SEIU AFFILIATES PENSION PLAN (U.S.) UPDATE ON FUNDED STATUS AND CHALLENGES

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1 SEIU AFFILIATES PENSION PLAN (U.S.) UPDATE ON FUNDED STATUS AND CHALLENGES Presented by SEIU Benefit Funds Office, Segal Consulting April 10, 2017 Copyright 2017 by The Segal Group, Inc. All rights reserved.

2 Agenda Why This Update Now? Current Status of the Plan Funding Challenges and Risks Primary Concerns Background on Funding Requirements Potential Impact on Plan Status Choices Facing the Trustees Gathering Your Input 1

3 Why This Update Now? Trustees requested Local Union Presidents be consulted on future choices Challenges for Local Union budgets and overall revenue Union s commitment to retirement security Future volatility in key drivers of Plan funding may create additional challenges Investment markets Membership and employment Last step of contribution rate increases approved in 2012 remains to be settled (from 20% to 21% of payroll) Year Adopted Contribution Rate Pre % % % % % (deferred) Explore possible changes on which Trustees want your feedback 2

4 Current Status of the Plan Profile of the Plan, 2016 Type of Plan Number of Employers 123 Active Participants 3,860 Multiemployer Contribution Rate 20% of payroll (since 2015) Annual Contributions Annual Cost Assets vs. Liabilities Current Benefits $53 million $52 million, actuarial value basis $64 million, market value basis 101%, actuarial value basis 91%, market value basis 2.5% of final average pay times years of service Rule of 80 for unreduced early retirement 1.5% annual cost of living increase in retirement 3

5 Primary Concerns Historically low interest rates; lower returns anticipated near-term Time Period Plan s Market Return 10 Year Average ( ) 4.3% Post-Crash Average ( ) 7.2% Estimated % Membership and employment reductions 4

6 Polling Question #1 As of today, my expectation is that my organization s budget for the next several years is likely to: Keep pace with inflation or better Be flat Fall slightly from current levels Fall significantly from current levels (30% or more over the next three years) 5

7 Background on Funding Requirements General measures of funding adequacy for multiemployer plans 6

8 Background on Funding Requirements General measures of funding adequacy for multiemployer plans Green Zone: funded percentage at least 80% and positive credit balance for at least the next seven years 7

9 Background on Funding Requirements General measures of funding adequacy for multiemployer plans Green Zone: funded percentage at least 80% and positive credit balance for at least the next seven years Credit balance is a measure of actual contributions versus required contributions on a cumulative basis 8

10 Background on Funding Requirements General measures of funding adequacy for multiemployer plans Yellow Zone: funded percentage less than 80% or credit balance deficiency within next seven years Green Zone: funded percentage at least 80% and positive credit balance for at least the next seven years Credit balance is a measure of actual contributions versus required contributions on a cumulative basis 9

11 Background on Funding Requirements General measures of funding adequacy for multiemployer plans Red Zone: credit balance deficiency within next several years or funded percentage less than 65% (other factors impact exact timing) Yellow Zone: funded percentage less than 80% or credit balance deficiency within next seven years Green Zone: funded percentage at least 80% and positive credit balance for at least the next seven years Credit balance is a measure of actual contributions versus required contributions on a cumulative basis 10

12 Background on Funding Requirements General measures of funding adequacy for multiemployer plans Red Zone and Critical and Declining: projected insolvency (run out of money) within 15 to 20 years Red Zone: credit balance deficiency within next several years or funded percentage less than 65% (other factors impact exact timing) Yellow Zone: funded percentage less than 80% or credit balance deficiency within next seven years Green Zone: funded percentage at least 80% and positive credit balance for at least the next seven years Credit balance is a measure of actual contributions versus required contributions on a cumulative basis 11

13 Background on Funding Requirements Zone status impact Yellow and Red Zones require participant notification and corrective measures within specific timeframe In Red Zone, Trustees have more tools under the law to change some benefits already earned The objective of the Affiliates Plan Trustees is to remain in the Green Zone with a margin of safety 12

14 Potential Impact on Plan Status Baseline Where the Plan is Today Based on: 2017 Zone Certification 20% contribution rate Level active participants 7.8% estimated 2016 market return 7.5% market return each year forward All Years Trustees monitor level of margin to remain Green under varying conditions 13

15 Investment Risk Baseline All Years Investment Risk Scenario Same as baseline except: 5.5% annual market return in 2017 through % market return in each year thereafter 14

16 Investment Risk Baseline Investment Risk Scenario Investment Risk Scenario and 21% Contribution Rate All Years All Years 15

17 Employment Risk Baseline All Years Employment Risk Scenario Same as baseline except: 30% reduction in active participants by January 1, 2018 Level number of active participants thereafter 16

18 Employment Risk Baseline Employment Risk Scenario Employment Risk Scenario and 21% Contribution Rate All Years All Years 17

19 Combined Risks Baseline Investment Risk and Employment Risk Scenario All Years 18

20 Combined Risks Baseline Investment Risk and Employment Risk Scenario Investment Risk and Employment Risk Scenario and 21% Contribution Rate All Years 19

21 Choices Facing the Trustees RELATIVE IMPACT OF FUTURE BENEFIT AND CONTRIBUTION RATE CHANGES ON FUNDING Benefit changes shown affect future earned benefits only, not benefits already earned Change Rule of 80 to Rule of 90 1% contribution rate increase Reduce future accrual rate from 2.5% to 2.25% 2% contribution rate increase Trustees also manage investments and administrative expenses 20

22 Gathering Your Input What is an appropriate balance of contribution rate and benefit adjustments: The 1% rate increase currently scheduled for 2018? If further changes are necessary? Your input will help the Trustees make future decisions 21

23 Polling Question #2 With regard only to the 1% increase in contribution rate scheduled for January 1, 2018, as of today I feel that: Increasing the contribution rate by 1% is preferable to changing future benefits Changing future benefits is preferable to increasing the contribution rate by 1% Implementing a mix of a contribution rate increase and a change in future benefits is preferable to a contribution rate increase only 22

24 Polling Question #3 If circumstances require the Trustees to consider additional changes, I would prefer: Contribution rate increases over benefit changes Benefit changes over contribution rate increases A mix of contribution rate increases and benefit changes 23

25 Wrap-up Next Steps Trustee consideration of your feedback today Development and modeling of options Trustee decision and communication plan Board of Trustees Mary Kay Henry Gerry Hudson J. Cameron Nelson Kevin Doyle William Dempsey (deputy) Inga Crarey (deputy) Additional feedback after this call? Contact information will follow 24