Understanding Your Actuarial Report

Transcription

1 2:40 3:55 May 7, 2018 Room 230 Complex 112 th Annual Conference May 6-9, 2018 St. Louis, Missouri Moderator/Speakers: Barry C. Faison Chief Financial Officer, Virginia Retirement System Drew Corbett Assistant City Manager and Finance Director, City of San Mateo, CA Leslie Thompson, FSA, FCA, EA, MAAA Senior Consultant, Gabriel, Roeder, Smith & Company Julie Underwood Chief Financial Officer, San Bernardino County Employees Retirement Association Understanding Your Actuarial Report #GFOA2018

2 Key Actuarial Metrics #GFOA2018

3 Your Actuarial Valuation Report: Key Actuarial Metrics Leslie Thompson, FSA, FCA, EA, MAAA Senior Consultant Gabriel, Roeder, Smith and Company

4 Defined Benefit Plans Define A Benefit The benefit promise Funding the benefit promise Forecasting future events Using taxpayer dollars wisely Risks in a defined benefit plan 4

5 Why do a valuation? Need to figure out all the payments that will be made There are all sorts of different amounts; for different reasons; commencing at different times That is why we discount to one date (the valuation date) Investment returns will pay for a part of the promise How do you value all those differing benefits with different start dates? Use a funding method to figure out how to pay for the benefits Basic equation the sum of past and future contributions must equal the present value of the benefits 5

6 Setting the Assumptions Economic assumptions Inflation Real return Administrative expenses People or demographic assumptions Mortality/life expectancy Retirement Termination Pay increases Disability 6

7 Actuarial value of assets Most plans employ a smoothing method The returns are smoothed or averaged over a period of time (typically 5 years) This is done to manage noise in the investment returns So that the decision making is smooth. 7

8 Normal Cost Current Year s Cost For Accruing Benefits Funding method tells the actuary how to calculate this year s normal cost A normal cost is calculated for each active employee (retirees have no normal cost since they no longer accrue benefits) The normal cost for the plan is the sum of the individual normal costs Normal cost has nothing to do with assets 8

9 Accrued Liability The liability earned as of the valuation date Often viewed as the desired amount of assets Used in measuring the funded status of the plan The funded ratio is the Assets/Accrued Liability Accrued liability has nothing to do with assets 9

10 Unfunded Accrued Liability 10

11 Unfunded Accrued Liability Changes in the accrued liability can create changes in the UAL Experience of the plan different than assumed Retroactive plan changes Assumption updates Missed (or excess) contributions 11

12 Paying off the Unfunded Accrued Liability Amortization Many ways to amortize, or pay down this debt Open vs closed amortization Just rollin along, or not Single base vs layered Managing volatility? Use layered As a flat dollar amount or tracking as a level percent of pay The years to amortize Watch for negative amortization! What you choose depends on your funding policy 12

13 Other Actuarial reports Experience Study Economic Assumption study Projections Especially useful for tiered plans with new hire benefit Strongly encouraged to look at projections every year 13

14 A Plan s Perspective #GFOA2018

15 Your Actuarial Valuation Report: A Plan Administrator s Perspective Julie Underwood Chief Financial Officer San Bernardino County Employees Retirement Association

16 The Plan s Perspective Long term commitment to provide benefits to members as promised by employers Actuarial Valuation is a tool to understand the financial health of the plan Contributions Investment Returns Benefits Expenses Plan Trustees make decisions long before the valuation report is developed 16

17 The Process Funding Policies Assumptions Actuarial Valuation Member Data Plan Provisions Financial Data 17

18 Funding Policy Long Term Full Funding Accountability & Transparency Objectives Reasonable & Equitable Allocation of Cost Minimize Volatility of Contributions 18

19 Funding Policy Components Amortization Asset Smoothing Cost Method 19

20 Plan Trustees Policy Considerations Level percentage of pay vs level dollar Negative Amortization Closed/Rolling/Resetting Amortization layers Asset Value Used to set contributions Market Value = point in time = volatile Smoothing offsets volatility but defers cost impacts of reality caution on length of smoothing period 20

21 Before the Valuation Report 21

22 Assumptions Demographic Mortality Retirement Disability Economic Investment Returns Inflation Salary Increases 22

23 Data From Employers Employers role is critical Accurate Reliable Timely Pensionable Compensation Service Credits Member Status (Active, On-Leave, Terminated) 23

24 Results Actuarial Value of Assets Actuarial Accrued Liability 24

25 Results Funded Status AAL - AVA Contribution Rates Normal Cost UAAL 25

26 Causes of Growth in UAAL Granting initial benefits or granting benefit increases for service already rendered. Actual experience which is less favorable than assumed. Such as: Higher salary increases Earlier retirement date(s) Lower death rates Lower rates of investment earnings Lower rates of non-death terminations Changing Assumptions Lower assumed rate of return Longer mortality 26

27 Take Away Understand the inputs of the Valuation Report Cost Method Amortization Period Smoothing Member Data Financial Data Plan Provisions Valuation Results provide a current look at the financial position of the plan Contribution Rates Funded Ratio Be Aware of Employment Agreement terms that affect pension benefits 27

28 An Employer s Perspective #GFOA2018

29 Your Actuarial Valuation Report: An Employer s Perspective Drew Corbett Assistant City Manager City of San Mateo, California

30 The Employer s Perspective Why is understanding your actuarial valuation report important? Budgeting What is the cost next year? Forecasting/long-term planning What are the costs over the next 5 to 10 years? What is the trend? Policy making Are we paying enough? Can we do more? 30

31 Valuation Reports Areas of Focus Required contributions Funded status of the plan Projected contributions Accrued and unfunded liabilities Schedule of amortization bases Amortization schedule alternatives Analysis of investment return scenarios 31

32 Required Contributions Fiscal Year Normal Cost as a Percentage of Payroll Fiscal Year Total Normal Cost % % Employee Contribution 9.123% 9.167% Employer Normal Cost % % Projected Annual Payroll for Contribution Year Estimated Employer Contributions $24,480,674 $26,575,606 Total Normal Cost $6,607,822 $7,408,747 Employee Contribution $2,233,372 $2,436,186 Employer Normal Cost $4,374,450 $4,972,561 Unfunded Liability Contribution $7,473,106 $8,517,886 Total Employer Contribution $11,847,556 $13,490,447 32

33 Funded Status of Plan June 30, 2015 June 30, 2016 Present Value of Projected Benefits $395,327,255 $419,528,145 Normal Accrued Liability $341,550,961 $359,246,328 Market Value of Assets $221,389,368 $216,794,797 Unfunded Accrued Liability $120,161,593 $142,451,531 Funded Ratio 64.8% 60.3% 33

34 Projected Contributions Fiscal Year Normal Cost % UAL Payment Required Contribution Projected Contribution % 19.5% 21.1% 21.1% 21.1% 21.1% 21.1% $8.5M $9.7 $10.7 $11.9 $13.0 $13.8 $

35 Accrued and Unfunded Liabilities Normal Accrued Liability June 30, 2015 June 30, 2016 Active Members $97,608,994 $103,171,202 Transferred Members $12,504,999 $13,635,899 Terminated Members $2,516,911 $1,996,640 Current Beneficiaries $228,920,057 $240,442,587 Total $341,550,961 $359,246,328 Market Value of Assets $221,389,368 $216,794,797 Unfunded Accrued Liability $120,161,593 $142,451,531 Funded Ratio 64.8% 60.3% 35

36 Schedule of Amortization Bases Reason for Base Date Established Amorti- zation Period Balance 6/30/17 Expected Payment Balance 6/30/18 ASSUMPTION CHANGE 06/30/03 7 $5,450,589 $817,557 $5,005,402 METHOD CHANGE 06/30/04 8 $(437,097) $(59,459) $(407,720) (GAIN)/LOSS 06/30/14 28 $(19,077,332) $(521,864) $(19,943,520) (GAIN)/LOSS 06/30/15 29 $9,764,959 $137,505 $10,342,640 ASSUMPTION CHANGE 06/30/16 20 $3,782,436 $(113,800) $4,179,312 (GAIN)/LOSS 06/30/16 30 $9,589,716 $0 $10,296,958 TOTAL $73,054,869 $3,651,732 $74,658,672 36

37 Amortization Schedule Alternatives Current Schedule 20-Year Schedule 15-Year Schedule Date Balance Payment Balance Payment Balance Payment 6/30/18 $147.7 $8.5 $147.7 $11.0 $147.7 $13.4 6/30/19 $149.8 $9.7 $147.2 $11.4 $144.7 $13.8 6/30/20 $150.9 $10.5 $146.2 $11.7 $141.0 $14.3 6/30/32 $107.9 $14.7 $87.3 $16.7 $19.6 $20.3 6/30/37 $73.0 $12.6 $18.6 $19.4 $0.0 $0.0 6/30/47 $0.5 $0.5 $0.0 $0.0 $0.0 $0.0 Totals $339.4 $296.7 $249.9 Interest $191.7 $149.0 $102.2 Savings -- $42.7 $

38 Investment Return Scenarios Assumed Return Projected Payment on Unfunded Liability (3.0%) $9.7M $11.0M $12.9M $15.1M 3.0% $9.7M $10.8M $12.3M $13.9M 7.0% (Assumed) $9.7M $10.7M $11.9M $13.0M 11.0% $9.7M $10.5M $11.5M $12.2M 17.0% $9.7M $10.3M $10.8M $10.8M 38

39 Speaker Contact Information: Barry Faison Leslie Thompson Julie Underwood th Annual Conference May 6-9, 2018 St. Louis, Missouri Questions: Speakers will take questions and comments. This session is being recorded, please utilize the microphone in the aisle to ask all questions. Provide Feedback: Please take a few minutes to provide your feedback at Discuss/Comment: Join the discussion at #GFOA2018 Drew Corbett dcorbett@cityofsanmateo.org Contact GFOA: To contact GFOA about session topics please research@gfoa.org #GFOA2018