Defined Benefit Solutions

Transcription

1 Defined Benefit Solutions Gary Burczek, FSA, EA, MAAA Regional Consulting Actuary The Principal Financial Group April 17,

2 Defined Benefit Issues Current Environment 2 annual actuarial reports for defined benefit (DB) plans Sweeping changes to both reports (Less smoothing) Many sponsors evaluating their DB plans: Plan design Asset Allocation Participant Education 2

3 Five Common Questions from DB Plan Sponsors How can I terminate my plan in the most effective manner? Should I change my plan design? How can I manage my retirement program more efficiently? Should I change my asset allocation? What will my future costs be can I budget for them? 3

4 SEI Quick Poll Same Findings Top Priorities for DB Plan Sponsors: 1. Controlling funded status volatility 2. Providing senior management with long-term pension strategies 3. Improving plan s funded status 4. Conducting an Asset/Liability (ALM) modeling study 5. Effectively managing duration going forward 6. Implementing an liability driven investing (LDI) approach using long-duration bonds 7. Defining fiduciary responsibilities (trustees and investment consultants) 8. Changing funding policies and timelines 9. Stress-testing the portfolio under extremes 10. Implementing a plan design change 4

5 Risk Management 1 Should I change my asset allocation? 5

6 Risk Management What is (LDI)? Typical pension plan allocation of 70% equity and 30% Core Bond An LDI allocation of 20% equity and 80% Long Term Bond Returns on Assets 30% 20% 10% 0% -10% Pension Liability versus Asset Returns for the last 15 years % % -10% -5% 0% 5% 10% 15% 20% Returns on Liability ROL vs ROA 70% Eq/30% FI ROL vs ROA 20% Eq/80% FI Perfect Hedge For illustrative purposes only. 6

7 Risk Management Alternative Portfolios Annual projected pension expense over next 10 years For illustrative purposes only. 7

8 Winding Down a Hard-Frozen DB Plan 2 How can I terminate my plan in the most effective manner? 8

9 Winding Down a Hard-Frozen DB Plan Develop a Termination Strategy Step 1. Step 2. Step 3. Step 4. Evaluate costs Evaluate funding strategies Evaluate asset allocation strategies Monitor progress 9

10 Winding Down a Hard-Frozen DB Plan Evaluate gap for ongoing plan AND termination Understand impact of interest rate changes Step 1. Evaluate Costs to Terminate For illustrative purposes only. 10

11 Winding Down a Hard-Frozen DB Plan Step 2. Evaluate Funding Strategies For illustrative purposes only. 11

12 Winding Down a Hard-Frozen DB Plan Step 3. Evaluate Asset Allocation Strategies Static Asset Allocation Fixed target allocation among various asset classes (e.g. 70% equity, 30% fixed income) Dynamic Asset Allocation (DAA) Adjusts target allocation based on funded ratio of the plan Higher funded ratio = more conservative target allocation 12

13 Winding Down a Hard-Frozen DB Plan Step 3. Evaluate Asset Allocation Strategies Termination Liability Funded Status DAA "Glide Path" 100% Equity 20% 30% 80% Equity 40% 50% 60% 70% 60% Fixed 40% 80% 70% 60% 50% 20% Fixed 40% 30% 0% <63% 63-72% 72-81% 81-90% 90-97% 97%+ For illustrative purposes only. 13

14 Winding Down a Hard-Frozen DB Plan Step 4. Monitor Progress Quarterly Funded Status reports Regular/consistent communication between actuary & investment advisor Reflects updated asset levels and interest rates Hands-off approach for plan sponsor 14

15 Benefit Modeling 3 Should I change my plan design? 15

16 Benefit Modeling Forecasting Minimum Required Contributions Sample Results For illustrative purposes only. 16

17 Benefit Modeling Replacement Ratios Sample Results For illustrative purposes only. 17

18 Provider Arrangement 5 How can I manage my retirement program more efficiently? 18

19 Bundled Provider Arrangement 19

20 Provider Arrangement Benefit calculation under an unbundled arrangement: Why Bundle? Benefit calculation under a bundled arrangement: Plan participant announces retirement date Plan sponsor requests calculation from actuary Plan participant announces retirement date Plan sponsor notifies service provider Plan participant selects payment option, returns to plan sponsor Plan sponsor completes election form, gives to participant Plan sponsor contacts custodian (e.g., bank) and communicates employee SSN, payment amount/instructions, etc. Actuary completes calculation Event reflected in actuary s annual data update request 20

21 Provider Arrangement 21