Review of October 1, 2017 Actuarial Valuation Results

Transcription

1 SEIU Local 1 & Participating Employers Pension Trust Review of October 1, 2017 Actuarial Valuation Results Presented by: Jessica A. Streit Vice President and Benefits Consultant John Redmond, ASA, MAAA, EA Consulting Actuary May 16, 2018 This document has been prepared by Segal Consulting, a member of the Segal Group Inc., for the benefit of the Board of Trustees of the SEIU Local 1 & Participating Employers Pension Trust and is not complete without the presentation provided at the May 16, 2018 meeting of the Board of Trustees and the final actuarial valuation and review as of October 1, This document should not be shared, copied or quoted, in whole or in part, without the consent of Segal Consulting, except to the extent otherwise required by law. The actuarial calculations were completed under the supervision of John Redmond, ASA, MAAA, EA. Asset performance after the valuation date is not reflected. Copyright 2018 by The Segal Group, Inc. All rights reserved. Copyright 2017 by The Segal Group, Inc. All rights reserved /10739

2 Agenda Valuation Summary Summary of Actuarial Valuation Results Plan Experience Funding Standard Account Funded Percentage Scheduled Cost Risk Appendix 2

3 Valuation Summary The October 1, 2017 valuation results are based on a draft financial audit. The final actuarial valuation will be issued based on the final audit. 1. Zone Status The 2017 certification, issued on December 29, 2017, classified the Plan as in the Green Zone based on a projected funded percentage of 100.9% and no projected funding deficiency. In addition, the Plan was not projected to be in critical status for any of the succeeding five years. 2. Asset Return The rate of return on the market value of plan assets was 11.44% for the plan year. The rate of return on the actuarial value of assets was 7.83% as a result of the asset valuation method. We will continue to monitor the Plan s actual and anticipated investment returns relative to the assumed long-term rate of return on investments of 7.25%. The actuarial value of assets is currently 98.4% of market value. 3. Population Changes The number of active participants has declined from 10,910 to 9,051 over the last eight years, while the number in pay status has increased by 1,405 over that period. As a result, the ratio of non-active to active participants is currently 1.4. As this ratio increases, the funding of the Plan will become less reliant on changes in the contribution rate and more reliant on asset performance. 4. Funded Percentage Based on this October 1, 2017 actuarial valuation, the funded percentage as of that date is 101.0%. This will be reported on the 2017 Annual Funding Notice. 3

4 Valuation Summary 5. Credit Balance The credit balance in the FSA as of September 30, 2017 was $90.6 million, an increase of $2.6 million from the prior year. 6. Scheduled Cost The current contribution rate of $1.15 per hour exceeds the Scheduled Cost of $0.65 per hour, resulting in a margin of $0.50 per hour, or 43.4% of contributions. 7. Risk The actuarial valuation results are dependent on a single set of assumptions; however, there is a risk that emerging results may differ significantly as actual experience proves to be different from the current assumptions. 8. Changes Since Prior Valuation There were no changes in actuarial assumptions or plan provisions since the prior valuation. Note regarding projections contained in this presentation: Additional scenarios would demonstrate sensitivity to investment return, employment and other alternative assumptions. 4

5 Summary of Actuarial Valuation Results Certified Zone Status Green Green Demographic Number of active participants 9,080 9,051 Data: Number of inactive participants with vested rights 1 6,591 6,683 Number of retired participants and beneficiaries 5,744 5,999 Assets: Market value of assets (MVA) $426,390,050 $471,666,200 Actuarial value of assets (AVA) 433,462, ,955,714 AVA as a percent of MVA 101.7% 98.4% Statutory Minimum required contribution $0 $0 Funding Maximum deductible contribution 672,543, ,451,823 Information: Annual Funding Notice percentage 98.2% 101.0% FSA deficiency projected in Plan Year beginning N/A N/A Amount Per Hour Amount Per Hour Scheduled Projected contributions 2 $21,406,100 $1.15 $21,337,733 $1.15 Cost and Scheduled Cost 13,898, ,073, Contributions: Margin 7,507, ,264, Actual contributions 22,765, Cost Elements Normal cost, including administrative expenses $8,807,677 $8,824,119 on a Scheduled Actuarial accrued liability 467,543, ,825,897 Cost Basis: Unfunded actuarial accrued liability (based on AVA) 34,080,263 20,870,183 1 Includes 32 beneficiaries with rights to deferred pensions for 2016 and Based on 2,050 hours per active. 5

6 Participant Data POPULATION AS OF SEPTEMBER 30 RATIO OF NON-ACTIVES TO ACTIVES AS OF SEPTEMBER 30 12, , , , , , Active Inactive Vested In Pay Status Note: Pensioners and beneficiaries in pay status are reported as of September 30. Active and inactive participants are reported as of the following December 31. 6

7 Participant Data Active Participants Distribution of Active Participants as of December 31, ,800 1,600 1,400 1,200 1, ACTIVES BY AGE 2,500 2,000 1,500 1, ACTIVES BY YEARS OF CREDITED SERVICE Average age 51.3 Average years of credited service 11.9 Prior year average age 51.0 Prior year average years of credited service 11.9 Difference 0.3 Difference 0.0 7

8 Employment History The industry activity assumption used for the 2017 actuarial zone certification was that the active population would remain level, and, on the average, contributions would be made for each active for 2,050 hours each year. The long-term assumption for Scheduled Cost purposes is 2,050 hours for each active participant TOTAL HOURS 2,500 AVERAGE HOURS ,000 Millions ,500 1, Historical Average Total Hours Historical Average Hours Last year 19,778,886 Last year 2,185 Last five years 20,231,697 Last five years 2,149 Last 10 years 21,631,940 Last 10 years 2,147 Long-term assumption 18,554,550 Long-term assumption 2,050 8

9 Assets and Investment Returns Determination of the Actuarial Value of Assets 1 Market value of assets, September 30, 2017 $471,666,200 Original Unrecognized 2 Calculation of unrecognized return Amount* Return** (a) Year ended September 30, 2017 $17,791,265 $14,233,012 (b) Year ended September 30, ,607,976 5,164,786 (c) Year ended September 30, ,916,753-13,166,701 (d) Year ended September 30, ,396,946 1,479,389 (e) Year ended September 30, ,160,974 0 (f) Total unrecognized return $7,710,486 3 Preliminary actuarial value: (1) - (2f) 463,955,714 4 Adjustment to be within 20% corridor 0 5 Final actuarial value of assets as of September 30, 2017: (3) + (4) 463,955,714 6 Actuarial value as a percentage of market value: (5) (1) 98.4% 7 Amount deferred for future recognition: (1) - (5) $7,710,486 * Total return minus expected return on a market value basis ** Recognition at 20% per year over 5 years 9

10 Assets and Investments Historical Investment Returns The assumed long-term rate of return of 7.25% considers past experience, the Trustees asset allocation policy and future expectations. 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Actuarial Value Market Value Average Rates of Return Actuarial Value Market Value Most recent year return: 7.83% 11.44% Most recent five-year average return: 8.44% 8.19% Most recent ten-year average return: 5.85% 5.84% 10

11 Actuarial Experience Actuarial Value of Assets Investment Experience 1 Net investment income $33,801,428 2 Average actuarial value of assets 431,808,517 3 Rate of return: % 4 Assumed rate of return 7.25% 5 Expected net investment income: 2 x 4 $31,306,117 6 Actuarial gain from investments: 1-5 $2,495,311 Total Net Plan Experience 1 Net gain from investments $2,495,311 2 Net gain from administrative expenses 36,413 3 Net loss from other experience -810,197 4 Net experience gain: $1,721,527 When compared to the projected actuarial accrued liability of $456,308,188 as of September 30, 2017, the net experience variation was not significant. 11

12 Funding Standard Account Projection The credit balance in the FSA as of September 30, 2017 was $90.6 million, an increase of $2.6 million from the prior year. A 15-year projection of the Funding Standard Account indicates that the credit balance will remain positive during the projection period, assuming all experience emerges as expected. $ Millions Projected Year-End Credit Balance for Plan Years Beginning October

13 Funded Percentage History Present Value of Accrued Benefits (PVAB) vs. Actuarial Value of Assets as of October $ Millions PVAB Actuarial Value of Assets PPA 06 Funded Percentage as of October 1 The Plan s funded percentage based on the actuarial value of assets is 101.0%, compared to 98.2% in the prior year. 13

14 Funded Percentage Projection A projection of the PPA 06 funded percentage indicates the funded ratio will gradually increase over the next 15 years, assuming all experience emerges as expected. 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Projected Funded Percentage as of October

15 Scheduled Cost Scheduled Cost Development and Reconciliation Year Beginning October Cost Element Normal cost $6,977,992 $6,994,434 Administrative expenses 1,829,685 1,829,685 23% Amortization of the unfunded actuarial accrued liability 4,576,679 2,802,682 Adjustment for monthly payments 514, ,816 4% 15% 58% Annual Scheduled Cost, payable monthly $13,898,715 $12,073,617 Scheduled Cost as of October 1, 2016 $13,898,715 Effect of maintaining a fixed amortization period -224,209 Effect of contributions more than Scheduled Cost -1,387,255 Effect of investment gain -374,783 Effect of other gains and losses on accrued liability 144,076 Effect of net other changes, including composition and number of participants 17,073 Total change -$1,825,098 Scheduled Cost as of October 1, 2017 $12,073,617 As indicated, the decrease in cost is primarily due to more contributions in the Plan year ended September 30, 2017 than the prior year s Scheduled Cost, and the effect of the investment gain. 15

16 Scheduled Cost Scheduled Cost vs. Contribution The projected annual employer contributions of $21,337,733 are based on the Trustees assumption that 9,051 participants will work an average of 2,050 hours at the $1.15 contribution rate. This exceeds the Scheduled Cost of $12,073,617 by $9,264,116, or 43.4% of projected contributions. Scheduled Cost ($0.65 per hour) Projected Contributions Normal Cost Expenses Amortization of UAL $0.39 $0.10 $0.16 $0.50 per hour margin $

17 Risk The actuarial valuation results are dependent on a single set of assumptions; however, there is a risk that emerging results may differ significantly as actual experience proves to be different from the current assumptions. We have not been engaged to perform a detailed analysis of the potential range of the impact of risk relative to the Plan s future financial condition, but have included a brief discussion of some risks that may affect the Plan. A more detailed risk assessment would provide the Trustees with a better understanding of the risks inherent in the Plan. This assessment may include scenario testing, sensitivity testing, stress testing and stochastic modeling. An assessment could be important for your Plan because: relatively small changes in investment performance can produce large swings in the unfunded liabilities since the assets and liabilities are of similar size. potential changes in the plan benefits may result in participant choices that vary from those assumed. the Trustees have not had a detailed risk assessment. Investment Risk (the risk that returns will be different than expected) The market value rate of return over the last 10 years has ranged from a low of -16.1% to a high of 18.4%. Employment Risk (the risk that actual contributions will be different from projected contributions) If the number of active participants declines by 10%, the contributions would decrease by 10%, but this would be offset by a 10% decrease in the Scheduled Cost. 17

18 Risk Longevity Risk (the risk that mortality experience will be different than expected) A 10% reduction in the assumed incidence of mortality results in a change in the actuarial cost factors of roughly 3% for most plans. For your Plan, a 3% change in the actuarial cost factors would result in approximately an 18.6% increase in Scheduled Cost. Other Demographic Risk (the risk that participant experience will be different than assumed) Examples of the risk include: Actual retirements occurring earlier or later than assumed. The value of retirement plan benefits is sensitive to the rate of benefit accruals and any early retirement subsidies that apply. While it is difficult to quantify the impact of potential experience, for your plan, each 1% change in the actuarial cost factors would result an increase in scheduled cost of approximately 6.2%. More or less active participant turnover than assumed. Return to covered employment of previously inactive participants. Maturity Measures As of October 1, 2017, the retired life actuarial accrued liability represents 44% of the total actuarial accrued liability. In addition, the actuarial accrued liability for inactive vested participants represents 17% of the total. The higher the non-active actuarial accrued liability is as a percent of the total liability, the greater the danger of volatility in results. 18

19 Appendix: Actuarial Assumptions and Methods for Projections All assumptions, methods and plan provisions used to develop the projections are those used for the October 1, 2017 valuation, which are the same as in the October 1, 2016 actuarial valuation. Future demographic experience is assumed to match the valuation assumptions. Net market value returns are assumed to be 7.25% per year in the future. Administrative expenses are assumed to be $1,900,000, payable monthly, for the year beginning October 1, 2017, increasing by 3% each year thereafter. The active population is assumed to remain level at 9,051 and, on the average, each active is assumed to work 2,050 hours per year. New entrants are assumed to have the same demographic mix as actual new hires in the last five years. Projections, by their nature, are not a guarantee of future results. The modeling projections are intended to serve as estimates of future financial outcomes that are based on the information available to us at the time the modeling is undertaken and completed, and the agreed-upon assumptions and methodologies described herein. Emerging results may differ significantly if the actual experience proves to be different from these assumptions or if alternative methodologies are used. Actual experience may differ due to such variables as demographic experience, the economy, stock market performance and the regulatory environment. Segal Consulting does not practice law and, therefore, cannot and does not provide legal advice. Any statutory interpretations reflected in the modeling are subject to review and opinion of Fund Counsel. 19

20 Appendix: Participant Data Detail Table of Plan Coverage Year Ended September 30 Category Change from Prior Year Participants in Fund Office tabulation 9,997 10, % Less: Participants with less than one year of credited service 917 1,024 N/A Active participants in valuation: Number (as of December 31) 9,080 9, % Average age Average years of credited service Average contribution rate for coming year $1.15 $ % Number with unknown age % Total active vested participants 7,295 7, % Inactive participants with rights to a pension: Number (as of December 31) 6,559 6, % Average age Average monthly benefit $200 $ % Number with unknown age % Beneficiaries with rights to deferred payments % Pensioners: Number in pay status 5,073 5, % Average age Average monthly benefit $365 $ % Number in suspended status % Beneficiaries: Number in pay status % Number in suspended status % 20

21 Appendix: Employment History Total Hours of Contributions 1 Active Participants Average Hours of Contributions Year Ended September 30 Number Percent Change Number Percent Change Number Percent Change ,714, % 10, % 2, % ,266, % 10, % 2, % ,903, % 10, % 2, % ,864, % 10, % 2, % ,411, % 10, % 2, % ,550, % 9, % 2, % ,875, % 9, % 2, % ,914, % 9, % 2, % ,039, % 9, % 2, % ,778, % 9, % 2, % Five-year average hours: 2,149 Ten-year average hours: 2,147 1 The total hours of contributions are based on total contributions divided by the average contribution rate for the year, which may differ from the hours reported to the Fund Office. The long-term assumption for Scheduled cost purposes remained at 2,050 hours per active. We look to the Trustees for guidance as to whether this continues to be reasonable. 21

22 Appendix: Participant Data Participant Population Year Ended September 30 Active Participants Inactive Vested Participants Pensioners and Beneficiaries Ratio of Non-Actives to Actives ,826 4,799 4, ,910 5,004 4, ,852 5,210 4, ,651 5,453 4, ,428 5,683 4, ,887 6,168 5, ,664 6,342 5, ,391 6,572 5, ,080 6,591 5, ,051 6,683 5, The number of active participants has declined from 10,910 to 9,051 over the last eight years, while the number in pay status has increased by 1,405 over that period. As a result, the ratio of non-active to active participants is currently 1.4. As this ratio increases, the funding of the Plan will become less reliant on changes in the contribution rate and more reliant on asset performance. 22

23 Appendix: Financial Information Comparison of Employer Contribution, Administrative Expenses, and Benefits Paid 30 Pension plan funding anticipates that, over the long term, both contributions (less administrative and investment fees) and investment returns will be needed to cover benefit payments. Contributions, net of administrative expenses, were $20,901,076 for the year. Benefit payments during the year totaled $24,338,630. They are projected to increase to approximately $42 million ten years from now $ Millions Contributions Benefits Paid 23

24 Appendix: Funded Percentage Detail c 2017 Plan Year 2016 Plan Year 2015 Plan Year Actuarial valuation date October 1, 2017 October 1, 2016 October 1, 2015 Funded percentage 101.0% 98.2% 94.7% Value of assets $463,955,714 $433,462,748 $402,864,028 Value of liabilities 459,325, ,585, ,282,810 Fair market value of assets as of plan year end Not available 471,666, ,390,050 The Plan was not in endangered or critical status in the Plan year ended September 30,

25 Appendix: Funding Standard Account Description ERISA imposes a minimum funding standard that requires the Plan to maintain a Funding Standard Account (FSA). The accumulation of contributions in excess of the minimum required contributions is called the FSA credit balance. If actual contributions fall short on a cumulative basis, an accumulated funding deficiency has occurred. The FSA is charged with the normal cost and the amortization of increases or decreases in the unfunded actuarial accrued liability due to plan amendments, experience gains or losses, and changes in actuarial assumptions and funding methods. The FSA is credited with employer contributions and amortization of decreases in the unfunded actuarial accrued liability. Both charges and credits receive relevant interest until the end of the Plan Year as applicable. Increases or decreases in the unfunded actuarial accrued liability are amortized over 15 years except that short-term benefits, such as 13 th checks, are amortized over the scheduled payout period and funding method changes are amortized over 10 years. 25

26 Appendix: Scheduled Cost Description The Scheduled Cost is the amount of annual contribution determined in accordance with the amortization approach adopted by the Trustees. It is an annual amount based on benefit levels and assets that allows a comparison to current contribution levels, given the expectation of a continuing Plan. The Plan s Scheduled Cost is based on a funding schedule that is different from the minimum funding requirements established by ERISA and uses a single amortization schedule for the combined unfunded actuarial accrued liability. The Scheduled Cost amortization period remains fixed at 10 years. We will continue to monitor this approach to advise the Trustees as to whether it continues to provide an adequate basis for assessing the funding needs of the Plan. The actuarial cost method used to calculate Scheduled Cost is the Entry Age Normal Cost Method. This method tends to produce a more level average cost than the Unit Credit Cost Method, which is used for minimum funding purposes. 26

27 Appendix: Important Information about Actuarial Valuations Analyzing Pension Plans There are several ways of evaluating funding adequacy for a pension plan. In monitoring the Plan s financial position, the Trustees should keep in mind all of these concepts: Funding Standard Account Zone Information Solvency Projections Scheduled Cost The ERISA Funding Standard Account (FSA) measures the cumulative difference between actual contributions and the minimum required contributions. If actual contributions exceed the minimum required contributions, the excess is called the credit balance. If actual contributions fall short of the minimum required contributions, a funding deficiency occurs. The Pension Protection Act of 2006 (PPA 06) called on plan sponsors to actively monitor the projected FSA credit balance, the funded percentage (the ratio of the actuarial value of assets to the present value of benefits earned to date) and cash flow sufficiency. Based on these measures, plans are then categorized as critical (Red Zone), endangered (Yellow Zone), or neither (Green Zone). The Multiemployer Pension Reform Act of 2014 (MPRA), among other things, made the zone provisions permanent. Pension plan funding anticipates that, over the long term, both contributions and investment earnings will be needed to cover benefit payments and expenses. To the extent that contributions are less than benefit payments, investment earnings and fund assets will be needed to cover the shortfall. In some situations, a plan may be faced with insufficient assets to cover its current obligations and may need assistance from the Pension Benefit Guaranty Corporation (PBGC). MPRA provides options for some plans facing insolvency. The Scheduled Cost is an annual amount based on benefit levels and assets that allows a comparison to current contribution levels, given the expectation of a continuing Plan. Withdrawal Liability ERISA provides for assessment of withdrawal liability to employers who withdraw from a multiemployer plan based on unfunded vested benefit liabilities. 27

28 Appendix: Important Information about Actuarial Valuations Valuation Input Items An actuarial valuation is a budgeting tool with respect to the financing of future uncertain obligations of a pension plan. As such, it will never forecast the precise future contribution requirements or the precise future stream of benefit payments. In any event, it is an estimated forecast the actual cost of the plan will be determined by the benefits and expenses paid, not by the actuarial valuation. In order to prepare a valuation, Segal Consulting ( Segal ) relies on a number of input items. These include: Plan Provisions Participant Information Financial Information Actuarial Assumptions Plan provisions define the rules that will be used to determine benefit payments, and those rules, or the interpretation of them, may change over time. Even where they appear precise, outside factors may change how they operate. For example, a plan may require the award of a Social Security disability pension as a condition for receiving a disability pension from the plan. If so, changes in the Social Security law or administration may change the plan s costs without any change in the terms of the plan itself. It is important for the Trustees to keep Segal informed with respect to plan provisions and administrative procedures, and to review the plan summary included in our report to confirm that Segal has correctly interpreted the plan of benefits. An actuarial valuation for a plan is based on data provided to the actuary by the plan. Segal does not audit such data for completeness or accuracy, other than reviewing it for obvious inconsistencies compared to prior data and other information that appears unreasonable. For most plans, it is not possible nor desirable to take a snapshot of the actual workforce on the valuation date. It is not necessary to have perfect data for an actuarial valuation: the valuation is an estimated forecast, not a prediction. The uncertainties in other factors are such that even perfect data does not produce a perfect result. Notwithstanding the above, it is important for Segal to receive the best possible data and to be informed about any known incomplete or inaccurate data. Part of the cost of a plan will be paid from existing assets the balance will need to come from future contributions and investment income. The valuation is based on the asset values as of the valuation date, typically reported by the auditor. Some plans include assets, such as private equity holdings, real estate, or hedge funds, that are not subject to valuation by reference to transactions in the marketplace. A snapshot as of a single date may not be an appropriate value for determining a single year s contribution requirement, especially in volatile markets. Plan sponsors often use an actuarial value of assets that differs from market value to gradually reflect year-to-year changes in the market value of assets in determining the contribution requirements. In preparing an actuarial valuation, Segal starts by developing a forecast of the benefits to be paid to existing plan participants for the rest of their lives and the lives of their beneficiaries. This requires actuarial assumptions as to the probability of death, disability, withdrawal, and retirement of participants in each year, as well as forecasts of the plan s benefits for each of those events. The forecasted benefits are then discounted to a present value, typically based on an estimate of the rate of return that will be achieved on the plan s assets. All of these factors are uncertain and unknowable. Thus, there will be a range of reasonable assumptions, and the results may vary materially based on which assumptions the actuary selects within that range. That is, there is no right answer (except with hindsight). It is important for any user of an actuarial valuation to understand and accept this constraint. The actuarial model may use approximations and estimates that will have an immaterial impact on our results and will have no impact on the actual cost of the plan (the total of benefits and expenses paid out over time). In addition, the actuarial assumptions may change over time, and while this can have a significant impact on the reported results, it does not mean that the previous assumptions or results were unreasonable or wrong. 28

29 Appendix: Important Information about Actuarial Valuations Given the above, the user of Segal s actuarial valuation (or other actuarial calculations) needs to keep the following in mind: The actuarial valuation is prepared for use by the Trustees. It includes information for compliance with federal filing requirements and for the plan s auditor. Segal is not responsible for the use or misuse of its report, particularly by any other party. An actuarial valuation is a measurement at a specific date it is not a prediction of a plan s future financial condition. Accordingly, Segal did not perform an analysis of the potential range of financial measurements, except where otherwise noted. Actuarial results in this report are not rounded, but that does not imply precision. Critical events for a plan include, but are not limited to, decisions about changes in benefits and contributions. The basis for such decisions needs to consider many factors such as the risk of changes in employment levels and investment losses, not just the current valuation results. ERISA requires a plan s enrolled actuary to provide a statement for inclusion in the plan s annual report disclosing any event or trend that the actuary has not taken into account, if, to the best of the actuary s knowledge, such an event or trend may require a material increase in plan costs or required contribution rates. If the Trustees are currently aware of any event that was not considered in this valuation and that may materially increase the cost of the Plan, they must advise Segal, so that we can evaluate it and take it into account. A certification of zone status under PPA 06 is a separate document from the actuarial valuation. Segal does not provide investment, legal, accounting, or tax advice. This valuation is based on Segal s understanding of applicable guidance in these areas and of the plan s provisions, but they may be subject to alternative interpretations. The Trustees should look to their other advisors for expertise in these areas. While Segal maintains extensive quality assurance procedures, an actuarial valuation involves complex computer models and numerous inputs. In the event that an inaccuracy is discovered after presentation of Segal s valuation, Segal may revise that valuation or make an appropriate adjustment in the next valuation. Segal s report shall be deemed to be final and accepted by the Trustees upon delivery and review. Trustees should notify Segal immediately of any questions or concerns about the final content. As Segal Consulting has no discretionary authority with respect to the management or assets of the Plan, it is not a fiduciary in its capacity as actuaries and consultants with respect to the Plan. 29