Texas Municipal Retirement System. August 22, Retiree Mortality Study. Joseph Newton Mark Randall. Copyright 2013 GRS All rights reserved.

Transcription

1 Texas Municipal Retirement System Retiree Mortality Study August 22, 2013 Joseph Newton Mark Randall Copyright 2013 GRS All rights reserved.

2 Today s Agenda Mortality Analysis Review Proposed Annuity Purchase Factors Impact on Liabilities and Contribution Rates Integration with Funding Policy Possible move to EAN Impact on Liabilities and Contribution Rates 2

3 Mortality Assumption As part of its 2012 Strategic Plan, the Board has requested an analysis of the mortality assumptions used in all of the actuarial processes of TMRS Valuation Mortality Assumption Used in determining liabilities and employer contribution requirements Annuity Purchase Rates Used to convert member balances to annuities at retirement Include partial lump sum and survivor options There is no requirement that the same mortality assumption be used for both (TMRS currently differ) Valuation assumption dictated more by actuarial standards Annuity Purchase Rates dictated more by policies and legal restraints However, if they are not set equal, there should be a general understanding of why and the possible impact 3

4 Future Recommendation to Valuation Mortality Assumption GRS recommendation would be to move to full generational mortality Instead of a static assumption with margin, the goal would be to find a good fit for today s experience and then project the rates using standard tables We are recommending the use of the RP-2000 table with blue collar adjustment, loaded by 109% for males and 103% for females This recognizes the lower than average life expectancy in the general population of Texas With no other adjustments, contribution rates for employers would increase on average by about ten percent (10%) For example, if the current employer contribution rate is 5.0% of payroll, this adjustment would increase the rate to 5.5%. If current rate is 15.0%, would increase to 16.5% Would add approximately $750 million to the System s Unfunded Actuarial Accrued Liability (UAAL), about a 25% increase. Current UAAL is $2.899 billion With this fully generational projection approach, a gradual and consistent improvement over time would be in the valuation process Future rates would not have to be reset every 4-5 years Keep future UAAL s from being systematically created With no other changes, this would be our recommendation in the next Experience Study, currently scheduled to be summer of

5 Annuity Purchase Factors The current factors are based upon the UP 1984 Mortality Table, setback two (2) years A setback is a technique used to recognize some improvement in longevity Setback 2 years means the mortality rate for a 65 year old member will be treated as if the member is 63 years old As discussed previously, the current factors were adopted in 1981 The current factors are not gender specific In 1981, approximately 90% of retiring members were male Today, approximately 70% of future retirees are male The current factors create an A/E ratio of 80% Underestimates life expectancy for a retiring 60 year old by approximately 13%, or 2.7 years With a 5% discount rate, the current factors are underpriced by 10-11% The difference between the current factors and the experience will continue to widen by about 1 year, or a little over 3%, per decade 5

6 Annuity Purchase Factors (cont.) If it is desired to update the factors, we would recommend a projected, generational approach Factors will change slowly over time to reflect mortality improvements Projection scales would be put in place today so that members could plan their retirements The factors need to continue to not be gender specific Proposed assumption is that 70% of future retiring members will be male The factors would be based on the same mortality assumption as used in the valuation process However, it would be prudent to phase into the new factors since no member should be provided an incentive to retire to protect a current benefit Can create losses due to a high number of retirements Creates human resource difficulties 6

7 Annuity Purchase Factors (cont.) Even with the shift to generational projections, the results are still based on assumptions about future experience There still could be some deviation, which will be re-examined every four years However, there should be no known upward bias on the liabilities Any changes in the future should be substantially smaller and could go either way Employees and retirees can benefit from the change as it makes it more likely cities are able to maintain benefit levels over the long term 7

8 Phase In Changes to APR s will have no impact on existing retirees If the factors changed overnight, members currently eligible to retire could see their annuity decrease by as much as 9% to 11%. The decrease from an immediate change in factors could take at least a year to make up, and many people may choose to retire immediately Based on the current factors, once eligible to retire, the average member will realize an increase in their annuity at about 10% per year due to new contributions, a 5% interest credit on their prior balance, and a smaller annuity factor Our preferred method would phase in the full implementation over 13 years effective for retirements after 1/1/2015 Thirteen years was chosen because the average member would still receive a 9% increase in their annuity each year (1% less than the current growth rate) and a vast majority of cities would not have a contribution rate increase With the phase-in, no member would ever have a decrease month over month in their annuity 8

9 Proposed Factors (Life Only) - with a 13-year phase in Annuity Factor for a retiring 60 year old Current Factors Year Phase In Proposed Unadjusted Factors RP-2000 with blue collar adjustment projected to 2010 by Scale BB, with 107.5% load, weighted 70%/30% male/female

10 Projected Life Only Annuity for a Sample Employee A Member reaching age 50 with 20 years of service, $45,000 salary, 7% and 2-to-1 Match $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $ Current Factors 1,392 1,541 1,705 1,883 2,078 2,290 2,523 2,778 3,058 3,363 3,699 4,068 4,474 4, Year Phase In 1,392 1,525 1,667 1,821 1,988 2,166 2,359 2,568 2,793 3,038 3,303 3,591 3,906 4,248 Proposed Unadjusted Factors 1,273 1,404 1,547 1,702 1,870 2,055 2,254 2,471 2,708 2,965 3,245 3,550 3,885 4,248 Annuity is increasing by about 1.0% less per year in the phase in scenario versus the current factors Approximately 30% of members choose a pure life only, with another 20% choosing a certain and life 10

11 Projected 100% Joint & Survivor Annuity for a Sample Employee A Member reaching age 50 with 20 years of service, $45,000 salary, 7% and 2-to-1 Match $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $ Current Factors 1,194 1,314 1,445 1,585 1,738 1,903 2,082 2,277 2,488 2,717 2,966 3,237 3,533 3, Year Phase In 1,194 1,308 1,431 1,563 1,706 1,859 2,024 2,202 2,395 2,603 2,828 3,072 3,338 3,625 Proposed Unadjusted Factors 1,154 1,268 1,391 1,524 1,667 1,823 1,990 2,171 2,368 2,581 2,811 3,060 3,332 3,625 Annuity is increasing by about 0.5% less per year in the phase in scenario versus the current factors Approximately 50% of members choose a survivor option 11

12 GRS recommendation We see the proposed change in factors as a reaction to an anticipated future increase in the contribution rates, not as a reaction to current rates If the annuity purchase factors are changed to reflect continued mortality improvement, GRS would recommend not letting the contribution rates change, or at least minimizing the change, due to a change in the annuity factors The current valuation process takes the difference between the annuity purchase factors and the actual experience into account. The 13 year phase in was determined by balancing the speed of increase in member annuities with keeping the employer contributions mostly unchanged If a different phase in approach is used, there will be a positive or negative impact to contribution rates The longer the phase in, there will be some increases in contribution rates A shorter phase in could create a decrease in contribution rates 12

13 Comparison of System-wide Funded Status Current With updated Mortality and 13 Year Phase In Present Value of Benefits $30,293 $29,880 Actuarial Accrued Liability (AAL) $22,545 $22,541 Actuarial Value of Assets $19,646 $19,646 Unfunded Actuarial Accrued Liability $2,899 $2,895 Funded Ratio 87.1% 87.2% Full Retirement Contribution Rates: Straight Average 8.34% 8.27% Payroll Weighted Average 13.10% 13.05% Normal Cost % 9.51% 9.09% Prior Service % 3.59% 3.96% $ amounts in millions 13

14 Distribution of Impact on Rates (All Cities) % -1.20% -1.00% -0.80% -0.60% -0.40% -0.20% 0.00% 0.20% 14

15 Distribution of Impact on Rates for Cities with 100 or More Actives % -0.80% -0.60% -0.40% -0.20% 0.00% 15

16 Cost Method As part of its 2012 Strategic Plan, the Board is reviewing a potential change in funding method from Projected Unit Credit (PUC) to Entry Age Normal (EAN) For many reasons, it may be preferable to move to EAN Removes bias for increasing normal costs More stability in contribution rates Employees and retirees benefit from increased likelihood cities will be able to maintain benefit levels Improved transparency and predictability for cities joining TMRS With no other changes, the contribution rate for many employers would increase, and the funding ratio would decrease However, when combined with the changes in annuity purchase factors and the change in valuation mortality, the increases in the contribution rates are much less substantial and many cities will see no rate increase EAN provides greater rate stability going forward However, it is impossible to remove all volatility. But, moving to EAN would remove the known upward bias in the normal cost and allow for smoother amortization of gains and losses Also, moving to EAN now would allow for a simplified transition to the new GASB standards 16

17 PUC Normal Costs over time for a sample employee Normal Cost $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $ Year 17

18 Comparison of Normal Costs over time for a sample employee $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $ Year PUC EAN 18

19 AAL accrues over the entire career of a sample employee 800% 600% New Employee: Entry Age 25 % of Payroll 400% 200% 0% PVB AAL EAN AAL PUC 19

20 Total Group The valuation uses the sum of the normal costs and accrued liabilities of each member in the population By design, the AAL under EAN is ALWAYS larger than the AAL under PUC Thus, EAN compared to PUC will have a larger UAAL and a lower funding ratio That does not necessarily mean higher contribution rates since the normal cost may decrease depending on demographics 20

21 Comparison of System-wide Funded Status Current Using EAN With updated Mortality and 13 Year Phase In Present Value of Benefits $30,293 $29,880 Actuarial Accrued Liability (AAL) $22,545 $24,335 Actuarial Value of Assets $19,646 $19,646 Unfunded Actuarial Accrued Liability $2,899 $4,689 Funded Ratio 87.1% 80.7% Full Retirement Contribution Rates: Straight Average 8.34% 8.60% Payroll Weighted Average 13.10% 13.22% 21 Normal Cost % 9.51% 7.20% Prior Service % 3.59% 6.02% $ amounts in millions

22 Distribution of Impact on Rates (All Cities)

23 Distribution of Impact on Rates for Cities with 100 or More Actives

24 Options for Board Consideration No change to APR, change to generational mortality in the valuation deferred to 2015 Based on current expectations, will have an approximate 10% increase in contribution rates in Calendar 2017 if fully implemented Change APR for retirements effective after 1/1/2015 and valuation mortality effective with the December 31, 2013 valuation, with phase in If remain on PUC, the Board should consider rate stabilization techniques Change APR for retirements effective after 1/1/2015 and valuation mortality and change to EAN effective with the December 31, 2013 valuation, with phase in 24

25 Next steps There are advantages for the new APR s to be approved by the Board before December 31, 2013 Allows the changes in valuation methods/assumptions to be implemented Allows the changes to be made before the new GASB standards are implemented Allows for members who request estimates for January 2015 retirements to have reliable information a year in advance To meet that timeframe, The Board would have to take action permitting posting of the proposed new trustee rules at the September Board meeting The Board would have to adopt proposed new trustee rules at the December Board meeting 25