Actuary recommends modest assumption changes; board told demographic updates could lower funded ratio

The Office of the State Actuary on Sept. 24 advised the Law Enforcement Officers' and Fire Fighters' Plan 2 Retirement Board to raise three long-term economic assumptions by 25 basis points and presented preliminary demographic assumption changes that, together, could leave the plan roughly 100% to 102% funded under projected 2025 conditions.

The recommended economic changes are a 0.25 percentage-point increase to the inflation assumption, a 0.25-point increase to the general salary growth assumption and an increase in the investment rate-of-return assumption to 7.25%. Sarah Baker, actuary with the Office of the State Actuary, told board members these changes would be reflected in the 6/30/2025 actuarial valuation and could be adopted by the pension funding council by Oct. 31 for some systems.

Why it matters: economic and demographic assumptions determine contribution-rate calculations, measured funded status and long-term plan affordability. The actuary said the changes would increase the plan's projected funded ratio by about 2 percentage points (driven mainly by the higher rate-of-return assumption), while the demographic changes (notably new mortality and retirement rates) were estimated to reduce funded status by roughly 2.5% to 4%.

Actuary presentation and rationale

Sarah Baker and Luke Maselink of the Office of the State Actuary (OSA) told the board the inflation and general salary growth recommendations come from a mix of historical data and external forecasts. "We recommend a 25 basis point increase in the inflation assumption," Maselink said, noting regional inflation in the Seattle-Tacoma-Bellevue area has historically outpaced national inflation and that short-term forecasts remained elevated in 2025.

On investment returns, Maselink said updated capital market assumptions and changes in the State Investment Board's simulation model increased the median and mean projected returns for the commingled trust fund. "We recommend an increase in the rate of return assumption up to 7.25%," he said, adding that higher assumed returns reduce calculated plan costs because more future benefits are expected to be covered by investment earnings.

Demographic study highlights

Mitch DeCamp and Sarah Baker presented preliminary results of the demographic experience study, a statutorily required review of non-economic assumptions performed about every six years. DeCamp said the study used 2014'to'2023 valuation data (2024 data were not included) and that several pandemic-era years were excluded or adjusted where they appeared to be outliers.

Key demographic recommendations included increases in retirement rates for members with 25 or more years of service, modest increases in service-based salary growth at early and late service levels, higher disability rates at most ages (though staff said disability changes contributed only a small portion of any funded-status change), and a material update to mortality assumptions. The mortality recommendations include moving from the older base tables to the Society of Actuaries' Pub-2016 public-safety mortality tables using amounts-weighted basis, adopting the newer MP-2021 mortality improvement scale, and retaining an age-offset (one-year) to better fit LEOFF Plan 2 experience.

Projected impacts and caveats

Mitch DeCamp presented a summary scenario: using current assumptions, the projection for the 2025 funded status was about 103%. Applying the new demographic recommendations would lower that projection to roughly 99% to 101%. Adding the economic assumption changes (the 25 basis-point upward adjustments) would raise that to an estimated 100% to 102% funded. DeCamp cautioned these are estimates pending the audited demographic report and the full 2025 valuation.

He also noted two items not reflected in the estimate: actual 2025 membership data (the 2024-to-2025 membership changes will be known only in next year's valuation) and actual investment returns for fiscal 2025. "Actual 2025 investment returns" were described as positive news not yet included in the projections; the office noted a 2024/25 return estimate of about 9.5% that had not been incorporated into the slides shown in September.

Board process and next steps

The OSA told the board the full 2025 valuation will be presented next summer and that Milliman will audit the demographic study later in the year. The board has the option to adopt economic and demographic assumption changes at its December meeting; any adopted changes would then be reflected in the 2025 valuation and used to inform contribution-rate setting for the 2027'29 biennium.