OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM 277 EAST TOWN STREET, COLUMBUS, OH PERS (7377)

Transcription

1 OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM 277 EAST TOWN STREET, COLUMBUS, OH PERS (7377) MEMORANDUM DATE: August 3, 2006 TO: FROM: OPERS Retirement Board Members Karen Carraher, Director - Finance RE: V. Discussion Items: A. 50-Year Cash Flow Projections (Pension and Health Care) Purpose To provide a summary of the results of the 50-Year Actuarial Projection of Base Retirement Benefits Report and the 50-Year Actuarial Projection of Retiree Health and Medicare Benefits report. Background Annually, the System s actuaries, Gabriel, Roeder, Smith & Company, prepare two projection reports the 50-Year Projection of Base Retirement Benefits (pension report) and the 50-Year Projection of Retiree Health & Medicare Benefits (health care report). These reports project asset and cash flows for a 50-year period beginning January 1, The projections are based on the same census data, financial information and actuarial assumptions used in the regular annual actuarial valuation as of December 31, Retiree health plan changes and scheduled employer and member contribution rate changes adopted as a component of the Health Care Preservation Plan document dated September 9, 2004 are incorporated in this report. The report includes pension projections based on the long-term actuarial assumed rate of return of 8%. The retiree health projections are based on a 6.5% market rate of return. In addition to projecting cash flows for pension, the pension projection report also projects the Unfunded Actuarial Accrued Liability (UAAL) and the number of years to amortize that liability. The pension projection report also analyzes alternative investment return scenarios and population scenarios and their impact on the UAAL and amortization years. The health care projection report projects future health claims and the corresponding impact on the solvency of the fund. The health care projection report analyzes the potential impact of alternative health care inflation and population projection scenarios and their impact on solvency.

2 50 Year Actuarial Projections of Retiree Health & Medicare Benefits Beginning January 1, 2006 Summary Report Summary Report August 16, 2006

3 50 Year Actuarial Projections of Retiree Health & Medicare Benefits 2

4 Section I Basis for Cash Flow Projections How will the relationship between contributions, benefit payments and investment return be affected, as the baby boom generation retires, and the HCPP goes into effect? This section explores the expected emerging patterns over the next half century, based upon intermediate health trend assumptions and 6.5% investment return. 3

5 Basis for Cash Flow Projections Retiree health care projection results are based upon: A market rate of return of 6.5% The intermediate trend assumption Benefit changes adopted under the Health Care Preservation Plan (HCPP) Medicare Part D subsidy from the Federal government Scheduled employer and member contribution rates prescribed in the HCPP Computations of Annual Required Contribution and actuarial liabilities for GASB 43 purposes do not reflect Medicare Part D subsidy payments assumed to happen in the future This is a change from the prior year due to the June 2006 GASB Technical Bulletin regarding the Retiree Drug Subsidy provisions of Medicare Part D 4

6 Plan Changes in CY 2006 The following calendar year 2006 plan changes were incorporated in the retiree health projection: Increased ER visit co-pay from $50 to $75 Increased inpatient hospital deductible from $0 to $50 Introduced RX Incentive model offering OTC product (Prilosec) Installed new Aetna network 5

7 Plan Changes in CY 2007 The following calendar year 2007 plan changes were incorporated in the retiree health projection: Bone-density screening added Increased annual physical maximum benefit from $50 to $100 Rx Mail order Rx co-pay from 2x to 3x retail Medical Eliminate $700 / 3 year hearing aid benefit Increase $150 annual deductible to $250 Increase out-of-pocket maximums by $100 Realign 100% paid charges to be consistent with rest of Plan benefits The following calendar year 2007 plan change was not incorporated in the retiree health projection: Comprehensive wellness/prevention benefit of up to $200 for non-medicare members 6

8 Basis for Cash Flow Projections Assets at Market Value ($ in Billions) 12/31/ /31/2004 Pension $ 57.7 $ 53.6 Health Total $ 69.5 $

9 Scheduled Employer Contribution Rates Phase In Increase Employer Rates Health Care 4.00% 4.50% 5.00% 5.50% 5.50% 5.50% 5.50% 8

10 Summary of HCPP Retiree Health Plan Changes Implement Choices program at 100% subsidy for current retirees and 75% to 90% of retiree subsidy for spouses. Spouse subsidy is graded based upon years of service. 15 years of service corresponds to 75% and 30 years corresponds to 90%. Implement Choices program for current actives with 50% subsidy at 10 years of service graded to 100% subsidy between 15 and 30 years. Spouse receives 50% (at 10 years) to 75% (at 30 years), increasing to 90% (at 40 years) of the retiree subsidy. Modify program for future actives (hired after 1/1/2003) to provide a 25% subsidy at 10 years of service grading to 100% between 15 and 30 years, with spouse receiving 50% of the retiree subsidy. Spouse % of the retiree subsidy increases to 65% at 40 years. Upon death of the retiree, spouse subsidy is increased to retiree level. Annual increase in amounts payable by retirees capped at 5% of per capita cost. Changes are assumed to be effective January 1, 2007, with a 5 year phase-in. 9

11 Historical Trend of Amounts Paid 9% 8% 8.1% 8.4% 9.2% % of Payroll 7% 6% 5% 4% 3% 2% 1% 0% 1.6% 2.1% 3.7% 3.6% 3.7% 3.2% 3.4% 2.8% 2.5% 2.7% 4.9% 4.2% 4.4% 4.2% 4.3%4.4% 4.4% 4.6% 5.5% 5.5% Year 6.4% 6.9% 10

12 Section II Health Investment Fund Projections Intermediate Assumptions Funding Value $ in Billions December 31 Nominal Real 2005 $ 11.1 $

13 Projected Pattern of Retiree Health Contribution Income and Benefit Payout Intermediate Assumptions 14% 12% 10% % of Payroll 8% 6% 4% 2% 0% Year Retiree Health Payout Employer Retiree Health Contributions Medicare Part D Subsidy Total Contributions (Employer + Med Part D) 12

14 Observations Benefit payments already exceed contribution income in the retiree health fund. The difference is made up by investment return, and, if need be, the liquidation of assets in the retiree health fund. Under the intermediate assumptions, unless significant investment gains continue, the retiree health fund will run out of money in At that point the retiree health plan would become pay as you go. Benefits would have to be reduced well below present levels, because benefits paid out could not exceed contribution income. 13

15 GASB 43 Reporting Intermediate Trend Valuation Date 12/31/ /31/2004 Computed Contributions Expressed as Percents of Payroll Normal Cost 8.96% 8.79% Unfunded Accrued Liability Payment 8.23% 7.85% Total Annual Required Contribution (ARC) 17.19% 16.64% ($ in Millions) Actuarial Accrued Liability Statutory Benefits $4,611 $3,621 All Other Benefits $26,696 $25,858 Total $31,307 $29,479 Funding Value of Retiree Health Assets $11,070 $10,816 Unfunded Accrued Liability $20,237 $18,663 14

16 Observations Generally, the ARC will tend to rise each year because it is not being fully funded. An additional upward force on the ARC was a change in the method for calculating the ARC that was promulgated by the GASB in a June 2006 Technical Bulletin. Basically, future expected Medicare D subsidy payments must now be ignored when the ARC is calculated. 15

17 Section III Supplemental Retiree Health & Medicare Projections

18 Retiree Health Characteristics The benefits are not vested. Annual claim costs are volatile. There is no direct relationship between payroll and benefits. Effects of future changes in the Medicare program are unknown. The potential effect of changes in the health care delivery system could be significant but cannot be estimated reliably. 17

19 Retiree Health Costs Exceed the current retiree health contribution level. Are expected to continue to rise due to demographics and further unit cost increases. Will lead to diminishing fund balances unless investment gains persist and costs are somehow brought back under control. HCPP design changes and other benefit design changes help, but continued review will be important. 18

20 Retiree Health Costs Next slide shows scenarios for unit cost increases that are investigated in the projection Market investment return is assumed to be a steady 6.5% 19

21 Health Care Cost Increase Scenarios Health Trend Above Wage Inflation Assumption of 4.0% Medical and Prescription Drug Medicare A B C D E Part D Year Testing 1 Testing 2 Testing 3 Intermediate Pessimistic Part A Part B Subsidy % 1.00% 2.00% 6.00% 9.00% 6.00% 6.00% 3.00% % 1.00% 2.00% 5.00% 8.00% 5.00% 5.50% 3.00% % 1.00% 2.00% 4.00% 7.00% 4.00% 5.00% 3.00% % 1.00% 2.00% 3.00% 6.00% 3.00% 4.50% 3.00% % 1.00% 2.00% 2.50% 5.00% 2.50% 4.00% 3.00% % 1.00% 2.00% 2.00% 4.00% 2.00% 3.50% 3.00% % 1.00% 2.00% 1.50% 3.00% 1.50% 3.00% 3.00% % 1.00% 2.00% 1.00% 2.00% 1.00% 2.50% 2.50% % 1.00% 2.00% 0.50% 1.00% 0.50% 2.00% 2.00% % 1.00% 2.00% 0.00% 0.00% 0.00% 1.00% 1.00% 2017 & Later 0.00% 1.00% 2.00% 0.00% 0.00% 0.00% 0.00% 0.00% 20

22 Projected Benefits as % s of Projected Payroll 23.0% 22.0% 21.0% 20.0% 19.0% 18.0% 17.0% 16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% A:Testing 1 B:Testing 2 C:Testing 3 D:Intermediate E:Pessimistic Testing 3 Pessimistic Testing 2 Intermediate Testing 1 21

23 Funding Levels Defined Question 1. How long will the health care fund remain solvent with employer contributions increasing from 4.5% to 5.5% of payroll by 2008: Funding Level 1? Question 2. What is the lowest employer contribution rate, Funding Level 2, that will enable the fund to become stable and to remain so indefinitely? 22

24 Funding Levels by Scenario Funding Level 1 Funding Level 2 Solvency Period in Years Employer Contribution Rate This Prior This Prior Scenario Year Result Year Result Year Result Year Result A: Testing % 9.2% B: Testing n/a n/a C: Testing n/a n/a D: Intermediate % 10.9% E: Pessimistic % 14.1% 23

25 Comments The intermediate solvency result improved by one year since last year. If experience had been exactly in accordance with assumptions, it would have gone down one year. Consequently, we see a 2 year improvement in solvency. 24

26 Comments Intermediate Solvency is now 18 years Factors that increased the expected solvency period Favorable claims experience during 2005 Plan changes in 2006 and 2007 Small investment gain as of December 31,

27 Alternate Population Growth Scenarios The next 2 slides show certain projection results under the following alternate population growth assumptions: Constant active population 1% per year decrease in active population for next 20 years; constant active population thereafter 1/2% per year decrease in active population for next 20 years; constant active population thereafter 1/2% per year increase in active population for next 20 years; constant active population thereafter 1% per year decrease in active population for next 20 years; constant active population thereafter 26

28 Projected Retiree Health Benefit Payments and Asset Values Under Various Population Growth Assumptions Constant 1%/year Decrease 1/2%/year Decrease Active Population in Active Population in Active Population ($ in Millions) Year Assets Assets Assets Ended Benefits EOY Benefits EOY Benefits EOY 2005 $ 1,090 $ 11,070 $ 1,090 $ 11,070 $ 1,090 $ 11, ,708 12,478 1,708 12,383 1,708 12, ,409 10,971 2,408 10,484 2,408 10, ,146 6,397 3,136 5,019 3,141 5, ,530 1,269 1, ,878 1,540 1,701 Solvency Years 18 years 17 years 18 years The above projections are based upon 6.5% market return in 2006 and later. 27

29 Projected Retiree Health Benefit Payments and Asset Values Under Various Population Growth Assumptions Constant 1%/year Increase 1/2%/year Increase Active Population in Active Population in Active Population ($ in Millions) Year Assets Assets Assets Ended Benefits EOY Benefits EOY Benefits EOY 2005 $1,090 $11,070 $1,090 $11,070 $1,090 $11, ,708 12,478 1,708 12,574 1,708 12, ,409 10,971 2,410 11,486 2,409 11, ,146 6,397 3,155 7,901 3,150 7, ,530 3,978 1,070 2, ,878 2,286 1,754 Solvency Years 18 years 20 years 19 years The above projections are based upon 6.5% market return in 2006 and later. 28

30 Future Retiree Health Benefits by Current Membership Status Year Current Ended Retirees Current Total Future Grand Dec.31 and Deferred Actives Current Hires Total % 4% 100% 0% 100% % 57% 99% 1% 100% % 72% 92% 8% 100% % 66% 74% 26% 100% When the solvency period is short, changes that affect only future hires do not affect the solvency period much, because there will be few new hires affected by the end of the solvency period. 29

31 Summary Observations-Health The HCPP allows the plan to operate in its present form for 18 years if important assumptions are approximately realized. Solvency is the period of years during which the retiree health fund is expected to contain assets. While the fund is solvent, retiree health benefits can be paid that exceed contribution income. If the fund ceases to be solvent, retiree health benefits could not exceed contribution income. Benefits might have to be reduced to a third or less of their present levels. 30

32 Comments Continued plan redesign as provided in the HCPP, increased contributions, and cost control efforts can all play a roll in addressing this imbalance. 31

33 Summary Observations - Health Intermediate assumptions provide for moderate levels of excess medical care inflation through Intermediate assumptions seem to be a reasonable middle ground between the risks associated with planning under optimistic assumptions and the short term costs of planning with pessimistic assumptions. Different people will have different judgments about what is optimistic, pessimistic or intermediate. We recommended that the primary measure of solvency be based upon the intermediate assumptions, but encourage the Board to remain aware of the potential for optimistic or pessimistic outcomes. The Board must remain aware that the funding level is far below the Annual Required Contribution (ARC). 32

34 Summary Observations - Health The true length of the present fund s solvency period cannot be known now. Rather, it is an estimate made by actuaries based upon assumptions. Currently, it is estimated that under intermediate assumptions, the fund might remain solvent for 18 years. The estimated solvency period can change dramatically from one year to the next based upon increases in health costs, investment return or the lack thereof, and other factors. 33

35 50 Year Population and Cash Flow Actuarial Projections of Base Retirement Benefits Beginning January 1, 2006 Summary Report August 16, 2006

36 Why Projections? Liability is a commitment to meet Cash Flow 2

37 Regular Valuation Quantifies commitments with present value liability calculations Contains an implied plan for meeting cash flows Doesn t disclose specifics of the plan very well 3

38 Projection Quantifies commitments by projecting year by year cash flows Demonstrates how the plan for meeting cash flows is expected to work Can test alternative hypotheses Discloses emerging patterns Not a prediction 4

39 Projection Projection is designed to draw attention to long term trends Pension projection focuses mostly on emerging demographics of baby boomers Retiree health projection focuses mostly on effects of health care cost increases 5

40 Section I Population Projection 6

41 Population Projection In the first phase, the development of the active and retired groups in coming decades is forecast. The results of the projection from 2005 through 2055 are based on a continuation of present demographic patterns. Members participating in the Traditional Plan (TP) and Combined Plan (CP) are included for this purpose. The base projections assume no growth in the active population and do not include an estimate for likely future shifts between the TP, CP, and Member-Directed Plan (MDP). For comparison purposes, we have also included certain projection results under 4 alternate population growth assumptions. 7

42 Projected Active Population December 31 Present Future Total , , , , , , , , , , , , , , ,804 The above results assume a constant active population. 8

43 Projected Retiree Population December 31 Present Future Total , , , , , , , , , , , , , , , , ,818 The above results assume a constant active population. 9

44 Observations The retirement of the baby boom generation has begun A growing retired life group means more administrative work in the future, and much more pressure on the retiree health plan The Health Care Preservation Plan (HCPP) is intended to help deal with those pressures 10

45 Ratio of Active Members to Retirees Year Based upon a constant active member population the ratio of actives to retirees reaches its ultimate level of 1 to 1 by

46 Section II Basis for Cash Flow Projections 12

47 Basis for Cash Flow Projections Assets at Market Value in ($Billions) 12/31/ /31/2004 Pension $ 57.7 $ 53.6 Health Total $ 69.5 $

48 Basis for Cash Flow Projections Pension projection results are based upon the long term actuarial assumed investment return rate of 8.0% Scheduled employer and member contribution rates prescribed in the HCPP 14

49 Scheduled Employer Contribution Rates Phase In Increase Employer Rates Local 13.55% 13.70% 13.85% 14.00% 14.00% 14.00% 14.00% State 13.31% 13.54% 13.77% 14.00% 14.00% 14.00% 14.00% Law Enforcement 16.70% 16.93% 17.17% 17.40% 17.63% 17.87% 18.10% Public Safety 16.70% 16.93% 17.17% 17.40% 17.63% 17.87% 18.10% 15

50 Scheduled Member Contribution Rates Phase In Increase Member Rates State and Local 8.5% 9.0% 9.5% 10.0% 10.0% 10.0% 10.0% Law Enforcement 10.1% 10.1% 10.1% 10.1% 10.1% 10.1% 10.1% Public Safety 9.0% 9.0% 9.75% 10.0% 10.0% 10.0% 10.0% 16

51 Section III Projection Results 17

52 Projection Results As OPERS matures, how will the relationship between contributions, benefit payments and investment return be affected? This section explores the expected emerging patterns over the next half century. 18

53 Pension Investment Fund Projections Valuation Assumptions Funding Value $ in Billions December 31 Nominal Real 2005 $ 54.5 $

54 Projected Pension Net Cash Flow* Valuation Assumptions Fiscal Year In '$Millions % of Assets 2005 $ (693) (1.4)% 2015 (2,431) (2.6)% 2025 (5,572) (3.8)% 2035 (8,477) (4.0)% 2045 (12,104) (3.8)% 2055 (17,821) (3.8)% * Contribution income less benefit payout. 20

55 Cash Flows as % s of Payroll External Cash Flow Contributions Benefits Investment Year Received Paid Return % 24.38% 34.71% % 31.56% 39.06% % 36.01% 41.60% % 34.80% 40.04% % 33.91% 39.54% % 33.79% 39.68% 21

56 Observations In nominal terms, pension assets will increase by a factor of 9 during the projection period In real terms, pension assets will rise by 26% by the end of the projection period The assets need to increase in real terms to support the larger retired life population that will exist when the baby boom generation is retired 22

57 Alternate Market Return Scenarios The next couple of slides show alternate pension results based upon a 7%, 8% or 9% market rate of return 23

58 Development of Pension Funding Percent and Amortization Period Under Various Return Assumptions and Total Pension Contribution Rates as Specified Under HCPP 8.0% Market Return December Funded 31st UAL % Amortization Period 2005 $6, % 20 years , % , % , % , % , % , % % % 2014 (406) 100.4% 2015 (1,184) 101.2% 2025 (15,050) 109.8% 24

59 Development of Pension Funding Percent and Amortization Period Under Various Return Assumptions and Total Pension Contribution Rates as Specified Under HCPP 9.0% Market Return December Funded 31st UAL % Amortization Period 2005 $6, % 20 years , % , % , % % (704) 100.9% 2011 (2,227) 102.6% 2012 (3,953) 104.4% 2013 (5,906) 106.3% 2014 (8,109) 108.3% 2015 (10,587) 110.3% 2025 (57,114) 137.2% 25

60 Development of Pension Funding Percent and Amortization Period Under Various Return Assumptions and Total Pension Contribution Rates as Specified Under HCPP 7.0% Market Return December Funded 31st UAL % Amortization Period 2005 $6, % 20 years , % , % , % , % , % , % , % , % , % , % , % 31 26

61 Development of Pension Funding Percent and Amortization Period Under Various Return Assumptions and Total Pension Contribution Rates as Specified Under HCPP The Alternate projections ignore the possibility of gains and losses from sources other than investment return. Of course, such gains and losses could affect results materially. The projections suggest that if investment return is close to or above 8%, the 2006 valuation will probably indicate an amortization period on the order of 10 years. The amortization period would not be above 10 years (even in the 7% scenario) again until the 2013 results come out. Leading to the possibility of increasing the share of the total contribution that is allocated to the health plan. 27

62 Alternate Assumptions for Market Rates of Return Funded Percentages Under Alternate Market Rates of Return 160% 150% 140% 130% 120% 110% 100% 90% 80% 70% % Market Return 9.0% Market Return 7.0% Market Return 28

63 Alternate Population Growth Scenarios The next slide shows certain projection results under the following alternate population growth assumptions: Constant active population 1% per year decrease in active population for next 20 years; constant active population thereafter ½% per year decrease in active population for next 20 years; constant active population thereafter ½ % per year increase in active population for next 20 years; constant active population thereafter 1% per year decrease in active population for next 20 years; constant active population thereafter 29

64 Development of Pension Funding Percent and Amortization Period Under Various Population Growth Assumptions Constant 1%/year Decrease 1/2%/year Decrease Active Population in Active Population in Active Population December Amort Amort Amort 31st Funded % Period Funded % Period Funded % Period % % % % % % % % % % % % % % % % % % 0 30

65 Development of Pension Funding Percent and Amortization Period Under Various Population Growth Assumptions Constant 1/2%/year Increase 1%/year Increase Active Population in Active Population in Active Population December Amort Amort Amort 31st Funded % Period Funded % Period Funded % Period % % % % % % % % % % % % % % % % % % 0 31

66 Comments A growing population helps to amortize unfunded liabilities faster than planned A shrinking population slows the process down Small changes in population don t affect results materially Large changes (not modeled) would have larger effects 32