Local Municipal Workshop

Transcription

1 Local Municipal Workshop Assessing your Pension Plan Joe Newton January 24, 2012 Copyright 2011 GRS All rights reserved.

2 Look At Critical Issues Facing Both Member And dthe Employer Income Replacement to the retired member, including a predictable and dependable retirement annuity Affordability to the taxpayers in an exchange for services Short term costs Sustainability of the Plan Longer term costs Equity among the population segments (equity not necessarily e meaning equal) 2

3 Managing the Liability Assess Current Situation Current benefit structure not found to meet objectives Found to be economically unsustainable Love It? Begin Benefit Modification Process Is there a better contribution strategy Can you earn more on investments? Do Nothing 3

4 Assess Current Situation Examine current retirement benefit structure Ensure all benefits that can be reasonably expected to be paid from the plan are included Analyze assumptions used in determining current and future costs Experience Study due April 1 st Spend time understanding current liabilities and valuation results Perform f cash flow projections Include sensitivity on main cost drivers 4

5 Purpose of Experience Study Assumptions are not static; they should occasionally change to reflect New information Mortality improvement Changing patterns of retirements, terminations, etc. Changing knowledge Recent 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 assumptions can be adjusted if necessary to provide the most accurate portrayal of future liabilities possible 5

6 General Procedures The study should answer the following questions for each assumption What was the plan s actual experience? How does that compare with the current assumption? Is a change warranted? Then, the final assumption set should be internally consistent as a whole 6

7 Should include all Assumptions and Methods Economic assumptions Price inflation (CPI) Investment return Salary increases (for individuals) Payroll growth rate (for plan as a whole, or overall budget growth) COLA provisions Demographic assumptions Mortality (Active Members & Retirees) Disability Retirement Other terminations Actuarial Methods Funding Method Asset Smoothing Method 7

8 General Findings from ERSRI experience 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 so Assumptions have already been strengthened in 2003 and 2006 Future economic growth likely to be suppressed compared to historical levels and current assumptions Current inflation, wage inflation, payroll growth, and investment return rate need to be lowered Retirees are living longer National trends have turned up Rhode Island experience confirms this trend Increases in life expectancy likely to continue Most of the other assumptions continue to be appropriate 8

9 At the local level Many plans will be too small to have a full experience study performed It may be appropriate to pattern the larger assumptions after the MERS assumptions Specifically the termination and mortality experience The economic assumptions have more subjectivity, but should be compared back to what the MERS plan is using and differences should be explicitly noted 9

10 Affordability and Sustainability One of the key objectives for any governmental entity is to ensure the sustainability of the benefits Governmental entities do not want to run out of money and leave workers with less than promised Also do not want to pay too much, leaving less for other public services Sustainability can be an economic measurement The valuation tells us the ARC (annual required contribution) If that ARC cannot be met, then sustainability must be reexamined 10

11 Defining Sustainability 11 An 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 cost Sustainability can be determined from available resources, and perhaps from new revenue streams Can include self correcting mechanisms Once sustainability is defined, benefits can be designed to meet the sustainability requirements Without h sustainability, there will be an implicit i tier of benefits

12 Projected Contribution Rates: State t Employees: Updated dthrough h FY % 40% 30% 36.34% 38.54% 42.35% 40.82% FY 2016 State Contribution: ti $311M 20% 10% FY 2012 State t Contribution: $149 M 0% Based on Estimated Actuarial Value of Assets as of June 30, 2011 With Recognition of Deferred Investment Losses Based on Estimated Actuarial Value of Assets as of June 30, 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

13 Sample Employer All Employees Combined $60 $50 $40 $30 $20 $10 $ Projected Contributions Assuming 3.75% Annual Growth 13 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

14 Contribution Strategies: State Employees Contribution Levels equal to FY2012 (22.98% employer) until 100% funded Funding Ratio based on 20% return in FY % 100% 80% 60% 40% 20% 0% 5.75% actual investment return would extinguish fund Current Policy (19 year) Current Contribution Extended 14 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

15 What investment return is needed? State Employees only 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Rate of Return: 9.00% each year 7.50% each year 20% for FY2011 & 2012 & 7.50% thereafter 15 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

16 Contribution io Strategies: State Employees 50% 44.73% 40% 30% 20% 36.34% 36.68% 30.81% 32.65% 26.88% 25.00% 14.11% 1% 10% 0% With recognition of Current Deferred Losses 30 Year Reamortization 30 Year Staggered ($1 B at 20 years, $1B at 25 years, balance at 30 years) 16 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

17 Benefit Provisions After looking at the assumptions, the investment earnings, contribution strategies, and other revenue e sources, there is only one other place to increase the sustainability The cash outflows from the plan must be reduced in a combination of the above is not achievable 17

18 18 Questions?