Retirement insights from a Colorado PERA perspective

Inside Colorado PERA

Explaining the Role of Actuaries in Retirement Plans like PERA

A woman sitting at a desk uses a calculator and references a binder on the desk
Photo credit: AndreyPopov/Getty Images

This year, as part of its regular review process, the Colorado PERA Board of Trustees will enlist an outside firm to conduct an audit of the methods and assumptions PERA’s actuaries use in their calculations.

But what is an actuary and what do they do?

Actuaries are highly skilled mathematicians who help pension plans, insurance companies, and other financial organizations plan for the future based on historical and anticipated demographic, trend, and financial data. In short, actuaries aim to predict the future as accurately as possible.

What does an actuary do for a retirement system like PERA?

PERA Senior Actuary Koren Holden

A retirement system could not function without actuaries. At Colorado PERA, Senior Actuary Koren Holden works with third party actuaries to make sure the Board and PERA leadership have an accurate understanding of PERA’s financial health.

“I act as a liaison between the PERA Board and Executive Team and the Board’s external actuarial service provider,” Holden said. “I am responsible for completion and timely delivery of all the requested actuarial work (i.e., actuarial valuations, special calculations, periodic actuarial studies, etc.) and also responsible for the initial review of all actuarial work to ensure completeness and reasonability.”

In order to pay benefits to retirees for decades to come, retirement plans like PERA need to make predictions about various factors that will determine how much money the plan needs to have on hand to pay those benefits. Actuaries develop those predictions — called actuarial assumptions — and calculate the effects they may have on the plan’s finances.

Actuarial assumptions

Pension plan assumptions fall into two categories: demographic and economic assumptions. Demographic assumptions attempt to accurately anticipate events that occur over the lifetime of plan participants, which can influence the amount and timing of benefits. They include:

  • Life expectancy (how long will plan participants live?)
  • Rates of retirement (when will plan participants retire?)
  • Mortality trends (how many participants will die before/after receiving a benefit?)
  • Salary growth (how quickly and by how much will salaries change for different groups of employees?)

Economic assumptions attempt to anticipate financial factors that can impact the cost of future benefits and the rate at which they are funded, such as:

  • Inflation (what will be the rate of consumer inflation in the future?)
  • Investment rate of return (how much investment income will the fund earn?)

Per Colorado statute, all actuarial assumptions recommended by the actuary are subject to approval by the PERA Board. Actuaries make recommendations to the Board, and the Board adopts them or requests further analysis and revised recommendations to be considered later.

Annual actuarial valuations

Actuaries conduct comprehensive studies known as annual actuarial valuations to evaluate funding progress and the impact of year-to-year changes on a pension plan’s finances. A valuation provides a summary of the plan’s funded status, funding period and recommended contribution rates, and often includes accounting information as required under the Governmental Accounting Standards Board (GASB) statements for public pension plans. In order to perform the valuation and provide this information, the actuary takes into consideration contributions, investment returns, demographic changes, retirements, withdrawals, economic factors, deaths, hires, and other system data.

The annual actuarial valuation is the backbone of the Annual Comprehensive Financial Report, a pension plan’s required public report of financial health.

Click here to read the latest Colorado PERA actuarial valuation and Annual Comprehensive Financial Report.

Experience analysis

An experience study compares the actual experience of the plan to the predictions made by the actuarial assumptions, including rates of death, retirement, separation from service, disability and salary increases. The comparison of actual results to predicted results demonstrates to actuaries which assumptions need to be revised to more accurately reflect true demographic and economic conditions. The experience analysis is the foundation for the annual actuarial valuation in that it determines the appropriate assumptions to be applied within the annual actuarial valuation.

PERA last conducted an experience study in 2020, and the Board adopted several new assumptions as a result. This process will take place again in 2024.

Other analyses

In addition to the pension plan’s annual actuarial valuation and periodic experience analyses, an actuary also performs special studies as needed and/or required by law. For instance, if proposed state legislation will be making changes to benefit provisions, an actuarial analysis of the proposed change would be necessary to determine the financial effect of the change.

Actuaries provide invaluable expertise to retirement systems like Colorado PERA, ensuring the Board and stakeholders have an accurate picture of the organization’s financial health and the road ahead.

“I love numbers, but my main passion for the work I perform here at PERA is being part of a dedicated team that serves my community as well as the entire state of Colorado,” Holden said. “I like the feeling that all of us at PERA are helping ensure a stable and dignified retirement for the teachers and many other public servants by promoting, promulgating, and defending a strong defined benefit retirement program (not to mention health care access), as the best means to deliver this vision.”

Defined benefitA mandatory retirement savings plan in which a participant’s future benefits are known or can be calculated, but contributions are subject to adjustments.

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