Case Study

In 2008, GRS began serving the Texas Municipal Retirement System (TMRS). Our consultants soon noticed that the structure and operation of the plan had the potential to create extreme contribution volatility for participating employers. The team’s actuaries were able to detect the potential volatility problems because of their expertise with multiple-agent employer plans and the dynamics of cash balance design.

The source of the problem lay in the structure of the cash balance plan and the method of crediting the rate of return. TMRS had three separate funds within the cash balance plan: 1) active employee contributions 2) employer asset balances 3) retiree reserve. Each fund was credited with a proportional rate of return. This method resulted in participating employers holding the largest burden for absorbing investment and contribution rate volatility.

TMRS employers tend to be small cities with relatively limited budget flexibility. Unexpected or extreme volatility could create a level of fiscal difficulty for local governments such that benefit reductions could be deemed as the only option to mend the financial picture. GRS actuaries were confident that there was a better solution.

Beginning in 2010, GRS began studying various options and ultimately recommended that assets of the retiree reserve and employer asset funds be combined. This approach would have a deleveraging effect on employer contribution rates and result in less volatility and lower, more predictable contributions in future years. GRS’ funding and risk management expertise was central to helping the State of Texas Legislature adopt this solution in 2011.

The outcome provided local government employers with stable and manageable contribution requirements and helped sustain benefit levels adequate to continue recruiting qualified employees. As a testament to the effectiveness of the solution we helped craft, employer contribution rates have remained almost constant since the passage of the legislation.