Each year, the actuaries consider revisions of the amount that employers should contribute so that the plans will be properly funded. In the annual calculation of the Actuarially Determined Contribution (ADC or sometimes referred to as the Annual Required Contribution or ARC), the actuaries rely on many assumptions about what will happen in the future. These assumptions include uncertain estimates of retirement patterns, employee compensation at the time of retirement, retiree longevity, future investment returns, etc., etc.
Recently, Kentucky Retirement Systems revised the actuarial assumptions for all five of the plans that they administer. The investment return, payroll growth and inflation assumptions were all lowered. All other things being equal, these changes will have the effect of increasing the ADC and the unfunded liability. Thus, employers will immediately face increased costs. (The Boards of the other three plans are considering assumption changes in the near future.)
Based on statutory benefit formulas, the actual cost of pension arrangements will play out in the future. As they say, the actual cost will be what it will be. As the view of the future changes, the assumptions change, thereby increasing or decreasing the current cost to employers.
So, do assumption changes drive up the cost of pensions?
No. However, as the view of the future changes, the amount needed for pension funding changes. Thus, what actually occurs in real life results in increased or decreased current costs. Changes in the actuarial calculations simply recognize changes in the view of the future.