Employer Update

At its November meeting, the VRS Board of Trustees approved FY 2025-2026 employer contribution rates for participating subdivisions.

The board also approved FY 2025-2026 contribution rates for health insurance credit for participating political subdivisions, Virginia Local Disability Program (VLDP) and the Line of Duty Act (LODA) Fund.

What’s Next?

Next quarter, VRS will send actuarial reports, including the retirement plan defined benefit contribution rate, to all political subdivisions, along with rates for the health insurance credit, if applicable.

Employer contribution rates provided for non-professional school board and political subdivision plans, including VLDP and the health insurance credit for political subdivisions, are final once certified by the VRS board.

In case you missed it: See the November Employer Update for more information about the FY 2025-2026 board-certified employer contribution rates for statewide plans as well as other post-employment benefits (health insurance credit, group life and the Virginia Sickness and Disability Program).

A Closer Look at Local Plans

The June 30, 2023, valuations conducted by Gabriel, Roeder, Smith & Company (GRS), the VRS plan actuary, highlighted factors that influenced contribution rates:

• Overall, the number of participants in political subdivision pension plans increased 4% from the prior year.
• The average salary of political subdivision employees increased 6.2% from the prior year.
• Due to persistent inflation, retirees received near-maximum or maximum cost-of-living adjustments in 2022 and 2023.
• Prior years’ investment returns are phased in gradually over time to help keep rates level.

A Closer Look at Contribution Rates

Political subdivision plans contribution rates are calculated based on the assets and liabilities of each individual participating employer.

Employer contributions will vary based on:

• Benefit offerings (enhanced hazardous duty coverage, for example).
• Demographics of the employee group covered.
• Current funded level of the plan.

Important reminder about Hybrid Retirement Plan rate separation: Beginning July 1, 2024, the board-certified employer contribution rates for the retirement plans will apply only to the defined benefit portion of the benefits. Previously, the board-certified employer rates also included an estimate of the defined contributions for Hybrid Retirement Plan members. Moving forward, contribution rates provided to employers no longer will include an estimate of employers’ defined contribution match. Instead, the defined contribution amount will vary based on each member’s voluntary contributions election. Employers with hybrid plan members will also continue to make matching defined contribution hybrid plan contributions of 1.0% to 3.5% based on member elections. See hybrid rate separation.

Overall, the defined benefit rate will increase less than 1% for the majority of political subdivision employers (70%) based on 2023 valuations.

Of the 594 political subdivision plans:

• 182 will experience a decrease in their defined benefit rates.
• 223 will see a defined benefit rate increase of less than 1%.
• 168 will experience increases ranging from 1% to 4%.
• The average actuarially determined employer defined benefit rate for employers that don’t offer enhanced hazardous duty benefits is 5.58%.
• The average defined benefit rate for employers that do offer enhanced hazardous duty benefits is 14.34%.

Funded Status Remains Stable

The aggregate funded status for all political subdivision plans was 88% as of June 30, 2023, on an actuarial value of assets basis, up from 87% in the last rate-setting valuation in 2021.

About two-thirds of the local pension plans (401 employers total) are at least 90% funded on an actuarial value of assets basis.

While the funded status and contribution rates remain stable, plan unfunded liabilities remain. In October, the VRS board approved a funding policy change to reset the total unfunded accrued liability to be amortized over 20 years. This means a slight increase in contribution rates in the short term; however, the action results in getting money into the fund more quickly to be invested sooner, leveling out the amortization payments in later years, and generally generating savings over time. The impact of this change on political subdivisions will vary based on individual plan assets and liabilities.

Line of Duty Act Premiums Increasing

The VRS board also certified the FY 2025-2026 contribution rate for the Line of Duty Act (LODA). Pending approval from the General Assembly, participating employers will pay $995 per full-time employee, an increase from $830 this fiscal year.

LODA benefits are funded on a “pay-as-you-go” basis, covering the health care premiums for current beneficiaries as well projected costs of any new claims. Because contribution rates are not pre-funded, participating employers generally should expect to see annual increases.

The LODA rate increase also can be attributed to:

• Updates to health care cost trends forecasting higher health care inflation in the short term.
• Recent legislation expanding presumptions of compensability for certain employee groups.