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Atlantic Connection 2013, Miami, Florida
Public Pensions & Pension DeficitsNew Ideas New Solutions?
Presented by: Marcia Tam-Marks, FSA
Morneau Shepell2 Confidential – Not for Distribution
Introduction and Outline
• Public pensions?- Pensions for Government Employees (Public
Servants)- Social Security
• Financing options• Funded levels of public sector plans in Canada• Benefit design / contribution levels - Caribbean• Liability profile and gain and loss analysis of sample
plan
Morneau Shepell3 Confidential – Not for Distribution
Financing Options
• Pay As You Go- Benefit payments are part of annual expenditure- It is usually not pre-funded- Vulnerable to increase in pensioner / active ratio- As plan matures cost increases- Unless the return on investments exceeds the GDP growth
rate pre-funding does not reduce the fiscal burden (applies to public sector plans)
Morneau Shepell4 Confidential – Not for Distribution
Financing Options
• Funded plans- Relies on a pension fund, productively invested, to pay for
the benefits of retired members.- Vulnerable to low interest rates, disappointing stock
market performance, increasing inflation, longevity, etc. - Contribution rates must be increased to sustain benefits or
investment earnings must fund the balance of the cost.• Some public sector plans are partially funded by design.• Initial unfunded liability at start of plan which continues
unless there is a plan to eliminate the deficit – lump sum payments, increasing contributions
Morneau Shepell5 Confidential – Not for Distribution
Global Financing
Source: Civil-service Pension Schemes around the World, Robert Palacios & Edward Whitehouse, World Bank May 2006.
Morneau Shepell6 Confidential – Not for Distribution
Conclusion of a World Bank Discussion Paper
“The civil service pension schemes tend to be more generous and less financially viable than those covering the rest of the formal sector. Taking the scope of coverage into account, they are also more expensive. Costs have spiraled in many countries as the schemes have matured and past promises have come due. Most projections show that the situation will worsen without reform, raising concerns about possible crowding out of important social programmes.”
Civil Service Pension Schemes Around the World, World Bank Discussion Paper, May 2006.
Morneau Shepell7 Confidential – Not for Distribution
Funding Level of 85 Public Sector Plans (84 Canadian and one Caribbean)
• Source: Morneau Shepell Limited Pensions Database
14
32
29
10
Funding Level
0 to 75%
75% to 90%
90% to 100%
Above 100%
Morneau Shepell8 Confidential – Not for Distribution
Statutory retirement age (Current Law)*
Early retirement
age *
Minimum Vesting Period *
Canada 65 60 rUnited States 67 62 10Antigua and Barbuda 60 - 10
Barbados 65 60 10Bolivia 65 - -Dominica 60 - 10Grenada 60 - 10Guyana 60 - 15Jamaica 60/65 - 28.86
St. Kitts and Nevis 62 - 10St. Lucia 63 60 13
St. Vincent and the Grenadines 60 - 10Suriname .. ..
Trinidad and Tobago 60 - 15
Notes:Not available: .. Not applicable: -
r: Qualifying conditions require a certain number of year of residence p: Qualifying condition are measured in terms of points which are gained through accruing years of contribution.
Qualifying Conditions (Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pagePK:148956~piPK:216618~theSitePK:396253,00.html)
Morneau Shepell9 Confidential – Not for Distribution
Contribution Rates and Scheme Design(Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pagePK:148956~piPK:216618~theSitePK:396253,00.html)
Employee Employer Total Programs Employee Employer TotalCanada 4.95 4.95 9.9 o-d-s/ sm/ w/ u/ f 6.7 7.4 14.1United States 6.2 6.2 12.4 o-d-s/ sm/ w/ u/ f 7.7 9.2 16.9Antigua and Barbuda 3 5 8 1 o-d-s/sm 3 5 8
Barbados 6.75 6.75 13.5 3 o-d-s/sm/w/u 7.5 7.5 15
Dominica 4 6.75 10.75 o-d-s/sm/w 4 7.75 11.75
Grenada 4 5 9 o-d-s/sm/w 4 5 9
Guyana 5.2 7.8 13 o-d-s/sm/w 5.2 7.8 13
Jamaica 2.5 2.5 5 o-d-s/sm/w/f 2.5 2.5 5
St. Kitts and Nevis 5 5 10 o-d-s/sm/w 5 6 11
St. Lucia 5 5 10 o-d-s/sm/w 5 5 10
St. Vincent and the Grenadines 3.5 4.5 8 o-d-s/sm/w 3.5 5 8.5
SurinameTrinidad and Tobago 3.2 6.4 9.6 o-d-s/sm/w/f 3.605 7.21 10.815
Notes:Not available: ..
Not applicable: -
o: Old Age; d: Disability; s:Survivorship; sm:Sickness and Maternity; w:Work Injury; u:Unemployment;f:Family Allowancev: Varies according the income levelw: Weekly rate of contributionHigh Income OECD:
Latin America & Caribbean
3. Barbados: Contribution rates for private sector employee, government temporary employees and apprentices. For government
Pillar 1 Social Security (all programs)
1. Canada: Unemployment contribution rate for both employer and insured person are different in Quebec.8. United States: Unemployment employer's contribution rate varies depending on federal taxes and state programs.
1. Antigua & Barbuda: Contribution rate for insured person in public sector corresponds to 2% of covered monthly earnings.
Morneau Shepell10 Confidential – Not for Distribution
Dependency Ratios(Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pagePK:148956~piPK:216618~theSitePK:396253,00.html)
20002001200220032004200520062007200820092010Recent Year(% GDP)Canada 18.5 18.5 18.6 18.7 18.8 18.9 19.1 19.3 19.6 19.9 20.3 2009 4.50
United States 18.7 18.7 18.6 18.5 18.5 18.5 18.6 18.7 18.9 19.1 19.5 2010 6.80Antigua and Barbuda 2006 2.5
Dominica 2006 4.00
Barbados 14.6 14.5 14.4 14.4 14.3 14.2 14.1 14.1 14.1 14.2 16.0 Dominican Republic 8.3 8.5 8.6 8.8 8.9 9.1 9.2 9.3 9.5 9.6 10.0 2009 0.69
Grenada 13.3 13.0 12.8 12.5 12.3 12.0 11.7 11.4 11.1 10.8 11.0 2006 2.00
Guyana 7.9 8.1 8.3 8.5 8.8 9.0 9.1 9.2 9.3 9.4 6.9 2010 0.07Haiti 7.1 7.2 7.2 7.2 7.2 7.3 7.3 7.3 7.3 7.3 7.4
Jamaica 12.5 12.6 12.6 12.7 12.7 12.6 12.6 12.5 12.4 12.3 12.4 2009 0.12St. Kitts and Nevis 2006 2.70
St. Lucia 12.6 12.2 11.9 11.5 11.1 10.8 10.6 10.4 10.3 10.2 10.0 2006 1.70St. Vincent /Grenadines11.2 11.2 11.2 11.3 11.2 11.1 11.0 10.7 10.5 10.2 10.2 2006 1.50Suriname 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.9
Trinidad and Tobago 8.7 8.6 8.6 8.7 8.7 8.8 8.9 9.0 9.1 9.3 9.6 2010 4.35
Population + 65 /(Working Age Population)Public pension spending
Morneau Shepell11 Confidential – Not for Distribution
Pension Spending to GDP (World)(Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pagePK:148956~piPK:216618~theSitePK:396253,00.html)
Morneau Shepell12 Confidential – Not for Distribution
Situation of Schemes and Focus
• Many public pension schemes face difficulties due to demographic and economic factors.
• For civil service pension the focus should be on sustainability since most are unfunded.
• Contributory social security schemes are mainly partially funded so the focus should be on contribution stability.
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Some Causes of Unfunded Liabilities
• Low than expected investment returns• Lower than expected post-retirement mortality• Non-compliance• Original unfunded or partially funded design • Government Fiscal Deficits• Administrative Inefficiencies• Disconnect between benefit improvements and contribution
rate increases• Maturing plan profile• Reciprocal agreements
Morneau Shepell14 Confidential – Not for Distribution
Range of Caribbean NIS Pension Benefits / Contributions
• Source: International Social Security Association (ISSA) Country Profiles at http://www.issa.int/Observatory/Country-Profiles
Country EE contributions ER Contributions Maximum annual earnings Basic Pension Benefit Average WageAntigua and Barbuda 3% 5% EC$54,000 25% of insured's average earnings in best 5 of last 10 years Best 5 years of last 10 yearsBahamas 3.90% 5.90% BAH$26,000 30% of covered wages in best 3 of last 10 years Best 3 years of last 10 yearsBarbados 5.93% to 13.50% 5.93% to 6.75% B$50,180 40% of average covered earnings Best 5 yearsBermuda Ber$30.40 per week Ber$30.40 per week BER$200,000 Ber $219.53 per weekBVI 3.25% 3.25% $36,199.80 30% of average covered wage in the best 9 years of contributions Best 9 years of contributionsCanada 4.95% 4.95% C$3,500 - C$48,300 25% of average monthly pensionable earningsGrenada 4% 5% EC$42,000 30% of average weekly wage Best 5 years /52Jamaica 2.50% 2.50% J$1,000,000 J$2,400 per weekGuyana 5.20% 7.80% G$1,593,956 40% of average weekly wage best 3 years of last 5St. Lucia 5% 5% None 40% of of average covered earnings, min $300 best 5 yearsSt. Kiits & Nevis 5% 5% EC$78,000 30% of average annual earnings, min EC$400 best 3 years of last 15yearsSt. Vincent & the Grenadines 3.50% 4.50% EC$780 - EC$ 52,000 30% of average annual earnings, min EC$280 best 3 years of last 15yearsTrinidad and Tobago 3.20% 6.40% TT$ 6,240 - TT$99,580 30% to 48% of average weekly wage, min TT$2,000 per month career averageUnited States 6.20% 6.20% US$110,100 maximum $2,326 per month average of 35 highest years
Morneau Shepell15 Confidential – Not for Distribution
Liability Profile of a Sample Pension Plan
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
2010 2012
Mill
ions
Retired
DVS
Actives
Morneau Shepell16 Confidential – Not for Distribution
Funded Position of the Sample Pension Plan
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2010 2012 2013 2014
Mill
ions
Assets
Liabilities
Morneau Shepell17 Confidential – Not for Distribution
Sample Pension Plan Gain and Loss
-20-15-10
-505
10152025
Mill
ions
Gain and Loss Experience
Morneau Shepell18 Confidential – Not for Distribution
Sensitivity Analysis for Sample Pension Plan
Assumption Change Impact on Total Liability (%)
Interest rate 1.0% increase (11.7)1.0% decrease 14.6
Salary increase rate 1.0% increase 4.01.0% decrease (3.6)
Inflation 1.0% increase 9.71.0% decrease (8.3)
Life Expectancy 1.0% increase 2.61.0% decrease (2.4)
Morneau Shepell19 Confidential – Not for Distribution
New Entrant Cost Example
Salary $70,000 $70,000 $70,000 Accrual Rate 2% 1.50% 1.25%Interest Rate 6.50% 6.50% 6.50%Salary increase 4.25% 4.25% 4.25%Form of benefit Life and 5 yr GuaranteeCOLA 3% every 2 yearsNRA 65Lump Sum 11.5 x 25% Annual PensionMortality GAM 94
Male Age Contribution Rate % Salary30 12% 9% 8%35 14% 10% 8%40 15% 11% 9%45 17% 13% 10%50 19% 14% 12%
Morneau Shepell20 Confidential – Not for Distribution
Conclusions
• Plan design – be careful when increasing benefits and contributions – consider relationship and impact on funded position – do actuarial costing instead of doing it in isolation
• Consider new entrant (n/e) profile – typically contribution rate more than cost of benefits for younger n/e
• Longevity risk is real and significant• In addition to interest rates, other plan experience should be
consistently monitored to determine sources of gains and losses – early retirement incidence and benefits, increase in longevity, new entrant profile, salary and merit increases, level of indexation etc.
Thank YouContact [email protected]