Date post: | 27-Mar-2015 |
Category: |
Documents |
Upload: | brooke-powell |
View: | 213 times |
Download: | 0 times |
Pension Liabilities in the U.S. Financial
AccountsSusan Hume McIntosh and Elizabeth Holmquist
Flow of Funds Section
Board of Governors of the Federal Reserve System
OECD Workshop on Pensions
Canberra, Australia
April 23, 2012
Presentation Outline
1. Summary of proposed changes
2. Current approach
3. International standards (SNA 2008)
4. Collaboration with BEA
5. New table layouts
6. Effect on household sector
7. Shift from DB plans to annuities
8. Underfunding/overfunding by sector
9. Ongoing and future work
April 23, 2013 2OECD Pension Workshop
April 23, 2013 OECD Pension Workshop 3
Proposed Changes for Sept. 2013
• Use BEA’s accrued liabilities series for private, state and local government, and federal government DB pension plans
• Show a new public and private aggregate pension table
• Show total household retirement assets
• Pension reserves becomes “pension entitlements”
• New instrument for “claims of pension fund on sponsor”
April 23, 2013 OECD Pension Workshop 4
Current Approach
• DC plans: liabilities equal amount invested plus investment income
• DB plans: liabilities equal assets held by pension funds for future pension entitlements
• IRAs: not included in pension sectors because they are not tied to a specific employer
• Life insurance annuities: included in the life insurance company sector and pension reserves of households
April 23, 2013 OECD Pension Workshop 5
International Standards (2008 SNA)
Pension entitlements
11.107 Pension entitlements show the extent of financial claims both existing and future pensioners hold against either their employer or a fund designated by the employer to pay pensions earned as part of a compensation agreement between the employer and employee.
April 23, 2013 OECD Pension Workshop 6
International Standards (2008 SNA)
Claims of pension fund on pension manager
11.109 When the pension manager is a unit different from the administrator, with the consequences that the responsibility for any deficit, or claims on any excess, rest with the pension manager, the claim of the pension fund on the pension manager is shown under this heading.
International Standards (2008 SNA)
April 23, 2013 OECD Pension Workshop 7
Financial InstrumentAsset Liability
FC HH NFC FC
Pension entitlements 11 11
Claim of pension fund on pension managers 3 3
April 23, 2013 OECD Pension Workshop 8
International Standards (2008 SNA)
Social security
17.191 In recognition of the fact that social security is normally financed on a pay-as-you basis, entitlements accruing under social security (both pensions and other social benefits) are not normally shown in the SNA.
April 23, 2013 OECD Pension Workshop 9
DB Pension Liabilities
• Calculated by BEA for July 2013 Comprehensive Revision
• Private: ABO approach using tax returns filed with PBGC; AAA corporate bond yield (5.5% recently) used for interest rate assumption
• State and local: ABO approach using sample of actuarial valuation reports covering 90% of assets back to 2000; Census Bureau will be collecting data going forward; AAA corporate bond yield used for discount rate
• Federal: PBO approach based on actuarial reports for civilian (1979 forward) and military plans (1985 forward) adjusted for plan changes.
April 23, 2013 OECD Pension Workshop 10
April 23, 2013 OECD Pension Workshop 11
April 23, 2013 OECD Pension Workshop 12
April 23, 2013 OECD Pension Workshop 13
April 23, 2013 OECD Pension Workshop 14
April 23, 2013 OECD Pension Workshop 15
April 23, 2013 OECD Pension Workshop 16
Claims of Private Plans on Corporations
• In 2008 and 2009, underfunding was about $250 billion for the top 100 firms with private DB pension plans, (Milliman)
• Financial corps. account for about 10% of the accrued liabilities (Milliman and BEA data using NAIC codes)
• Financial corps. represent only 5% of the underfunding (Milliman)
• Banks and insurance cos. have most of the private DB plans
• Bank DB plans are better funded than insurance companies DB plans
• Given that financial firms represent a small share and percentages will vary by year on whether under/overfunded, we attribute all under/overfunding to nonfinancial corporations
April 23, 2013 OECD Pension Workshop 17
April 23, 2013 OECD Pension Workshop 18
April 23, 2013 OECD Pension Workshop 19
April 23, 2013 OECD Pension Workshop 20
Shift from Defined Benefit Plans to Life Insurance Annuities
April 23, 2013 OECD Pension Workshop 21
April 23, 2013 OECD Pension Workshop 22
General Motorsand Prudential Insurance
• On June 1, 2013 GM offered 42,000 salaried retirees who retired after Oct. 1, 1997 and before Dec. 1, 2011 lump sum payments; roughly 30% accepted
• Purchased group annuity from Prudential Insurance for 76,000 salaried retirees who turned down lump sum or retired before Oct. 1, 1997; retirees get same payout
• Shifted $26 billion of pension obligations; Only $9.2 billion in pension obligations with $6.1 billion in assets left in U.S. salaried pension plan.
• Prudential getting 10% premium on transaction; expected to ultimately make $91 million of total profits on the deal
• Cost to employer is 110% to 115% of current liabilities
• No longer offers DB pensions to newly hired salaried workers.
April 23, 2013 OECD Pension Workshop 23
Verizon Communications and Prudential Insurance
• Oct. 2013 Verizon transferred $7.5 billion – 25% of total pension obligations -- to Prudential Insurance
• Covered 41,000 salaried employees who began receiving pensions before Jan. 1, 2010; retirees formerly represented by unions not included in buyout
• Verizon contributed $2.5 billion to its pension plan to raise funding to 80% of obligations and paid insurer premium of $1 billion (15% of 2011 cash flow from operations)
• DB plan closed to new hires, now placed exclusively in the 401(k) plan
April 23, 2013 OECD Pension Workshop 24
Decoupling DB Pension Plan from Employer
• Objective is to de-risk the pension plan (interest rate and longevity) while improving longer-term financial profile
• Employers no longer exposed to fluctuating interest rates and investment results which can affect contributions
• Investments shift from equities to mostly high-quality corporate bonds.
• PBGC will no longer insure benefits
• Neither GM nor Prudential will pay PBGC premiums (flat or variable based on underfunding) for annuitized obligations
• State guaranty associations provide partial coverage for Prudential annuities
• Prudential and MetLife two largest players in the buyout market
April 23, 2013 OECD Pension Workshop 25
April 23, 2013 OECD Pension Workshop 26
April 23, 2013 OECD Pension Workshop 27
Ongoing and Future Work
• Recently updated benchmarks and methodology for state and local government employee retirement plans (Census Bureau) for 2004:Q3 forward (March 2013)
• Updating benchmarks and methodology for private DB and DC pension plans assets (Department of Labor 5500) for 2006:Q1 forward (June 2013)
• Add State and local DC plans (403(b)s and 457s)
• Splitting CREF between private and state and local plans
• Add Private Benefit Guaranty Corporation (PBGC) to federal pension sector