessary corrections concerning your reconciliation reports to Rick Parpart at (608) 267-2198.

Please forward this material as soon as possible to the individual in your office who is responsible for processing contribution reports. Thank you.

QUESTIONS AND ANSWERS RELATED TO UNFUNDED ACCRUED ACTUARIAL LIABILITY (UAAL)

What is Unfunded Accrued Actuarial Liability (UAAL), also known as Prior Service Liability?

Prior Service Liability is the cost of providing benefits for service credit earned:

  1. prior to an employer joining the WRS, or

  2. for providing benefit improvements based on service credit earned prior to the effective date of certain major benefit legislative changes, several of which have been enacted into law by the Legislature/Governor over time.

Your current balance is the net of:

  1. the original amounts determined for your employes' service prior to the time you came under the retirement system, plus

  2. the liability for statutory benefit changes, plus

  3. all interest that has been assessed on the liability, less

  4. all payments made.

How do employers make payments on prior service liability?

Your monthly retirement contribution rate includes a small component for prior service liability (about one to two percent for most employers). Each month as you make retirement contributions, you are also making a payment for your prior service liability.

Your prior service contribution percentage rate is fixed at a level that is projected to be adequate to fully pay off the liability over the 40-year amortization period.

To minimize future interest charges, you have the option of paying off your liability faster. You can pay off the entire liability in a single payment, or simply make larger-than-required payments each year. If you are interested in paying off your liability early, ETF will develop a customized payment plan for you.

How is interest assessed on prior service liability?

Interest is assessed at the "assumed" long-term retirement investments earnings rate on the outstanding balance of the liability at the end of each calendar year. The assumed rate applied to each employer's prior service outstanding balance is 8.0 percent.

The interest that is charged on our prior service liability each year is greater than the payments we are making. How are we ever going to pay off our liability?

The prior service contribution rates are based on a level percentage of payroll over the entire 40-year amortization period. This means that the contribution rate will remain constant, but the actual contributions will increase each year as the salaries of covered employes increase.

During the early years, the salary base used to calculate contributions is low, and the contributions are less than the interest charges. Each year as covered wages increase, the contributions also grow until, in approximately the 20th year, the contributions and interest assessment will be equal. The contributions begin to reduce the liability until the end of 40 years, when the liability has been totally paid.

The actuarial assumption of 4.8% annual salary growth is used.

I heard that my UAAL balance was going to be reduced. What's happening with that?

On December 15, 1997, the Employe Trust Funds Board accepted their consulting actuary's recommendations for updates to the system's actuarial assumptions, including a reduction in the future wage growth rate from 5.3% to 4.8 percent. The actuary also recommended that the balance be reduced by approximately 20% in recognition of the lower wage growth assumption.

The Board initially accepted the actuary's recommendation to adjust the UAAL balance, but subsequently tabled the recommendation until they could get clarification of their legal authority to make adjustments to the UAAL.

On January 15, 1999 the Attorney General's Office advised that the Board did not have the authority to make this adjustment to the UAAL. Acting on this advice, the Board rescinded the proposed UAAL adjustment on February 15, 1999.

Does this mean my UAAL balance will never be adjusted?

Although the Board has resolved the questions related to the proposed actuarial adjustment to the UAAL, this does not mean that the UAAL balance is not subject to future adjustments. The Board will be considering whether actuarial reductions to the UAAL implemented in 1990, 1992 and 1994 should be reversed for consistency with the current interpretation of the Board's authority. If the Board takes such an action, it would result in an increase to your UAAL balance, even if you have paid the full amount due.

It is also possible that the legislature may act to give the Board the authority to apply actuarial adjustments to the UAAL balance. If such authority were proposed, the Department would ask that the Board be allowed to apply the authority in a way which would be fair to employers who had chosen to prepay all or a portion of their UAAL.

Finally, it is possible that future legislation providing early retirement opportunities or improved retirement benefits would be partially funded through an increase in prior service liabilities. Such an action would increase your balance -- even if you have paid off your entire UAAL balance.

What happens if after 40 years we have not fully paid off our liability?

Under current law, any liabilities remaining at the end of the 40-year amortization period will continue to be payable. Payments will continue on a monthly basis until full payment has been made. However, it is probable that before the end of 40 years the Legislature will pass new laws that will have an impact on prior service liability, contribution rates, and the amortization period.

Many of the employes granted prior service when we joined the Wisconsin Retirement System (WRS) have since terminated. Why do we still have a prior service liability?

Once you agreed to fund prior service coverage for your employes, the granting of that service is irrevocable. The service remains available to those employes for calculating a retirement benefit, regardless of whether they continue in your employ, or move on to other employers.

Since the WRS remains liable to the participant for benefits based on having granted prior service, the employer who authorized the granting of prior service remains liable to the WRS for the cost of granting that service.

Can an employer pay off the balance of their prior service liability at any time?

Yes, an employer may pay off the entire balance of their prior service liability in a lump sum payment. The Department of Employe Trust Funds (ETF) can also provide a customized amortization schedule so the employer can pay down the prior service liability balance faster to reduce interest charges.

Why are employers charged 8% interest on the unpaid balance when prevailing interest rates are lower?

The interest rate charged on the unpaid prior service balance is based on the assumed rate of investment return for the assets in the Wisconsin Retirement System (WRS). The WRS cannot charge an interest rate that is less than what it expected to earn had the entire prior service liability been paid off immediately. To do so would not only violate the fiduciary requirements of the trust, but would result in higher liabilities to the system as a whole.

If an employer pays off its prior service liability will it ever have another prior service liability assessed?

If the Legislature enacts new benefit changes that result in an unfunded prior service liability, that liability will be assessed to all employers, including those who have paid off their previous prior service liability.

NOTE: The Legislature's Retirement Research Committee may be reviewing the current method for funding prior service liability during the 1999-2001 Legislative session.

Please direct questions concerning your prior service liability to Nancy Kittleson at (608) 267-9034.

 

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