Colorado PERA Defined Benefit Pension Plan Funding Policy

Transcription

1 Clrad PERA Defined Benefit Pensin Plan Funding Plicy I. Intrductin The Clrad Public Emplyees Retirement Assciatin (PERA) maintains five pre-funded, hybrid defined benefit pensin plans ([i.e., State Divisin Trust Fund, Schl Divisin Trust Fund, Lcal Gvernment Divisin Trust Fund, Judicial Divisin Trust Fund, and Denver Public Schls (DPS). ) Divisin Trust Fund]. Each defined benefit pensin plan is funded thrugh PERA-affiliated emplyer cntributins, emplyee member cntributins, and the investment earnings resulting frm thse cntributins. The fixed cntributin rate at which each divisin s emplyers cntribute is determined by the Clrad General Assembly and defined within the statutes gverning PERA. The purpses f this funding plicy are t state the verall funding gals and annual actuarial metrics and t guide the PERA Bard f Trustees (Bard) when cnsidering whether t pursue r supprt prpsed cntributin and benefit legislatin. Finally, tthe plicy alswill includes a brief list f gvernance respnsibilities regarding the cmmissining, cllectin, and review f actuarial infrmatin, as described in the Bard s Gvernance Manual. PERA als maintains tw pre-funded defined benefit retiree health care subsidy plans (i.e., Health Care Trust Fund and DPS Health Care Trust Fund), classified as ther pstemplyment benefit (OPEB) plans. The funding plicy regarding the retiree health care subsidy plans On XXXXX XX, 201X, the Bard apprved a separate OPEB funding plicy recgnizing the adptin and implementatinwill be revised and updated after the cmpletin and release f the anticipated Gvernmental Accunting Standards Bard (GASB) Financial and Accunting Standards Statement N. 74, applicable t OPEB. Until that time, the current funding plicy will remain in frce with regard t the health care subsidy plans administered by PERA. It is the intentin f the Bard that this funding plicy be cnsidered a wrking dcument, reviewed peridically and, as necessary, altered in the future thrugh frmal actin f the Bard. The final page f this dcument cntains the review and revisin/adptin histry pertaining t the funding plicy f the PERA defined benefit pensin plans. Cmment [KH1]: After definitins f the plan types and listing f names, we tried t be cnsistent with the use the wider-scpe Pensin and OPEB references thrughut the dcument regarding the PERA Divisin Trust Funds and Health Care Trust Funds fr ease f wrding and t better align with the subsectins nw existing in the PERA CAFR (within the Financial and Actuarial sectins). Cmment [KH2]: Mentins the existence f the OPEB plans. Cmment [KH3]: Speaks t the adptin f the OPEB funding plicy. II. Backgrund In respnse t the unfavrable investment market f 2008, and in additin t the funding plicy adpted in Nvember 2007, the Bard set the fllwing guiding principles in 2009 in the develpment f a cmprehensive package t maintain lng-term sustainability f the pensin plans: Shared respnsibility amng members, retirees, and emplyers; Intergeneratinal equity; Preservatin f the defined benefit plan; Preservatin f prtability thrugh the maintenance f existing benefit structures fr the different divisins; and Develpment f recmmendatins that wuld have little-t-n shrt-term impact n member behavir. In 2009 and 2010, these guiding principles benefited the Bard and all the stakehlders assciated with the pensin plan as slutins t the immediate funding situatin were explred. The Bard cnstructed a series f plan prvisin changes, enlisting the philsphy f the guiding principles under the umbrella f shared respnsibility and cmmunicated their recmmendatins t the General Assembly. Senate Bill was the culminatin f all the prvisinal and cntributin changes that were t set PERA s curse tward sustainability. Senate Bill als cntained the fllwing funding and annual increase requirements, which nw are embedded in Clrad Statute and will be implemented regardless f the Bard s pensin funding plicy: Per C.R.S (8), and (9), the AED and the SAED are adjusted based n the year-end actuarial funded rati within a particular divisin; If a divisin trust fund s actuarial funded rati; 1 Page

2 Clrad PERA Defined Benefit Pensin Plan Funding Plicy Reaches 103 percent, a decrease in the AED and SAED is mandated, and, Subsequently falls belw 90 percent, an increase is mandated. Fr the Lcal Gvernment and Judicial Divisins, if the actuarial funded rati reaches 90 percent and subsequently falls belw 90 percent, an increase in the AED and SAED is mandated. Increases in AED and SAED cannt exceed the statutry maximum allwable limitatin. Per C.R.S , if the cmbined pensin divisins trust fund actuarial funded rati; Reaches 103 percent, the upper limit f the annual increase shall be increased by nequarter f ne percent, and, Subsequently falls belw 90 percent, the upper limit f the annual increase shall be decreased by ne-quarter f ne percent. These statutry elements, in additin t the current schedule f emplyer cntributin rates, assist in the nging balance f shared respnsibility. It is nt the intentin f this Bard, thrugh the develpment f this funding plicy, t undermine r circumvent the wrk accmplished by Senate Bill , but rather t ensure cntinued fiduciary cmmitment thrugh sund gvernance practices and recgnitin f these statutry funding plicies. The cmbined funding plicy regarding PERA s pensin and OPEB plans, adpted by the Bard in Nvember 2007, was in frce with regard t the pensin plans thrugh March 19, On March 20, 2015, the Bard apprved a separate pensin funding plicy with regard t these plans recgnizing the adptin and implementatin f the GASB Statement N. 67, applicable t pensin plans. This funding plicy was first effective with the December 31, 2014, actuarial valuatin and has been updated and adpted as indicated n the last page f the dcument. Cmment [KH4]: After the 2018 Legislative sessin, if the Variable Mechanism (r sme derivatin theref) is adpted, the Bard may want t mentin it r briefly describe it prir t r within this paragraph. Cmment [KH5]: This paragraph prvides the histry f the adptin f the pensin funding plicy. III. Funding Gals Preservatin f the defined benefit plan structure f prviding lifetime retirement benefits t the emplyees f PERA-affiliated emplyers, reflecting the fact that PERA members are nt cvered under Scial Security. Demnstratin f transparency and accuntability thrugh the cntinued maintenance f a defined benefit pensin plan funding plicy fr the stakehlders f PERA. Achievement f a cmbined divisins trust fund actuarial funded rati greater than r equal t 110%. Once the 110% cmbined funded rati is achieved, fllwing (1) the cmplete discntinuance f AED and SAED cntributins, and (2) the restratin f the annual increase t pre-2010 levels pursuant t C.R.S , the Bard will cnsider and/r supprt the fllwing actins, as rdered, as lng as the funded rati, either cmbined r individual by divisin, des nt fall belw 100% after cnsideratin f the prpsed change: Examinatin and pssible actin f de-risking the entire planttal trust fund, including all divisins Reductin in the base cntributin rate(s) Adptin f a benefit enhancement, beynd restratin f the annual increase as described abve. If the 110% cmbined funded rati benchmark is attained thrugh the assistance f certain funding arrangements where assets, utside f statutry cntributins, are added t the plans, and results in additinal tax-payer bligatin, the payment methd and duratin f this debt shuld be cnsidered prir t any supprtive actin taken regarding benefit enhancements. Dedicatin t the balance between: Cntributin rate stability keeping cntributins relatively stable ver time, and 2 Page

3 Clrad PERA Defined Benefit Pensin Plan Funding Plicy Intergeneratinal equity allcating csts ver the emplyees members perid f active service. Dedicatin t the systematic reductin f the unfunded actuarial accrued liabilities (UAAL), subject t the required actin by the state legislature as described in C.R.S (8), (9), and , and as briefly summarized abve in Sectin II. Recgnitin that within a multiple-emplyer cst-sharing defined benefit plan there are beneficial elements f pled risk, bth in the accrual f plan liabilities, recgnizing actuarial gains and lss by divisin, rather than by emplyer; and in the accumulatin f plan assets thrugh the engagement f an apprpriate level f asset risk management. IV. Annual Actuarial Metrics Belw is a list f actuarial metrics t be assessed n an annual basis as f the actuarial valuatin date. The Bard recgnizes that a single year s results may nt be indicative f lng-term trends and prjected results. Funded ratis Calculate and review by divisin: The actuarial funded rati based n the actuarial value f plan assets divided by the defined benefit pensin plan s actuarial accrued liability (AAL), and The market value funded rati based n the market value f plan assets divided by the defined benefit pensin plan s AAL. Funding perid T be determined fr each divisin with respect t the divisin s applicable cntributin rates. A funding perid is the amrtizatin perid required t pay ff that divisin s UAAL cnsidering the resurces available. Funding perids fr each divisin will be determined in the annual actuarial valuatin in relatinship t bth Statutry cntributin rates, and Actuarially determined cntributin (ADC) rates. Cntributin rate cmparisn Calculate and review by divisin. Actuarial Prjectins Perfrm and review, by divisin, Actuarial prjectins cnsidering apprpriate benefit prvisins, salary and demgraphic data, actuarial assumptins, membership grwth, and statutry cntributin rates in rder t determine the sustainability f each divisin under their benefit prvisins and statutry cntributin rate structure. Prjectin mdeling that allws fr the testing f prjectin results under varius ecnmic and demgraphic stress cnditins. V. Funding Valuatin Elements Annually, the Bard s actuary will perfrm an actuarial valuatin fr funding purpses, and calculate ADC rates against which t cmpare cntributin rates mandated under State statute. The ADC will be the sum f a payment based n nrmal cst and a payment n the UAAL. The nrmal cst and the amunt f payment n the UAAL are determined by the fllwing three majr cmpnents f a funding valuatin: Actuarial Cst Methd: This cmpnent determines the attributin methd upn which the cst/liability f the retirement benefits are allcated t a given perid, defining the nrmal cst r annual accrual rate assciated with the prjected benefits. 3 Page

4 Clrad PERA Defined Benefit Pensin Plan Funding Plicy The Entry Age Nrmal Cst Methd (EAN), as is used fr PERA s annual actuarial valuatin purpses, is t be used fr the determinatin f the nrmal cst rate and the actuarial accrued liability fr purpses f calculating the ADC. Under this methd, nrmal cst is calculated using benefits based n prjected service and salary at retirement and is allcated ver an individual s career as a level percent f payrll. Because EAN nrmal cst rates are level fr each participant, the nrmal cst pattern fr the entire plan under EAN is mre stable in the face f demgraphic shifts in the wrkfrce. It is this nrmal cst stability that makes the EAN methd the preferred funding methd fr the majrity f public defined benefit pensin plans. Asset Valuatin Methd: This cmpnent dictates the methd by which the asset value, used in the determinatin f the UAAL, is determined, which culd be a market value r a smthed actuarial value f trust assets. Because investment markets are vlatile and defined benefit pensin plans typically have lng investment hrizns, applicatin f an asset-smthing technique can be an effective tl t manage cntributin vlatility and prvide a mre cnsistent measure f pensin plan funding ver time. Asset-smthing methds reduce the effect f shrt-term market vlatility n cntributins, while still tracking the verall mvement f the market value f plan assets, by recgnizing the effects f investment gains and lsses ver a perid f years. The asset valuatin methd t be used shall be a fur-year smthed market value f assets. The difference between actual market value investment returns and the expected actuarial investment returns is recgnized equally ver a fur-year perid. Amrtizatin Methd: This cmpnent prescribes, in terms f duratin and pattern, the systematic manner in which the difference between the actuarial accrued liability and the actuarial value f assets is reduced. Once established fr any cmpnent f the UAAL, the amrtizatin perid fr that cmpnent will be clsed and will decrease by ne year annually. The amrtizatin payment will be determined n a level percentage f pay basis. The length f the amrtizatin perids will be as fllws: Existing UAAL n December 31, years. Any increase (r decrease) in the UAAL existing as f December 31, 2014 remaining perid f the initial 30-year perid frm the date f the valuatin. Annual future actuarial experience gains and lsses 30 years frm the date f the valuatin. Future assumptin changes 30 years frm the date f the valuatin. Future benefit enhancements/reductins the number f years, as determined by the Bard, t represent the anticipated duratin f payment f the enhancement r, if a reductin, duratin f the benefit t the plan. This determinatin will be based n the nature f the benefit change and the demgraphics f the membership grup affected by the change, nt t exceed 25 years frm the date f the valuatin. If any future annual actuarial valuatin indicates a divisin has a negative UAAL, the ADC shall be set equal t the Nrmal Cst until such time as the funded rati equals r exceed 120%. At that time, the ADC shall be equal t the Nrmal Cst less an amunt equal t 15 year amrtizatin f the prtin f the negative UAAL abve the 120% funded rati. The target amrtizatin perid nted abve regarding new UAAL will be applied fr funding benchmark and RSI reprting purpses. Alternative ADCs, will be determined by divisin, by applying the layered amrtizatin methdlgy as described abve, using a 25-year clsed perid, a 20-year clsed perid, and a 15-year clsed perid, in lieu f the 30-year perid, fr amrtizatin f new UAAL. These cmparatives are t appear in the Cmprehensive Annual Financial Reprt (CAFR) as a demnstratin f the transparency and accuntability funding gal delineated in Sectin III f this dcument. 4 Page Cmment [KH6]: Depending n final 2018 PERA legislatin, this date may change. Cmment [KH7]: Depending n final 2018 PERA legislatin, this date may change.

5 Clrad PERA Defined Benefit Pensin Plan Funding Plicy In cnjunctin with the three majr cmpnents discussed abve, a number f actuarial assumptins are used t develp the annual actuarial metrics, as well as the ADC rates, and are described in detail in the annual actuarial valuatin reprt. The actuarial assumptins are derived and prpsed by the Bard s actuary and adpted by the PERA Bard f Trustees in cnfrmity with the Actuarial Standards f Practice issued by the Actuarial Standards Bard. The assumptins represent the Bard s best estimate f anticipated experience under the benefit prvisins f PERA and are intended t be lng-term in nature. In the develpment f actuarial assumptins, the Bard cnsiders nt nly past experience but als trends, external ecnmic frces, and future demgraphic and ecnmic expectatins. Actuarial Assumptins Actuarial assumptins are generally gruped int tw majr categries: Demgraphic assumptins, which include rates f terminatin, retirement, disability, mrtality, etc., and Ecnmic assumptins, which include investment return, salary increase, payrll grwth, and inflatin, etc. Actuarial assumptins d nt impact the ttal cst f the plan (benefit payments and expenses), but rather the timing f prescribed cntributins. T the extent that actuarial experience deviates frm the assumptins, and actual cntributins deviate frm prjected, experience gains and lsses will ccur. These gains (r lsses) then serve t reduce (r increase) the prjected future cntributins necessary t achieve r sustain a certain actuarial standard. It is in this vein that the ADC rates may help indicate if the statutry cntributin rates are adequate t meet the future cst requirements f the plan, althugh the ADC calculated in valuatin results has limitatins due t changing csts ver time. In Clrad PERA s situatin, until future scheduled cntributin increases are fully realizedcnsidering varius benefit tiers currently in effect within the Clrad PERA defined benefit pensin plan, the results f the actuarial prjectins will be the best indicatin f the adequacy f the statutrily prescribed pensin cntributin schedule. VI. Gvernance Plicy/Prcesses As delineated in the PERA Gvernance Manual, belw is a list f specific actuarial and/r fundingrelated studies, the frequency at which they shuld be cmmissined/requested by the Bard, and additinal respnsibilities relating t the studies: Actuarial Valuatin (perfrm annually) The Bard is respnsible fr reviewing PERA s annual actuarial valuatin reprt; and submitting a summary reprt t the Legislative Audit Cmmittee and the Jint Budget Cmmittee f the General Assembly, tgether with any recmmendatins cncerning such liabilities that have accrued. In additin, the Bard, in cnsultatin with the pensin their retained actuary, will prvide recmmendatins t the Clrad General Assembly regarding any necessary adjustments t the statutry emplyer and member cntributin rates. Experience Analysis (perfrm peridically, histrically perfrmed apprximately every fur years) The Bard is respnsible fr ensuring that an experience analysis is perfrmed as prescribed, fr reviewing the results f that study, and fr apprving the actuarial assumptins and methdlgies t be used fr all actuarial purpses relating t the defined benefit pensin and OPEB plans. Actuarial Audit (perfrm every five years, r the appintment f a new actuarial firm will satisfy requirement) The Bard is respnsible fr ensuring that an actuarial audit is perfrmed as prescribed and fr reviewing the results f that audit. Asset Liability Study (perfrm at least every three t five years, r mre frequently if necessary) The Bard is respnsible fr ensuring that a study f the relatinship between the defined benefit trust assets and liabilities is perfrmed as prescribed and fr reviewing the results f that study. Cmment [KH8]: Even thugh this is the Pensin Plan Funding Plicy, gvernance applied t bth plans, s I thught bth shuld be mentined here. 5 Page

6 Clrad PERA Defined Benefit Pensin Plan Funding Plicy Review f the Defined Benefit Pensin Plan Funding Plicy and the Defined Benefit OPEB Plan Funding Plicy (perfrm peridically) The Bard is respnsible fr the peridic review f the funding plicies applicable t the defined benefit pensin and OPEB plans funding plicy, as is deemed necessary. Cmment [KH9]: Even thugh this is the Pensin Plan Funding Plicy, gvernance applied t bth plans, s I thught bth shuld be mentined here. VII. Glssary f Funding Plicy Terms Actuarial Accrued Liability (AAL): The AAL is the value at a particular pint in time f all past nrmal csts. This is the amunt f assets the plan wuld have tday if the current plan prvisins, actuarial assumptins, and participant data had always been in effect, cntributins equal t the nrmal cst had been made, and all actuarial assumptins had been met. Fr each f the PERA defined benefit plans, the AAL includes the balance in the affiliated annual increase reserve. Actuarial Cst Methd: The actuarial cst methd allcates a prtin f the ttal cst (present value f benefits) t each year f service, bth past service and future service. Annual Increase Reserve (AIR): As f January 1, 2007, an AIR was created fr each divisin trust fund fr the purpse f funding annual increases fr PERA benefit structure members hired n r after January 1, A prtin f the emplyer cntributin, equal t ne percent f the salaries f affected members, is accumulated in the AIR t be paid ut in annual increases each July 1, t the extent affrdable. Althugh invested with the affiliated divisin assets, the reserve balances are accunted fr separately. Asset Values: Fr each f the PERA defined benefit plans, the actuarial and market asset values include the balance in the affiliated AIR. Actuarial Value f Assets (AVA): The AVA is the market value f assets less the deferred investment gains r lsses nt yet recgnized by the asset smthing methd. Market Value f Assets (MVA): The MVA is the fair value f assets f the plan as reprted in the plan s audited financial statements. Entry Age Nrmal Actuarial Cst Methd (EAN): The EAN actuarial cst methd is a funding methd that calculates the nrmal cst as a level percentage f pay r level dllar amunt ver the wrking lifetime f the plan s members. Funded Rati: The funded rati is the rati f the plan assets t the plan s actuarial accrued liabilities. Actuarial Value Funded Rati: is the rati f the AVA t the AAL. Market Value Funded Rati: is the rati f the MVA t the AAL. Nrmal Cst: The nrmal cst is the cst allcated under the actuarial cst methd t each year f active member service. Present Value f Benefits (PVB) r ttal cst: The PVB is the value at a particular pint in time f all prjected future benefit payments fr current plan members, plus the balance in the affiliated AIR. The future benefit payments and the value f thse payments are determined using actuarial assumptins regarding future events. Examples f these assumptins are estimates f retirement and terminatin patterns, salary increases, investment returns, etc. Surplus: A surplus refers t the psitive difference, if any, between the AVA and the AAL. Unfunded Actuarial Accrued Liability (UAAL): The UAAL is the prtin f the AAL that is nt currently cvered by the AVA. It is the psitive difference between the AAL and the AVA. Valuatin Date: The valuatin date is the annual date upn which an actuarial valuatin is perfrmed; meaning that the trust assets and liabilities f the plan are valued as f that date. PERA s annual valuatin date is December 31 st. 6 Page

7 Adpted: March 20, 2015 Clrad PERA Defined Benefit Pensin Plan Funding Plicy Amended: XXXXX XX, 201X 7 Page