Explanation of New Option Factor Tables (Effective January 1, 2020)
EXPLANATION OF NEW OPTION FACTOR TABLES
(Effective January 1, 2020)
After review of the most recent experience study, the State Employee Retirement Commission (SERC) adopted new actuarial assumptions to be used for the most recent State Employees Retirement System (SERS) and the Probate Judges and Employees Retirement System (PJERS) actuarial valuations.
As a result of these new actuarial assumptions, and in keeping with standard actuarial practice, SERC adopted new option factor tables that incorporated these assumptions. It is important to note that the option factor tables for the State Employees Retirement System (SERS) and the Probate Judges and Employees Retirement System (PJERS) were last updated in 2009. There are no option factor tables used for the Judges, Family Support Magistrates and Compensation Commissioners Retirement System.
Briefly explained, there are three different changes incorporated in the new option factor tables:
1. Mortality Tables
Mortality was updated from a RP-2000 table with projection, to the most recent RP-2014 (White Collar) table with projection to 2020. The recognition of improved mortality of members means retirees are expected to receive benefits for a longer period of time before they die and the annuitant’s benefits start. While the annuitant will live longer, as the benefits will be paid to the annuitant further in the future, they have less value in today’s dollars, so the member’s benefit does not have to be reduced as much to “pay for” the annuitant’s benefits.
2. Interest Rate
Interest rate was decreased from 8.25% to 6.90%. The interest rate is used to discount future benefits into today’s dollars. Since there is a lower interest rate, benefits expected to be paid many years from now, i.e. benefits to the annuitant are worth more than they were with the old interest rate. Since the benefits have greater value in today’s dollars, the member’s benefit will have a greater reduction to “pay for” the annuitant’s benefits. This effect partially offsets the lower reductions due to the improved mortality.
The assumed rate of future COLAs was decreased from 2.70% to 2.25%. Since there is a lower rate of COLA, benefits expected to be paid to the beneficiary many years from now will be less than they were with the prior assumed rate of COLAs. Since the benefits have less value in today’s dollars, the member’s benefit does not have to be reduced as much to “pay for” the annuitant’s benefits, hence an increased option factor due to the reduction in the assumed rate of future COLAs.