With every new version of our favorite technology – such as smartphones, televisions, and even cars – we can accomplish or experience something better than we were previously able. The computer has certainly helped the actuary by increasing the speed and accuracy in which calculations can be made.
But like many trade-specific tools, the available actuarial software was largely available only to actuaries and required more than just a general understanding of actuarial principles to properly utilize.
This has changed with a new website created by the Society of Actuaries, the main governing body for the actuarial profession. This site puts a simple yet powerful tool in the hands of non-actuaries. It can be found here: afc.soa.org/#Calculator. (Note: if this direct link doesn’t work, use this link instead, www.soa.org/resources/tables-calcs-tools/act-practice-tools-landing/ and click the “learn more” link under the “Annuity Factor Calculator”.) It allows the user to calculate an actuarial annuity factor. Having the annuity factor doesn’t do the non-actuary any good, unless the person knows how to apply that value. We hope to give you a basic understanding of how an actuary uses an annuity factor, enabling you to understand and reasonably approximate the numbers in a LOSAP valuation report.
The annuity value is used to determine the Actuarial Present Value (APV) of a future obligation. In our context, the obligation is a lifetime monthly service award benefit payment. The APV is then the current lump-sum cash value, in “today’s dollars” of that lifetime monthly service award.
If we remove the word “Actuarial” from APV, we are typically removing any decrements, like mortality (life expectancy), disability, and withdrawal (employment termination) from the calculation. Excel can easily calculate the present value of fixed-number of payments with a constant interest rate, whether a lump-sum payable in the future or a series of annual or monthly payments payable over a designated period.
A simple example of present value would be to consider that you owe someone $1,000 one year from now. If we assume that we will earn 5% in our savings account during the year, the present value is about $952. If we have $952 in the bank, and earn 5% on that $952 during the year, we will have $1,000 at the end of a year. If we will only earn 1% on our savings account, then the present value increases to $990! That is because we will not earn as much interest, so we need to invest more in our savings account today to have the $1,000 one year from now. The complications ratchet up when we consider a payment that might be $1,000 per month for an individual’s lifetime starting a year from now, and not just a one-time payment.
While there are other assumptions the actuary could make in the calculation, for most LOSAPs the two main assumptions are an interest rate and a mortality table. Some factors the actuary must consider:
Ultimately, the APV of a monthly service award is: Monthly Benefit x 12 x Annuity Factor = APV
The Annuity Factor is where all of those assumptions are baked into one number.
When you first access the tool online, you should see something like this:
There are several different options/assumptions that can be selected. For the more curious reading this article, in the header of the website there is a “Technical Terms” link. By clicking that link you will get more detailed information about some of these options.
In a typical actuarial valuation of a LOSAP, the actuary does not assume mortality before the entitlement age (the tool calls it Mortality Before BCA). The use of a projection method on the mortality varies. For our purposes, we made the following changes:
After making these changes, the resulting annuity factor is 5.7859. Note we did not change the “Primary Annuitant Age” from 45, which means this factor is only for a 45-year-old and based on the assumptions we noted. That being said, if this 45-year-old had accrued a $200 monthly benefit, the APV would be $13,886. In plain English, this essentially means we need $13,886 in the bank today in order to pay a 45-year-old male $200 per month for the rest of his lifetime beginning at age 62.
Where you can experiment a bit with this tool is to make changes to the assumptions, such as:
There are a couple limitations to this tool that you must be aware of, especially when trying to compare results to your actuarial report or participant statement:
This free tool from the Society of Actuaries is a valuable resource to help municipalities, participants, and auditors understand a bit of the actuarial mathematics and to verify that the calculations in the actuarial report. You will not likely get a 100% match on the APV you calculate compared the actuarial report, but you should end up with a reasonable approximation. We hope you will give it a try!
If a village, town, city, or fire district elected to participate in the “State pension” in order to provide a retirement benefit to its employees, that municipality is participating in the New York State and Local Retirement System (NYSLRS). This system is actually comprised of two pension plans – the Employee’s Retirement System (ERS) and the Police and Fire Retirement System (PFRS).
While a LOSAP is not part of the NYSLRS, and the scale and scope of the NYSLRS is significantly greater than a LOSAP, it can be an interesting benchmark for comparison. How much larger is the NYSLRS than an average DB LOSAP? Based on information we received from the State on 256 defined benefit (DB) fire department LOSAPs, the average DB had $2 million in assets. We know that 256 DB plans is not representative of the total number in New York – the actual amount is likely between 475 and 500 based on other information that is available. If all DB plans were considered, the average of $2 million per plan would certainly be different. Additionally, those values are now over two years old.
For our purposes, however, an average DB LOSAP in New York could be reasonably assumed to have an asset value of around $2 million. In general, each DB plan is individually managed by the sponsoring municipality. That $2 million being managed by a sponsor pales in comparison to the value of the assets held for the NYSLRS, which is $194.3 billion as of March 31, 2020. This means from an asset standpoint, the NYSLRS is about 100,000 times larger than an average LOSAP! Therefore, drawing conclusions between the two can be misleading if the proper context is not kept. That said, it is interesting to see the financial condition of the NYSLRS and use some of the information provided as a comparison to a locally-administered LOSAP.
On September 3, 2020 the Office of the State Comptroller released the contribution rates for the NYSLRS. The rates for the ERS increased from 14.6% to 16.2% of payroll, and PFRS from 24.4% to 28.3% of payroll. That represents increases of about 11% and 16% respectively.
The funded ratio was reported to be 86.2%, a decrease from 96.1% as of 2019 and 98% as of 2018. You can read the press release here: https://www.osc.state.ny.us/press/releases/2020/09/nyslrs-announces-employer-contribution-rates-retirement-system-2021-22
The assumed rate of return on the Common Retirement Fund assets is 6.80%. The Fund earned -2.68% during the fiscal year that ended on March 31, 2020. The fiscal-year end of March 31 was bad timing this year, when the investment markets saw significant declines in March due to the onset of the COVID-19 pandemic. This was a significant factor in the increase in the contribution rates. As of March 31, 2020, the Fund had about 49% of the assets allocated to publicly traded equities, with another 11% in private equity. About 26% was in cash, bonds, and mortgages, 10% in real estate and real assets, and the remaining in alternative strategies.
Additional information about the Common Retirement Fund can be found in this press release: https://www.osc.state.ny.us/press/releases/2020/07/dinapoli-state-pension-fund-value-1943-billion
Each year, the Retirement Systems Actuary issues a report on the actuarial assumptions used to determine the employer contribution rates. Michael Dutcher is the Actuary and is very skilled and clear in his written communications. We suggest you download and read the report, which is located here:
We suggest reading the Executive Summary and the section on the Investment Rate of Return found on pages 5 to 9. Mr. Dutcher does an excellent job walking the reader through the importance of the Investment Rate of Return Assumption and the process used to select it.
Some key takeaways from this information for LOSAP sponsors are:
Firefly Admin Inc. is guided by six core principles – Serve, Trust, Value, Teach, Grow, and Collaborate. These principles can be applied in many ways, including both in how we deliver our services to clients and how we operate internally as a team.
Recently, we have made several internal decisions on enhancing our service offerings, all done in line with these principles. However, the purpose of this communication is to highlight one we are very excited to announce, which is the addition of Craig Relyea, ASA to our team.
Craig joins Firefly as an Actuary; he is an Associate of the Society of Actuaries and a Member of the American Academy of Actuaries. Most recently, Craig has been working for a health insurance company, assisting them manage their large volume of data, analyzing and helping develop trends and pricing for their products. For the 10 years prior, Craig worked with service award programs and developed a specific expertise in this field – one that we are extremely fortunate to now have working for Firefly’s clients.
In recent months, Craig assisted us with a couple actuarial projects on a consulting basis. Now that he has been hired as an employee, he will be involved in all facets of our services, including administration, consulting, and client meetings. His unique experience will allow him to make an immediate and significant impact. While adding Craig’s talents will enhance the service we can provide, his addition is equally important to strengthening the continuity of our services over time. This illustrates our commitment to ensure our services can be trusted and valued in the future.
On actuarial matters, Craig will work closely with our consulting actuary, Tony Fiorillo. Tony Fiorillo is also an Associate of the Society of Actuaries, and he certified all valuations we prepared in 2020. We entered into a consulting agreement with Tony in January 2020. This also means we will not be relying as much on our collaboration with Jefferson Solutions, Inc. We continue to work with Jefferson on specific projects and recommend any municipality in need for GASB 75 valuations to contact them through their website, www.jefsi.com.
As a result of the addition of Craig and Tony, our team now consists of five professionals all with at least ten years of experience with service award programs. Although 2020 was not typical by any measurement, we successfully delivered on our promises, making at least one part of our clients’ year routine. All annual reports and participant benefit statements were delivered timely, both in paper form and electronically. We were also able to provide our clients a draft of the resolution to award points for the period of the COVID-19 pandemic at no additional fee.
If you’d like to contact Craig, please email him at firstname.lastname@example.org. Although Tony Fiorillo is a project-based consultant, if you have questions about an actuarial valuation or would like to touch base with him, you can email Tony at email@example.com.
For those municipalities that have chosen to partner with Firefly, we are thankful for the trust you have placed in us, and we will continue to work to validate that trust.
As was mentioned in a previous post, a bill was introduced in the Senate to try and address the impact of the current COVID-19 pandemic will have on the ability of volunteers to earn LOSAP points in 2020.
Since that post, the bill was amended to include changes to Articles 11-AA and 11-AAA, which are the statutes that govern the LOSAPs for volunteer ambulance squads.
Yesterday, May 11th, an Assembly bill was introduced which mirrors the amended Senate version. We have included it at the bottom of this post for you.
Our comments on the version Senate bill were provided to the legislature and other interested parties. A condensed version will be made available soon.
In the meantime, please do not assume this bill will pass. We will continue to monitor and update you as this situation develops.
A bill was introduced in the Senate this week to address how the current COVID-19 pandemic has impacted how firefighters can earn LOSAP points.
At this point, we are providing the text of the bill with no comments. It can be found at the bottom of this article.
In general, we maintain that we cannot assess how this pandemic will impact how firefighters can earn 50 points until we are clearly near the bottom of the curve. Therefore, it is difficult to know how to best address this situation. Since this legislation is only in bill form, we encourage you not to wait for this bill to possibly become law - start thinking about ways to be creative to allow firefighters to earn points in 2020.
We have been asked for our input on this bill and will be providing it soon.
If you have any questions, please contact us! Stay safe!
Sharing my thoughts and insights on LOSAP, and occasionally other topics.