OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM 277 EAST TOWN STREET, COLUMBUS, OH PERS (7377)

Transcription

1 OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM 277 EAST TOWN STREET, COLUMBUS, OH PERS (7377) MEMORANDUM DATE: February 4, 2005 TO: FROM: OPERS Retirement Board Members Karen Carraher, Director Finance Mark Snodgrass, Assistant Director Accounting & Budgeting RE: V. Discussion Items: B. Continuing Education: 50 year cash flow projections Purpose To provide a summary of the results of the Actuarial Projection of Base Retirement and Retiree Health and Medicare Benefits report. Background Annually, the System s actuaries, Gabriel Roeder, Smith & Company, prepare a report of the Actuarial Projection of Base Retirement and Retiree Health and Medicare Benefits. This report projects asset and cash flows for a 50-year period beginning January 1, The projections are based on the same census data, financial information and actuarial assumptions used in the last regular annual actuarial valuation as of December 31, Retiree health plan changes and scheduled employer and member contribution rate changes adopted as a component of the Health Care Preservation Plan document dated September 9, 2004 are incorporated in this report. The report includes pension projections based on the long-term actuarial assumed rate of return of 8%. The retiree health projections are based on a 6.5% market rate of return. This report was originally included in the December informational items portion of the Board materials. Parts of the report have been updated to reflect the 2004 preliminary investment return of approximately 12.4%..

2 50 Year Population and Cash Flow Actuarial Projections Beginning January 1, 2004 Summary Report Gabriel, Roeder, Smith & Company November 17, 2004 With Updates to February 16, 2005

3 Why Projections? Liability is a commitment to meet Cash Flow 2

4 Regular Valuation Quantifies commitments with present value liability calculations Contains an implied plan for meeting cash flows Doesn t disclose specifics of the plan very well 3

5 Projection Quantifies commitments by projecting year by year cash flows Demonstrates how the plan for meeting cash flows is expected to work Can test alternative hypotheses Discloses emerging patterns Not a prediction 4

6 Projection Projection is designed to draw attention to long term trends. Pension projection focuses mostly on emerging demographics of baby boomers. Retiree health projection focuses mostly on effects of health care cost increases. 5

7 Section I Population Projection In the first phase, the development of the active and retired groups in coming decades is forecast. The results of the projection from 2004 through 2053 are based on a continuation of present demographic patterns. Members participating in the Traditional and Combined plans are included for this purpose. This projection assumes no growth in the active population and does not include an estimate for likely future shifts between TP, CP, and MDP plans. There is not yet sufficient information to make realistic estimates of the future mix of population among the three plans. 6

8 Projected Active Population December 31 Present Future Total , , , , , , , , , , , , , , ,584 7

9 Projected Retiree Population December 31 Present Future Total , , , , , , , , , , , , , , , , ,428 8

10 Observations The retirement of the baby boom generation has begun. Growing retired life group means more administrative work in the future, and much more pressure on the retiree health plan. The Health Care Preservation Plan (HCPP) is intended to help deal with those pressures. 9

11 Summary of HCPP Retiree Health Plan Changes Implement Choices program at 100% subsidy for current retirees and 75% to 90% of retiree subsidy for spouses. Spouse subsidy is graded based upon years of service. 15 years of service corresponds to 75% and 30 years corresponds to 90%. Implement Choices program for current actives with 50% subsidy at 15 years of service graded to 100% subsidy at 30 years. Spouse receives 50% (at 15 years) to 75% (at 30 years), increasing to 90% (at 40 years) of the retiree subsidy. Modify program for future actives to provide a 25% subsidy at 15 years of service grading to 100% at 30 years, with spouse receiving 50% of the retiree subsidy. Spouse % of the retiree subsidy increases to 65% at 40 years. Subsidy is available to members with 10 or more years of service. Upon death of the retiree, spouse subsidy is increased to retiree level. Annual increase in amounts payable by retirees capped at 5% of per capita cost. Changes are assumed to be effective January 1, 2007, with a 5 year phase-in. 10

12 Ratio of Active Members to Retirees Year Based upon a constant active member population the ratio of actives to retirees reaches its ultimate level of 1 to 1 by

13 Section II Basis for Cash Flow Projections As OPERS matures, how will the relationship between contributions, benefit payments and investment return be affected? This section explores the expected emerging patterns over the next half century. 12

14 Basis for Cash Flow Projections Assets at Market Value $Billions Pension $ 53.6 $ 48.2 Health Total $ 65.0 $ figures are approximate, and are presented for information only. Most of the projections in this report do not account fully for the investment experience of

15 Basis for Cash Flow Projections Pension projection results are based upon the long term actuarial assumed investment return rate of 8.0% Retiree health care projection results are based upon: A market rate of return of 6.5%, The intermediate trend assumption, Changes adopted under the Health Care Preservation Plan (HCPP), Recently negotiated prescription drug savings effective January 1, 2005, in particular 1. Renegotiated pricing with PBM s - 100% of all rebates, pass through pricing. 2. Eliminate Rx coverage Non Sedating Antihistamines. These are mostly available over the counter. 3. Require more prior authorization for the G.I Drug class to reduce unnecessary usage. Medicare Part D. Scheduled employer and member contribution rates prescribed in the HCPP 14

16 Scheduled Employer Contribution Rates Phase In Increase Employer Rates Current Local State Law Enforcement/ Public Safety Health Care 13.55% 13.31% 16.70% 4.00% 13.70% 13.54% 16.93% 4.50% 13.85% 13.77% 17.17% 5.00% 14.00% 14.00% 17.40% 5.50% 14.00% 14.00% 17.63% 5.50% 14.00% 14.00% 17.87% 5.50% 14.00% 14.00% 18.10% 5.50% 15

17 Scheduled Member Contribution Rates Phase In Increase Member Rates Current Member Rate* 8.50% 9.00% 9.50% 10.00% 10.00% 10.00% 10.00% * State and Local Government Divisions 16

18 Section III Pension Results As OPERS matures, how will the relationship between contributions, benefit payments and investment return be affected? This section explores the expected emerging patterns over the next half century. 17

19 Pension Investment Fund Projections Valuation Assumptions Funding Value $ in Billions December 31 Nominal Real 2003 $ 46.7 $

20 Projected Pension Net Cash Flow* Valuation Assumptions Year $Millions % of Assets 2003 $ (408) (0.9)% 2013 (1,846) (2.1)% 2023 (4,218) (3.0)% 2033 (8,097) (3.8)% 2043 (11,790) (3.7)% 2053 (17,407) (3.8)% * Contribution income less benefit payout. 19

21 Observations In nominal terms, pension assets will increase by a factor of 10 during the projection period. In real terms, pension assets will rise by about 45%. The assets need to increase in real terms to support the larger retired life population that will exist when the baby boom generation is retired. 20

22 Alternate Market Return Scenarios The next couple of slides show alternate pension results based upon a 6%, 8% or 10% market rate of return. 21

23 Development of Pension Funding Percent Under Various Return Assumptions and 18.55% Average Total Pension Contribution Rate Assumed Realized Return Year 6% 8% 10% % 85.3 % 85.3 % % 95.5 % % % % % % % % % % % % % % The above projections are based upon actual return in 2003 and 2004 (12.4%) and the indicated return in 2005 and later. Funding % s larger than 100% suggest the possibility of being able to shift some contributions to the health plan. Funding % s lower than 100% suggest the opposite, although not in the immediate future. 22

24 Alternate Assumptions for Market Rates of Return Funded Percentages Under Alternate Market Rates of Return 160% 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% % Market Return 10.0% Market Return 6.0% Market Return 23

25 Section IV Health Results How will the relationship between contributions, benefit payments and investment return be affected, as the baby boom retires, and the HCPP goes into effect? This section explores the expected emerging patterns over the next half century, based upon intermediate health trend assumptions and 6.5% investment return. 24

26 Historical Trend of Amounts Paid % of Payroll 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1.6 % 2.1% 3.2% 3.4% 3.7% 3.6% 3.7% 2.8% 2.5% 2.7% 4.2% 4.4% 4.2% 4.3% 4.4%4.4% 4.6% 4.9% 5.5%5.5% Year 6.4% 6.9% 8.1% 25

27 Health Investment Fund Projections Intermediate Assumptions Funding Value $ in Billions December 31 Nominal Real 2003 $ 10.5 $

28 Projected Pattern of Retiree Health Contribution Income and Benefit Payout Intermediate Assumptions 14% 12% 10% % of Payroll 8% 6% 4% 2% 0% Year Retiree Health Payout Retiree Health Contributions 27

29 Observations Benefit payments already exceed contribution income in the retiree health fund. The difference is made up by investment return, and, if need be, the liquidation of assets in the retiree health fund. Under the intermediate assumptions, unless significant investment gains continue, the retiree health fund will run out of money in At that point the retiree health plan would become pay as you go. Benefits would have to be reduced well below present levels, because benefits paid out could not exceed contribution income. 28

30 Section III Supplemental Retiree Health & Medicare Projections

31 Retiree Health Characteristics The benefits are not vested. Annual claim costs are volatile. There is no direct relationship between payroll and benefits. Effects of future changes in the Medicare program are unknown. The potential effect of changes in the health care delivery system could be significant but cannot be estimated reliably. 30

32 Retiree Health Costs Exceed the current retiree health contribution level. Are expected to continue to rise due to demographics and further unit cost increases. Will lead to diminishing fund balances unless investment gains persist and costs are somehow brought back under control. HCPP design changes help, but continued review will be important. 31

33 Retiree Health Costs Next slide shows scenarios for unit cost increases that are investigated in the projection. Results based upon the HCPP and recently negotiated prescription drug savings. Market investment return is assumed to be a steady 6.5%. 32

34 Health Care Cost Increase Scenarios Health Trend Above Wage Inflation Assumption of 4.0% A B C D E Year Testing 1 Testing 2 Testing 3 Intermediate Pessimistic % 1.00% 2.00% 5.00% 8.00% % 1.00% 2.00% 1.00% 4.00% % 1.00% 2.00% 6.00% 9.00% % 1.00% 2.00% 5.00% 8.00% % 1.00% 2.00% 4.00% 7.00% % 1.00% 2.00% 3.00% 6.00% % 1.00% 2.00% 2.00% 5.00% % 1.00% 2.00% 1.00% 4.00% % 1.00% 2.00% 0.00% 3.50% % 1.00% 2.00% 0.00% 2.50% % 1.00% 2.00% 0.00% 1.00% 2016 & Later 0.00% 1.00% 2.00% 0.00% 0.00% The intermediate and pessimistic trend for 2005 incorporates recently negotiated prescription drug savings effective January 1, trends include an estimate of the net savings due to the introduction of Medicare Part D. 33

35 Projected Benefits as % s of Projected Payroll Assuming no Future Plan Changes 19.0% 18.0% 17.0% 16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Pessimistic Testing 3 Intermediate Testing 2 Testing 1 A:Testing 1 B:Testing 2 C:Testing 3 D:Intermediate E:Pessimistic This chart includes an estimate of the effect of the Health Care Preservation Plan, 2005 plan design changes, and Medicare Part D. 34

36 Funding Levels Defined Question 1. How long will the health care fund remain solvent with employer contributions increasing from 4.0% to 5.5% of payroll by 2008: Funding Level 1? Question 2. What is the lowest employer contribution rate, Funding Level 2, that will enable the fund to become stable and to remain so indefinitely? 35

37 Funding Levels by Scenario Funding Level 1 Funding Level 2 Solvency Period in Years This Prior Prior Scenario Year Result Year Result * % Year Result A: Testing % 6.9% B: Testing n/a n/a C: Testing n/a n/a D: Intermediate % 9.8% E: Pessimistic % 13.5% * Current year results are based upon a 4.0% employer contribution rate for 2004 and 2005, 4.5% for 2006, 5% for 2007, and 5.5% for 2008 and beyond. Prior year results for Funding Level 1 were based on a 4.0% employer contribution rate. The figures, as shown, do not include the effects of the 2004 investment gains. 36

38 Comments Intermediate Solvency is now 18 years. The HCPP extended the solvency period but a longer term imbalance between contribution income and benefit payout remains. Continued plan redesign as provided in the HCPP, increased contributions, and cost control efforts can all play a roll in addressing this imbalance. 37

39 Future Retiree Health Benefits by Current Membership Status Year Current Ended Retirees Current Total Future Grand Dec.31 and Deferred Actives Current Hires Total % 4% 100% 0% 100% % 58% 99% 1% 100% % 73% 94% 6% 100% % 67% 75% 25% 100% When the solvency period is short, changes that affect only future hires do not affect the solvency period much, because there will be few new hires affected by the end of the solvency period. 38

40 Summary Observations-Health The HCPP allows the plan to operate in its present form for 18 years if important assumptions are approximately realized. Solvency is the period of years during which the retiree health fund is expected to contain assets. While the fund is solvent, retiree health benefits can be paid that exceed contribution income. If the fund ceases to be solvent, retiree health benefits could not exceed contribution income. Benefits might have to be reduced to a third or less of their present levels. 39

41 Summary Observations - Health Intermediate assumptions provide for moderate levels of excess medical care inflation through Intermediate assumptions seem to be a reasonable middle ground between the risks associated with planning under optimistic assumptions and the short term costs of planning with pessimistic assumptions. Different people will have different judgments about what is optimistic, pessimistic or intermediate. We have recommended that the primary measure of solvency be based upon the intermediate assumptions, but encourage the Board to remain aware of the potential for optimistic or pessimistic outcomes. 40

42 Summary Observations - Health The true length of the present fund s solvency period cannot be known now. Rather, it is an estimate made by actuaries based upon assumptions. Currently, it is estimated that under intermediate assumptions, the fund might remain solvent for 18 years. The estimated solvency period can change dramatically from one year to the next based upon increases in health costs, investment return or the lack thereof, and other factors. 41