Local Municipal Workshopp p

Assessing your Pension Plan

Joe NewtonJanuary 24 2012

Copyright © 2011 GRS – All rights reserved.

January 24, 2012

Look At Critical Issues Facing Both M b A d Th E lMember And The Employer

Income Replacement to the retired memberIncome Replacement to the retired member, including a predictable and dependable retirement annuityyAffordability to the taxpayers in an exchange for services► Short term costsSustainability of the Plan► Longer term costsEquity among the population segments(e uity ot e e a ily ea i e ual)

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(equity not necessarily meaning equal)

Managing the LiabilityManaging the Liability

Current benefit structure not found to meet objectives

Begin Benefit Modification 

Process

Assess Current Situation

Found to be economically unsustainable

Is there a better contribution strategyunsustainable

Can you earn more on investments?

Love It?Love It?

Do Nothing

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Assess Current SituationAssess Current Situation

Examine current retirement benefit structureExamine current retirement benefit structure►Ensure all benefits that can be reasonably expected to be paid from the plan are included

Analyze assumptions used in determiningAnalyze assumptions used in determining current and future costs►Experience Study due April 1st

Spend time understanding current liabilities and valuation resultsP f h fl j tiPerform cash flow projections►Include sensitivity on main cost drivers

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Purpose of Experience StudyPurpose of Experience Study

Assumptions are not static; they should occasionally p y ychange to reflect► New information► Mortality improvementy p► Changing patterns of retirements, terminations, etc.► Changing knowledgeRecent experience provides strong guidance for someRecent experience provides strong guidance for some assumptions (for example, turnover) and weak guidance for others (for example, the investment return rate)Based on results of an experience study the assumptionsBased on results of an experience study, the assumptions can be adjusted if necessary to provide the most accurate portrayal of future liabilities possible

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General ProceduresGeneral Procedures

The study should answer the followingThe study should answer the following questions for each assumption►What was the plan’s actual experience?►What was the plan s actual experience?►How does that compare with the current assumption?p

►Is a change warranted?Then, the final assumption set should be pinternally consistent as a whole

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Should include all Assumptions and Methodsand Methods

Economic assumptionsp► Price inflation (CPI)► Investment return► Salary increases (for individuals)► Payroll growth rate (for plan as a whole or overall budget► Payroll growth rate (for plan as a whole, or overall budget 

growth)► COLA provisionsDemographic assumptions► Mortality (Active Members & Retirees)► Disability► Retirement► Other terminations► Other terminationsActuarial Methods► Funding Method► Asset Smoothing Method

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g

General Findings from ERSRI i d l S iexperience study last Spring

The funded ratio has trended down over the last decade► Mostly due to investment performance, but also liability 

experience► Contribution rates have correspondingly trended up sharply, and 

are expected to continue to do soare expected to continue to do so► Assumptions have already been strengthened in 2003 and 2006Future economic growth likely to be suppressed compared to historical levels and current assumptionshistorical levels and current assumptions► Current inflation, wage inflation, payroll growth, and investment 

return rate need to be loweredRetirees are living longer► National trends have turned up► Rhode Island experience confirms this trend► Increases in life expectancy likely to continueM f h h i i b iMost of the other assumptions continue to be appropriate

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At the local levelAt the local level

Many plans will be too small to have a fullMany plans will be too small to have a full experience study performedIt may be appropriate to pattern the largerIt may be appropriate to pattern the larger assumptions after the MERS assumptions►Specifically the termination and mortality►Specifically the termination and mortality experience

►The economic assumptions have more psubjectivity, but should be compared back to what the MERS plan is using and differences should be explicitly notedshould be explicitly noted

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Affordability and SustainabilityAffordability and Sustainability

One of the key objectives for any governmentalOne of the key objectives for any governmental entity is to ensure the sustainability of the benefitsGovernmental entities do not want to “run outGovernmental entities do not want to  run out of money” and leave workers with less than promisedAlso do not want to pay too much, leaving less for other public servicesSustainability can be an economic measurementSustainability can be an economic measurement►The valuation tells us the ARC (annual required contribution)• If that ARC cannot be met then sustainability must be

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• If that ARC cannot be met, then sustainability must be reexamined

Defining SustainabilityDefining Sustainability

An entity has to be able to focus on its ownAn entity has to be able to focus on its own unique definition of economic sustainability►It may be a long term (e.g. 20 years) percent of payroll cost• Or percent of total budget

►It may be a long term dollar costy g►Sustainability can be determined from available resources, and perhaps from new revenue streams• Can include self correcting mechanisms• Can include self correcting mechanisms

►Once sustainability is defined, benefits can be designed to meet the sustainability requirementsWi h i bili h ill b i li i i f

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►Without sustainability, there will be an implicit tier of benefits

Projected Contribution Rates: St t E l U d t d th h FY2011State Employees: Updated through FY2011

42 35%50%

36.34%38.54%

42.35% 40.82%

30%

40%

FY 2016 StateC t ib ti $311M

20%

30%

FY 2012 St t

Contribution: $311M

0%

10%FY 2012 StateContribution: $149 M

2010 2013 2016 2019 2022 2025 2028Based on Estimated Actuarial Value of Assets as of June 30, 2011With Recognition of Deferred Investment LossesBased on Estimated Actuarial Value of Assets as of June 30 2011Based on Estimated Actuarial Value of Assets as of June 30, 2011

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•Assumes ARC met each year and actual investment return of 7.50% during each year•Assumes continuation of current amortization policy and current member rate•Payroll grows at assumed 3.75% per year

Sample Employer All E l C bi dAll Employees Combined

$60

$40

$50

$30

$10

$20

$0

2012 2017 2022 2027 2032 2037

Projected Contributions Assuming 3 75%Annual Growth

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•Assumes ARC met each year and actual investment return of 7.50% during each year•Assumes continuation of current amortization policy and current member rate•Payroll grows at assumed 3.75% per year

Projected Contributions Assuming 3.75% Annual Growth

Contribution Strategies: State EmployeesContribution Levels equal to FY2012 (22.98% employer) until 100% fundedFunding Ratio based on 20% return in FY2011

120%

80%

100%

40%

60%

0%

20%

2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046

5.75% actual investment returnwould extinguish fund

2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046Current Policy (19 year)

Current Contribution Extended

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•Assumes 22.98% employer contribution each year and actual investment return of 7.50% during each year after 2011•Payroll grows at assumed 3.75% per year

What investment return is needed? State Employees onlyState Employees only

45%50%

30%35%40%45%

15%20%25%30%

0%5%

10%

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031

9.00% each year7.50% each year20% for FY2011 & 2012 & 7.50% thereafter

Rate of Return:

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•Expected ARC at each valuation date based on stated return during each year•Assumes continuation of current amortization policy and current member rate•Payroll grows at assumed 3.75% per year

Contribution Strategies: State EmployeesCo i u io S a egies S a e E p oyees

44.73%50%

36.34%

32.65%30.81%

36.68%

25 00%30%

40%

26.88%32.65% 25.00%

14.11%1 %

20%

30%

0%

10%

2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 20402010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040With recognition of Current Deferred Losses

30 Year Reamortization

30 Year Staggered ($1 B at 20 years $1B at 25 years balance at 30 years)30 Year Staggered ($1 B at 20 years, $1B at 25 years, balance at 30 years)

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•Assumes ARC met each year and actual investment return of 7.50% during each year•Assumes continuation of current amortization policy and current member rate•Payroll grows at assumed 3.75% per year

Benefit ProvisionsBenefit Provisions

After looking at the assumptions theAfter looking at the assumptions, the investment earnings, contribution strategies, and other revenue sources, s a egies, a o e e e ue sou es,there is only one other place to increase the sustainabilityyThe cash outflows from the plan must be reduced in a combination of the above is not achievable

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Questions?

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