Session 111 PD, Financial Stress in the DB Retirement System. Moderator: Lisa A. Schilling, FSA, EA, FCA, MAAA

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1 Session 111 PD, Financial Stress in the DB Retirement System Moderator: Lisa A. Schilling, FSA, EA, FCA, MAAA Presenters: Christopher M. Bone, FSA, EA, MAAA Theodore A. Goldman, FSA, EA, MAAA Lisa A. Schilling, FSA, EA, FCA, MAAA SOA Antitrust Disclaimer SOA Presentation Disclaimer

2 111PD Financial Stress in the DB Retirement System Ted Goldman, FSA, EA, MAAA Chris Bone, FSA, EA, MAAA Lisa Schilling, FSA, EA, FCA, MAAA Oct. 25, 2016

3 Ted Goldman, FSA, EA, MAAA 111PD Financial Stress in the DB Retirement System Oct. 25, 2016

4 Today s Agenda Define DB financial stress Factors leading to stress Three perspectives Single Employer, Multiemployer, and Public Sector Signs/measures of stress Data, data, data SOA research findings Stress reduction considerations Wrap-up 3

5 Defining DB Financial Stress ** The risk that a pension plan will not be able to deliver the promised benefits to some or all of the participants. 4

6 Stress Factors Maturing plans Market fluctuations Changing capital markets Funding strategies 5

7 Three Perspectives Similar, but Different States of Stress Single Employer Plans Multiemployer Plans Public Plans Many frozen/ terminated replaced with DC only Risk transfers lump sum offers, annuity purchases Aggregate 74% funded status PBGC program likely, but not certain, to reach surplus Continued commitment to DB Growth in severely underfunded plans Industry changes place pressures on withdrawal liabilities Aggregate 41% funded status PBGC program high likelihood of insolvency Benefit security redefined by MPRA Continued commitment to DB Competition for contribution dollars Media attention on underfunded plans and how to measure Aggregate 51% funded status Examples of benefit security being redefined 6

8 Signs/Measures of DB Financial Stress Funded status Sustainability Ratio of inactives to actives Previous benefit cost (SOA research) unfunded liability per active participant Difference between benefit cash outflows and noninvestment cash inflows Ratio of plan assets to the revenue base or financial resources of the plan sponsor Ratio of liabilities to contributions Duration of the benefit payment stream 7

9 Christopher M. Bone, FSA, EA, MAAA 111PD Financial Stress in the DB Retirement System Oct. 25, 2016

10 Systemic Stresses 9

11 Coverage of Active Wage and Salary Workers by Pensions in the Private Sector 40% 35% 30% 25% 20% 15% 10% 5% 0% Active Participants as a Percentage of Wage and Salary Workforce 8.2% 28.8% 10.2% 3.3% Multiemployer Active Participants Single- Employer Active Participants Source: PBGC 2014 Databook Table S-33 10

12 Single-Employer Insured Plans by Industry 2013 Insured Plans Insured Participants NON-PROFIT ORGANIZATIONS, 3.4% AGRICULTURE, MINING, AND CONSTRUCTION, 8.4% NON-PROFIT ORGANIZATIONS, 0.7% AGRICULTURE, MINING, AND CONSTRUCTION, 1.7% FINANCE, INSURANCE, AND REAL ESTATE, 17.7% SERVICES, 29.2% MANUFACTURING, TRANSPO 23.0% RTATION AND PUBLIC UTILITIES, 3.8% INFORMATION, 2.7% RETAIL TRADE, 4.5% WHOLESALE TRADE, 7.4% FINANCE, INSURANCE, AND REAL ESTATE, 12.8% RETAIL TRADE, 4.9% SERVICES, 19.4% WHOLESALE TRADE, 2.4% INFORMATI ON, 6.6% MANUFACTURING, 43.8% TRANSPORTATION AND PUBLIC UTILITIES, 7.8% 11

13 Multiemployer Insured Plans by Industry 2013 RETAIL TRADE, 6.0% WHOLE SALE TRADE, 1.7% INFORMATION, 2.3% TRANSPORTATION AND PUBLIC UTILITIES, 10.3% AGRICULTURE, 0.6% MANUFACTURING, 10.0% Insured Plans SERVICES, 15.1% MINING, 0.3% CONSTRUCTION, 53.8% WHOLESALE TRADE, 0.5% INFORMATION, 2.1% AGRICULTURE, 0.2% MINING, 1.0% SERVICES, 19.5% RETAIL TRADE, 15.3% Insured Participants TRANSPORTATION AND PUBLIC UTILITIES, 14.6% CONSTRUCTION, 37.3% MANUFACTURING, 9.4% 12

14 Stress Differential not due to Dependency Ratios Multiemployer 2013 Single-Employer 2013 Separated Vested 28% Active 37% Separated Vested 30% Active 37% Retired 35% Public Plans 2015 Other, 21% Retired, 32% Active, 47% Retired 33% Sources: Single-employer and multiemployer universe of plans PBGC 2014 Databook, Public sector Publicplansdata.org 13

15 Funding of US Employer-based Pension Systems Estimated Market Basis % 77% 162% 116% 123% 103% Multiemployer System Funding Single-Employer System Funding 106% 88% 144% 105% 101% 77% 89% 62% Public sector estimate Biggs, 2015 (median), 49% Public sector estimate Rauh, 2016, 51% 72% 74% 41% 41% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Average funding level Sources: Single-employer and multiemployer time series PBGC 2014 Databook, Public sector estimates for FY 2014 (Rauh, Hoover Institute April 2016) and FY 13/14 (Biggs, AEI, September 2015) 14

16 Plans by Funding Ratio Multiemployer 7,000 6,377 Single-Employer , ,000 4,000 3,000 2,000 1,000 3, ,737 2,386 1,123 1,951 1, % or More 140% - 149% 130% - 139% 120% - 129% 110% - 119% 100% - 109% 90% - 99% 80% - 89% 70% - 79% 60% - 69% 50% - 59% 40% - 49% Less Than 40% 150% or More 140% - 149% 130% - 139% 120% - 129% 110% - 119% 100% - 109% 90% - 99% 80% - 89% 70% - 79% 60% - 69% 50% - 59% 40% - 49% Less Than 40% Source: PBGC 2014 Databook Tables M-13 and S-48 15

17 Participants by Funding Ratio ,000 Multiemployer Thousands 12,000 11,113 Single-Employer 5,148 5,000 10,000 9,418 4,000 8,000 3,000 2,955 6,000 5,290 2,000 1,852 4,000 2,825 1, , , % or More 140% - 149% 130% - 139% 120% - 129% 110% - 119% 100% - 109% 90% - 99% 80% - 89% 70% - 79% 60% - 69% 50% - 59% 40% - 49% Less Than 40% 150% or More 140% - 149% 130% - 139% 120% - 129% 110% - 119% 100% - 109% 90% - 99% 80% - 89% 70% - 79% 60% - 69% 50% - 59% 40% - 49% Less Than 40% Source: PBGC 2014 Databook Tables M-8 and S-38 16

Underfunding ($ billions) Growth in severe underfunding in multiemployer plans (Plans less than 40% funded) 2013 Projections report ($120) ($100) ($80) ($60) ($40) ($20) 15 Plans (2001) 54 Plans

18 Underfunding ($ billions) Growth in severe underfunding in multiemployer plans (Plans less than 40% funded) 2013 Projections report ($120) ($100) ($80) ($60) ($40) ($20) 15 Plans (2001) 54 Plans ( ) Participants 228 Plans (2010) Millions Number of Participants ($0) Source: PBGC 2013 Projections Report (based on Databooks Table M-13) 17

Underfunding ($ billions) Growth in severe underfunding in multiemployer plans (Plans less than 40% funded) Updated ($400) ($350) ($300) ($250) ($200) ($150) ($100) ($50) ($0) 15 Plans (2001) 2001

19 Underfunding ($ billions) Growth in severe underfunding in multiemployer plans (Plans less than 40% funded) Updated ($400) ($350) ($300) ($250) ($200) ($150) ($100) ($50) ($0) 15 Plans (2001) Plans ( ) Plans (2010) Plans (2013) Millions Number of Participants Source: PBGC Databooks Table M-13 18

20 Insured Private Sector Plans -- Insurance Program Impact 19

21 PBGC s Single-employer Program Likely, But not Certain, to Reach Surplus Source: PBGC 2015 Projections Report 20

22 PBGC s Multiemployer Program Faces Ongoing Deficits Actual (historic dollars) Projected High/Low Range Projected Mean Source: PBGC 2015 Projections Report 21

23 and a High Likelihood of Running out of Funds Source: PBGC 2015 MPRA Report 22

24 Most likely to Exhaust Funding in Source: PBGC 2015 MPRA Report 23

25 If Guarantee Solvency Addressed by Raising Premiums, Considerable Increases are Needed Source: PBGC 2015 MPRA Report 24

26 And Assessing Premiums Carefully Is Important to Protect Benefits Source: PBGC 2015 MPRA Report 25

27 Lisa Schilling, FSA, EA, FCA, MAAA 111PD Financial Stress in the DB Retirement System Oct. 25, 2016

28 Single Employer System 27

29 SE: Counts (partial) Plans (thousands) Total Participants (millions) Active Participants (millions) Source: Forms 5500 Schedule SB as of Jan 5.,

30 SE: Counts Compared to % 80% 60% 40% 20% 0% Plans Total Participants Active Participants Source: Forms 5500 Schedule SB as of Jan 5.,

31 SE: Aggregate Unit Credit Liabilities and Funded Status Liabilities Trillions $2.50 $2.25 $2.00 $1.75 $1.50 $1.25 $1.00 $0.75 $0.50 $0.25 $0.00 Funding Target Liabilities and AVA Est. Liabilities at Unsmoothed Rates and MVA 10% % 8% 7% 6% 5% 4% 3% 2% 1% 0% Discount Rate Unfunded Liability Funded Liability Liab-wtd Discount Rate Source: Forms 5500 Schedule SB as of Jan 5.,

32 SE: Aggregate Contributions and Benchmarks Billions $90 $80 $70 $60 $50 $40 $30 $20 $10 $ * MRC After Offsets NC + Interest on UFT NC + 7-yr Amortization of UFT Actual Contribution Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting 31

33 SE: Aggregate Contributions and Benchmarks Billions $140 $120 $100 $80 $60 $40 $20 $ * MRC After Offsets NC + Interest on UFT NC + 7-yr Amortization of UFT Est. MV: maintain UL Est. MV: 7-yr amortization Actual Contribution Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting 32

34 SE: Aggregate Contributions and Benchmarks Billions $140 $120 $100 $80 $60 $40 $20 $ * MRC NC + Interest on UFT UFT: Interest Only Est. MV: maintain UL Est. MV: Interest Only Actual Contribution Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting 33

35 SE System General Observations Over The system is shrinking Plans are exiting the system, or Positioning to exit Under current funding rules: Aggregate funding levels were 92% 99% Contributions significantly exceed both MRC and simplified funding benchmarks Estimated market value funded status: Aggregate funding levels would have been 82% 93% Starting with 2012, actual contributions would not have been enough to maintain unfunded liabilities 34

36 Multiemployer System 35

37 ME: Counts (partial) Plans 1,344 1,325 1,308 1,311 1, Total Participants (millions) Active Participants (millions) Source: Forms 5500 Schedule MB as of Jan 5.,

38 ME: Counts Compared to % 80% 60% 40% 20% 0% Plans Total Participants Active Participants Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting 37

39 ME: Aggregate Unit Credit Liabilities and Funded Status Aggregate Liabilities Billions $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 PPA Zone Determination (Actuary s Discount and AVA) Current Liability and MVA 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% Discount Rate Unfunded Liability Funded Liability Liab-wtd Discount Rate $ % Source: Forms 5500 Schedule SB as of Jan 5.,

40 ME: Number of Inactive Participants per Active Participant * Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting 39

41 ME: Previous Benefit Cost (PBC) Plan Actuary Discount Rates Current Liability Discount Rates Thousands $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $ * * 85th-95th 75th-85th 50th-75th 25th-50th 15th-25th 5th-15th 0-5th Median Source: Forms 5500 Schedule SB as of Jan 5.,

42 ME: Observations on Unfunded Liabilities Relative to Active Participants Aggregate unfunded liabilities (unit credit and MVA): Significant but stable around $115 billion for PPA Zone Much greater and increasing as measured by Current Liability ($385 billion for 2009 to $500 billion for 2013) While aggregate ratio of inactive to active participants increased 1.40 in in 2014 (partial year of reporting for 2014) Unfunded liability per active participant (PBC) varies across plans: While stress is high, most plans are improving, but The most highly stressed plans are getting worse 41

43 ME: Aggregate Contributions and Benchmarks Billions $30 $25 $20 $15 $10 $5 $ * MRC NC + Interest on UAL NC + 30-yr pmt on UAL Actual 2009 Actual + CPI Source: Forms 5500 Schedule MB as of Jan 5., 2016 * Partial Year of Reporting 42

44 ME: Aggregate Contributions and Benchmarks Billions $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $ * MRC NC + Interest on UAL NC + 30-yr pmt on UAL NC + Interest on UCL NC + 30-yr Pmt on UCL Actual Source: Forms 5500 Schedule MB as of Jan 5., 2016 * Partial Year of Reporting 43

45 ME: Aggregate Contributions and Benchmarks Billions $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $ * MRC NC + Interest on UAL Interest on UAL NC + Interest on UCL Interest on UCL Actual Source: Forms 5500 Schedule MB as of Jan 5., 2016 * Partial Year of Reporting 44

46 ME: Aggregate Contribution Observations Contributions increased faster than inflation Greatly exceeded Minimum Required Contribution, yet Were insufficient to maintain existing unfunded liabilities, let alone pay down unfunded liabilities Credit balances enable phenomenon PPA Zone aggregate funding stability stemmed from market returns and benefit reductions, not contributions 45

47 Ted Goldman, FSA, EA, MAAA 111PD Financial Stress in the DB Retirement System Oct. 25, 2016

48 Stress Reduction Considerations Actuaries have an important role to play with plan sponsors Risk management is our forte Adopt funding and investment approaches early Early detection is critical but nuances exist Disclose and explain the significance of appropriate metrics Use projections to check for sustainability Scenario test the projections of targeted metrics 47

49 Stress Reduction Considerations (cont d) Fully fund and immunize liabilities for inactives, e.g. Automatically adjust the level of risk as a plan ages and the retiree population grows Immunize liability for next X years of payments Or immunize Y% of retiree payments, based on funded status Link amortization periods to size and remaining working lifetime of the active workforce Long amortization periods can cause problems especially if the funding source does not grow or diminishes Shorter amortization periods may help Stay abreast of current market signals Set realistic/conservative perspective on asset return forecasts Plan for interaction when needed 48

50 The Data Indicates Significant Financial DB Stress Exists Across Single Employer, Multiemployer, and Public Plans DB financial stress, if not addressed, can lead to the need to reduce benefits First for future participants, then future accruals for current participants Even for current benefits for active participants and retirees. We have learned a lot from weathering economic ups and downs, aging workforces, and maturing plans. We need to strengthen the role we play with plan sponsors. These are exciting and important changes for the actuarial profession to embrace. 49

51 Questions and Discussion 50

Multiemployer Pension Plan System Overview. January 2017

Multiemployer Pension Plan System Overview January 2017 Multiemployer Pension Plan System Overview Author Lisa A. Schilling, FSA, EA, FCA, MAAA Retirement Research Actuary Society of Actuaries Acknowledgments