Other Postemployment Benefit ( OPEB )

Transcription

1 Upcoming Changes to Other Postemployment Benefit ( OPEB ) Valuations GASB 43/45 Replacement with GASB 74/75 CHRISTOPHER DIORIO, ASA, MAAA HANNAH ROSSER, ASA, MAAA JULY 19, 2017

2 Agenda Introduction to Arthur J. Gallagher OPEB Valuation Background New OPEB Valuation Standards: GASB 74 and GASB 75 Important Dates High-Level Summary Terminology Changes Methodology Changes Accounting Changes Sample Exhibits OPEB Self-Service Tool for Districts with fewer than 200 members Working with Gallagher 2

3 Who is Arthur J. Gallagher? 3

4 ajginternational.com US Company Structure

5 Gallagher Benefit Services Our Footprint NYSE:AJG $3.6B Total Adjusted Revenues in % Revenue Growth in ,748 ORGANIZATIONS REPRESENTING 12,209,000 EMPLOYEES $761M Acquired Revenues $637M in Revenue 180+ Locations 3,000+ Employees 5

6 Services & Solutions Executive Benefits Health & Welfare Healthcare Analytics Human Resources & Compensation Institutional Investment & Fiduciary Services Multinational Benefits & HR Retirement Plans Voluntary Benefits Powered by Proprietary Tools & Analysis Data Warehousing & Benchmarking Workforce Evaluation Program Optimization Healthcare Reform Tools 6

7 About Healthcare Analytics Consulting A Division of Gallagher Benefit Services Founded in 1993 Acquired by Arthur J. Gallagher in 2002 Current Facts and Figures: Offices in Princeton (NJ), Boca Raton (FL), Boston (MA), Charlotte (NC) 36 Practitioners (Actuaries, Clinicians, Data Architects, Software Developers, Auditors) Proprietary Data Warehouse (GBSInsider TM ) Over 10 terabytes of data Maintains established feeds with over 60 health and welfare vendors 7

8 Healthcare Analytics Service Offerings Actuarial Services General (Custom Cost / Contribution Modeling, Certified IBNRs, P&C) Retiree Health Benefits (FASB / GASB Valuations, Part D Attestations) Provider Consulting (ACO Analyses) Diagnostic Analysis of Employee Benefit Programs Audit Services Traditional Sample-based Claim Audits Electronic Claim and Eligibility Audits TPA Contracting and Performance Guarantees PBM Contract, Claims and Rebate Audits Pre-implementation Audits Dependent Eligibility Audits Software Apex.HRM (Healthplan Rating Model) Apex.INBR (IBNR Reserve Model) Discount Database GBSInsider TM All tools supported by HCA 8

9 OPEB Valuation Background 9

10 OPEB Valuation Background OPEB = Other PostEmployment Benefits Typically health benefits (Medical/Drug/Dental/Vision/Life) Other than pensions In addition to pensions, many employers provide OPEB as part of the total compensation offered to: attract and retain the services of qualified employees maximize tax advantages for offering retiree OPEB benefits Prior to GASB 45, most OPEB plans were financed on a pay-as-you-go basis Financial statements generally did not report the financial effects of OPEB until the promised benefits were paid. Historical financial reporting generally failed to: recognize the cost of benefits in periods when the related services are received by the employer provide information about the actuarial accrued liabilities for promised benefits associated with past services and whether and to what extent those benefits have been funded provide information useful in assessing potential demands on the employer s future cash flows 10

11 OPEB Valuation Background The big OPEB valuation question: What is the value of other postemployment benefits being offered to the employer s current active and retired population? This may raise another question 11

12 Why does my District need an OPEB valuation if the retirees pay the full premium for coverage? Source: Dale H. Yamamoto, Health Care Costs From Birth to Death, June

13 Why does my District need an OPEB valuation if the retirees pay the full premium for coverage? Chapter 509A.13: Iowa retirees must be allowed to continue governmentemployer-sponsored coverage until age 65 at the same premium levels as active employee population. Implicit Rate Subsidy 60-year-old retiree pays $7,000 in premium this year to continue medical and prescription drug coverage through District plan Retiree incurs claims of $11,000 this year Retiree costs District $1,000 in administrative fees this year The District s plan is providing an implicit rate subsidy: Retiree costs are $11,000 in claims + $1,000 in fees = $12,000 Retiree pays only $7,000 in premium Implicit Rate Subsidy = $12,000 - $7,000 = $5,000 Conclusion: The retiree is being provided implicitly subsidized coverage via the plan s blended active/retiree rates. 13

14 Why does my District need an OPEB valuation if the retirees pay the full premium for coverage? Implicit Rate Subsidy arises for any coverage with costs that we would expect to increase with age: Medical and Prescription Drugs Life Insurance Dental and Vision coverages do not usually fall in this category Because of 509A.13, all IASB Districts will have at least an implicit subsidy that must be valued to comply with GASB standards. 14

15 New OPEB Valuation Standards: GASB 74 and GASB 75 15

16 New OPEB Valuation Standards: Important Dates GASB Statements 74 and 75 released June 2, 2015 GASB 74 replaces GASB 43 Applies to funded OPEB plans GASB 75 replaces GASB 45 Applies to unfunded OPEB plans New Standards are intended to mimic pension valuation requirements 16

17 New OPEB Valuation Standards: Important Dates GASB 74 must be adopted for fiscal years starting after June 15, 2016 For IASB members, Districts with funded plans will need to comply as of fiscal year end June 30, 2017 GASB 75 must be adopted for fiscal years starting after June 15, 2017 For IASB members, Districts with unfunded plans will need to comply as of fiscal year end June 30,

18 New OPEB Valuation Standards: High-Level Summary of Changes GASB 45 GASB 75 Requirement to report a Net OPEB Obligation (NOO) in statement of financial position (notes to financial statement) Previously used Projected Unit Credit for most employers Discount Rate was determined by actuary or auditor (reflected inflation + interest rates in the current market if unfunded) Total OPEB Liability (TOL) reported on balance sheet Long Term Liability Expense items now reported on income statement Short Term Liability (affects profit and loss) Required use of Entry Age Normal (level % of pay) Discount Rate now based on end of year market rates for municipal bond rates (rated grade Aa or better) Previously AAL, Assets, UAAL & ARC Assumptions were less regulated. Backup of information was more informal. Actuarial valuation allowed every 3 years for groups under 200 TOL, FNP, NOL & Expense More footnote disclosures and supplementary information required, similar to what is required under GASB 67/68. Plans with fewer than 200 members now must perform a valuation every 2 years 2017 GALLAGHER BENEFIT SERVICES, INC. 18

19 New OPEB Valuation Standards: Terminology Changes GASB 45 GASB 75 Actuarial Accrued Liability (AAL) Total OPEB Liability (TOL) Assets Fiduciary Net Position (FNP) Unfunded AAL Net OPEB Liability (NOL) Normal Cost Service Cost Amortization of Liability Deferred inflows/outflows Interest on NC and Amortization Interest cost (Now on NOL) Net OPEB Liability N/A 19

20 Methodology Changes: Entry Age Normal Cost Method A little review of OPEB valuation terminology: Present Value of Future Benefits (loaf of bread) Actuarial Accrued Liability (a chunk of the loaf of bread) Normal/Service Cost (one slice of bread) GASB 43/45 allowed actuary to select one of several cost methods used to calculate the service cost GASB 74/75 requires Salary-Based Entry Age Normal (EAN) cost method Projected Unit Credit (PUC) method has a service (or normal) cost that increases over a person s lifetime Entry Age Normal calculates a service (or normal) cost that is theoretically constant over the person s lifetime 20

21 Methodology Changes: Entry Age Normal Cost Method Normal Cost with Varied Cost Methods $1,300 $1,100 $900 $700 $500 $300 Projected Unit Credit Entry Age Normal 21

22 Methodology Changes: Entry Age Normal Cost Method Changing from Projected Unit Credit to Entry Age Normal cost method will: Increase liabilities for younger members while smoothing out the year-to-year increases due to the aging members. Increase overall liabilities by approximately 10% to 15% in the first year of adoption. 22

23 New OPEB Valuation Standards: Accounting Changes Similar to pensions (GASB 67/68), employers must now recognize these liabilities on their balance sheet (Net OPEB Liability) and income statement (Expense items Service cost, deferred inflows/outflows) Net OPEB obligation is eliminated Must have more detailed backup of assumptions made in the valuation Example: Better tracking of participation Notes and disclosures must be restructured (RSI) Auditors may be more assertive Discount rate is now based on market rate and will likely lower from current standards (thus increasing liabilities) 23

24 New OPEB Valuation Standards: Sample Exhibits 24

25 New OPEB Valuation Standards: Smaller Districts Under GASB 43/45, Districts with fewer than 200 plan members were allowed to have a full valuation performed every three years. Under GASB 74/75, all Districts, regardless of size, must have a full valuation performed every two years. GASB 45 Self-Serve website is still available to employers with fewer than 100 plan members. Alternative Measurement Method allows for: Simplified assumptions Simplified inputs Actuary does not need to sign valuation report Self-Serve website will be updated soon to incorporate GASB 74/75 Standards. Alternative Measurement Method still available under GASB 74/75, with some changes. IASB will be notified when this update is available. Stay tuned! 25

26 Working with Gallagher 26

27 Gallagher Partnership with IASB Access details related to valuations on IASB website Access to qualified health actuaries Full service OPEB valuation resources Benefits Consulting Offering guidance on managing cost of retiree health benefits 27

28 Team Structure Signing Actuary Co-Signing Actuary Hannah Rosser Actuary, ASA Mark Bogert Actuary, ASA Sam Feldman Actuary, ASA Sam Lopresti Actuarial Analysts Nicole Diebold Nikhita Patel 28

29 Timeline of Events Phase I Strategy Phase 2 Analysis Phase 3 Finalization Collect necessary Data Identify immediate concerns / challenges Set short-term priorities Confirm assumptions with District Evaluate liability of current and future retirees Reconcile the current results to prior Discuss upcoming strategies Prepare necessary accounting exhibits Send Draft Report (final report produced at fiscal year end) AJG to handle auditor questions Present final report (if necessary) 29

30 Questions? Christopher Diorio ASA, MAAA Hannah Rosser ASA, MAAA 30