Office of Personnel Management

Retirement and Insurance Service

1920 1954 1959 1986

 

 

Federal Employee Benefit Programs

FINANCIAL MANAGEMENT LETTER

Number: F-97-08 Date: October 23, 1997

SUBJECT: Cost Factors for Pensions and Other Retirement Benefits

On December 20, 1995, the Federal Accounting Standards Advisory Board issued

Statement of Federal Financial Accounting Standards Number 5 (SFFAS-5) --

"Accounting for Liabilities of the Federal Government". Among other provisions,

SFFAS-5 establishes accounting and reporting standards for liabilities relating to

the Federal employee benefit programs (Retirement, Health Benefits and Life

Insurance). The adoption of SFFAS-5 is required for fiscal year 1997 financial

reporting. 

Currently, employing agencies recognize no cost for the pensions, health benefits

or life insurance their employees will receive after they retire. Instead, SFFAS-5

requires that employing agencies recognize the cost of pensions and other

retirement benefits during their employees' active years of service. So that you

may compute these costs, SFFAS-5 requires that the Office of Personnel

Management, as administrator of the Civil Service Retirement (CSRS) and Federal

Employees Retirement Systems, the Federal Employees Health Benefits Program,

and the Federal Employees Group Life Insurance Program, provide you with "cost

factors".

PENSION EXPENSE 

The Office of Personnel Management actuaries begin the process of determining

the costs factors by calculating the value of pension benefits expected to be paid

in the future. This calculation is based in large measure on assumptions they

make about the future; both economic (inflation, interest rates, and future salary
levels) and demographic (e.g., rates of retirement, mortality, and separation). 

After they 

calculate future benefits, the actuaries determine the amount of money that must

be contributed by and for covered employees to pay for it. Using an actuarial cost

method, the actuaries determine the percentage of an employee's pay that would

be sufficient to fund his/her projected pension benefit. The "cost factors" for the

Civil Service and Federal Employees Retirement Systems are these percentages of

pay; they are also referred to as "normal cost" rates. 

In February 1997, the Board of Actuaries of the Civil Service Retirement and

Disability Fund (CSRDF) adopted new economic and demographic assumptions. 

The new assumptions have resulted in lower 1997 cost factors for both the

Federal Employees Retirement System (FERS) and Civil Service Retirement System

(CSRS). Although the new cost factors were not effective until October 1, 1997,

for agency contribution purposes, they must be used to compute your 1997

Employer's Pension expense. 

Federal Employees Retirement System (FERS). The law requires that FERS be

fully funded. That means the amount contributed by and for FERS-covered

employees must be sufficient to cover the projected cost of providing a basic

pension benefit to them when they retire. For "regular" FERS employees, this

amount is 11.5 percent of pay. Thus, for regular FERS employees, the cost factor

for 1997 is 11.5 percent of basic pay. [Note that this cost factor pertains to the

basic-benefit component of FERS only -- not to the Thrift Savings Plan or Social

Security components.]

Civil Service Retirement System (CSRS). Most employees and their employers

each contribute seven percent of basic pay for CSRS coverage. The combined 14

percent of basic pay contributed by and for these "regular" CSRS-covered

employees, however, is less than the amount calculated to be sufficient to pay for

the projected CSRS benefit. The amount that, in fact, would be required to fund

fully the projected CSRS benefit, for regular CSRS-covered employees, is 24.2

percent of basic pay. Thus, for regular CSRS employees, the cost factor for 1997

is 24.2 percent of basic pay. 

Your agency may employ other categories of CSRS and FERS employees in

addition to "regular" employees. The chart below presents the major categories

of CSRS and FERS coverage and the 1997 cost factors pertaining to each:
Classification Cost Cost

CSRS FERS

Factor Factor

Regular 24.2 11.5

CSRS-offset 14.8 n/a

Law enforcement officers 40.0 24.6

Air traffic controllers 31.9 23.1

Members of Congress 29.3 16.5

Congressional employees 32.5 16.7

Military reserve technicians n/a 11.9

To calculate your Employer's Pension Expense, perform the following steps:

1. Determine the basic pay of employees subject to CSRS or FERS

withholdings for each CSRS and FERS category. [Basic pay is short for the

"annual basic salary or compensation"; it does not generally include

bonuses, allowances, overtime, holiday, or military pay. The CSRS and

FERS Handbook, Chapter 30, contains a complete definition of basic pay;

your payroll and personnel office should have a copy.] 

2. Multiply the basic pay for each category by the associated cost factor.

3. Compute the grand total of all of the individual computations performed in

Step 2 -- this is your "normal cost". 

4. Subtract the contributions deducted from the pay of all CSRS and FERScovered employees -- this is your Employer's Pension Expense. 

For a simplified illustration of the computation of Employer's Pension Expense,

take the case of fictional Agency XYZ. Agency XYZ, which has 50 "regular"

CSRS-covered employees and 25 "regular" FERS, computes its 1997 Employer's

Pension Expense, as follows: 
A B C D E F

Basic Pay Factor Cost Employer Employee Expense

 in 1997 (%) [AxB] Cont. Cont. [C-E]

Cost Normal 1997 1997 Pension

Employers

CSRS $2,500,000 24.2 $605,000 $175,000 $175,000 $430,000

FERS $1,250,000 11.5 $143,750 $142,500* $10,000 $133,750

Total $748,750 $317,500 $185,000 $563,750

* During 1997, actual FERS agency contributions were 11.4 percent of pay, based on a

normal cost of 12.2 percent.

Agency XYZ's Employer's Pension Expense for 1997 would be $563,750.

OTHER RETIREMENT BENEFITS 

The postretirement benefits administered by the Office of Personnel Management

are the Federal Employees Health Benefits Program (FEHB) and the Federal

Employees Group Life Insurance Program (FEGLI). So that you may compute your 

Employer's Other Retirements Benefit Expense, SFFAS-5 requires that we, as

administrators of the FEHB and FEGLI, provide you with the necessary cost

factors.

Past Accounting Practice. Prior to SFFAS-5, postretirement health benefits and

life insurance were accounted for on the cash basis of accounting. The Civil

Service Retirement and Disability Fund would recognize an expense at the time it

made a contribution (drawn from an appropriation account) to the retiree's health

benefits and life insurance premiums. Employing agencies would recognize no

expense whatsoever for the cost to provide health benefits and life insurance for

their retirees.

SFFAS-5 Requirements. SFFAS-5 prohibits the cash basis of accounting for

postretirement benefits. It requires employing agencies to recognize an expense

for the Government's cost of providing health benefits and life insurance to their 

employees after they retire. This expense is called the Employer's Other

Retirement Benefits (ORB) Expense.

Employer's Other Retirement Benefits (ORB) Expense - FEHB

In accordance with SFFAS-5, we have computed the cost factor you will need to

determine your Employer's ORB Expense relating to the FEHB for 1997. The cost
factor is $2,493 per employee enrolled in the FEHB. To compute your Employer's

ORB Expense, related to the FEHB, follow the following steps: 

1. To compute average enrollment, determine your enrollment in the FEHB

Program at three points-in-time during fiscal year 1997 -- on October 1,

1996; March 31, 1997; and September 30, 1997. 

2. Multiply your October 1, 1996, enrollment by 1; your March 31, 1997,

enrollment by 2; and your September 30, 1997, enrollment again by 1.

3. Divide the total computed in Step 2 by 4 -- this is your average FEHB

enrollment in 1997.

4. Multiply the average FEHB enrollment determined in Step 3 by the cost

factor -- this is your Employer's ORB Expense relating to the FEHB.

For example, assume Agency XYZ has the following enrollment in the

FEHB -- 70 on October 1, 1996; 66 on March 31, 1997; and 60 on

September 30, 1997. XYZ would compute its ORB Expense relating

to the FEHB, as follows:

10/1/96 3/31/97 9/30/97

Enrollment in FEHB 70 66 60

Multiplier 1 2 1

Product 70 132 60

Total 262

Divisor 4

Average Enrollment 65.5

Cost Factor $2,493

Employer's ORB Expense - FEHB $163,29

2

Employer's ORB Expense - FEGLI

In accordance with SFFAS-5, we have computed the cost factor you would use to

determine your Employer's ORB Expense relating to the Federal Employees Group

Life Insurance (FEGLI) Program. The cost factor for 1997 is .02 percent of basic

pay. Thus, employers would recognize an Employer's ORB Expense relating to the

Federal Employees Group Life Insurance Program of .02 percent of the basic pay

paid to each employee enrolled in the FEGLI Program in 1997. 
Assume Agency XYZ had 50 employees enrolled in FEGLI in 1997. 

These employees received basic pay of $2,500,000 in 1997. XYZ's

Employer's ORB Expense relating to FEGLI for 1997 would be $500

[$2,500,000 basic pay times .02 percent].

If you have any questions about any of the matters discussed in this letter, please

contact us on 202-606-0667.

Kathleen M. McGettigan J. Gilbert Seaux

Assistant Director Chief Financial Officer

 for Systems, Finance and Administration