An Analysis of Connecticut s State Employees Retirement System (SERS): Final Report

Transcription

1 An Analysis of Connecticut s State Employees Retirement System (SERS): Final Report Jean-Pierre Aubry Center for Retirement Research at Boston College Connecticut Pension Analysis Nov 10th, 2015 Hartford, CT

2 1 Overview Looking back o SERS historical funded status o The source of SERS unfunded liability (UAAL) o Today s funded status if SERS had been adequately funded Looking forward o Funded level and cost under status-quo and alternative funding methods o Other ways to address the UAAL o A better system for handling risk going forward

3 Looking back. 2

4 3 Over the past 2 decades, SERS funded status has lagged behind the national average. Funded Ratio, % 100% 80% 60% 40% 20% Connecticut SERS National average 0% Sources: Various actuarial valuations for Connecticut SERS; PENDAT ( ); and Public Plans Database ( ).

5 4 SERS provided benefits as far back as 1939, but did not pre-fund benefits until Percentage of State and Local Plans Established or Significantly Restructured, by Date 40% 30% 29.6% 20% SERS 16.1% 14.6% 15.6% 10% 6.1% 3.0% 1.8% 5.3% 5.0% 5.8% 0% Sources: Various actuarial valuations for Connecticut SERS; PENDAT ( ); and Public Plans Database ( ).

6 5 But today s poor funded ratio has to do with more than SERS late start. Methodology for UAAL Analysis Each SERS valuation provides data on the UAAL, the change in the UAAL from the prior year, and some information on factors behind the change. We combine the factors into meaningful groups and sum the data from to highlight the factors that have played a role in the development of the UAAL over the past 29 years.

7 Billions 6 Since 1985, actuarial experience, returns, and contributions have driven UAAL growth. $16 Sources of Change to UAAL, $ $8 ARC < UAAL growth, 2.3 $4 Contributions < ARC, $ $4 Source: Authors calculations based on various actuarial valuations for Connecticut SERS.

8 Billions 7 But not much happened before $16 Sources of Change to UAAL, $12 $8 ARC < UAAL growth, 0.1 $4 $0 Contributions < ARC growth, $ Source: Authors calculations based on various actuarial valuations for Connecticut SERS.

9 Billions 8 Since 2000, the UAAL has grown by $11 billion. Sources of Change to UAAL, $16 $12 ARC < UAAL growth, $8 Contributions < ARC, 1.4 $ $ $4 Source: Authors calculations based on various actuarial valuations for Connecticut SERS.

10 9 Two of the factors contributing to the UAAL growth were controllable. 1. Contributions SEBAC agreements and other negotiated reductions in contributions allowed account for nearly $2 billion in unfunded liabilities. Starting in 2000, UAAL payments were calculated using a level-percent-of-payroll method instead of level-dollar, and no longer kept up with UAAL growth. 2. Assumed Investment Return SERS assumed return was higher than average.

11 Millions 10 Actual contributions fell short of required amounts. Contributions to CT SERS, , in Billions $1,600 $1,200 Minimum required contribution to prevent UAAL growth Annual Required Contribution Actual Contribution $800 $400 $ Source: Authors calculations based on various actuarial valuations for Connecticut SERS.

12 11 Also, the assumed rate of return was unusually high. Assumed Investment Return, % 8.5% 8.0% 7.5% 7.0% 6.5% Connecticut SERS National average 6.0% Sources: Actuarial valuations for Connecticut SERS; PENDAT ( ); and Public Plans Database ( ).

13 12 Two of the factors contributing to the UAAL growth were less controllable. Deviations from actuarial experience Actual investment returns

14 Billions 13 Key demographic assumptions were continually off. Annual Impact of Actuarial Experience on Unfunded Liabilities, $1.2 $1.0 $0.8 $0.8 $0.4 $0.3 $0.0 -$ Sources: Authors calculations based on CT SERS actuarial valuations; and the 1996 and 2002 Gain/Loss Studies for Connecticut SERS.

15 Billions 14 Recently, retirement assumptions have accounted for much of the poor experience. Impact of Specific Actuarial Assumptions on Unfunded Liabilities, $1.5 $1.21 $1.0 $0.5 $0.38 $0.0 $0.00 -$0.09 $0.05 -$0.5 Retirement Separation Salary Mortality Other Sources: Authors calculations based on actuarial valuations for CT SERS;

16 15 Up to 2000, SERS actual investment returns were above the assumed return. 15% Actual vs. Assumed Investment Return, % 10% 8.5% 5% 2000 Assumed return Average return from % Sources: Actuarial valuations for Connecticut SERS; and Census of Governments ( ).

17 16 But since 2000, investment returns have fallen considerably short of the assumed. 15% Actual vs. Assumed Investment Return, % 8.0% 5% 5.4% 0% 2014 Assumed return Average return from Sources: Actuarial valuations for Connecticut SERS; and Census of Governments ( ).

18 17 Where would SERS be today if Connecticut had contributed 100 percent of the ARC? 100% Funded Ratio, % National average = 72% 60% 40% 20% Paying full ARC/Level-dollar Paying full ARC Actual contributions 0% Source: Authors calculations based on various actuarial valuations for Connecticut SERS.

19 Looking forward. 18

20 19 The key question is how to deal with the existing UAAL. 50% 2014 Actuarial Costs as a Percent of Payroll, by Element 40% Employer UAAL payment Employer normal cost Employee contribution 30% 35.4% 20% 9.0% 10% 0% 8.0% 2.2% Connecticut SERS 7.0% 6.6% National average Sources: Actuarial valuation for Connecticut SERS; and Public Plans Database (2014).

21 20 Three factors determine the trajectory of UAAL amortization payments. 1. Payment schedule: Level dollar: front-loaded payments Level percent of pay: back-loaded payments 2. Funding period Closed amortization period: fixed date for full funding Open amortization period: no fixed date 3. Length of amortization period

22 21 Projection methodology We begin with data from SERS 2014 actuarial valuation. The Actuary provides projection for payroll, normal costs, and benefit payments. We calculate the UAAL and amortization payment in each year. We assume the plan pays its full projected ARC (normal cost + amortization payment) and achieves its assumed return. Market assets in each year equal the prior year s assets plus contributions and investment earnings, minus benefit payments. SERS actuarial smoothing method is used for actuarial assets.

23 22 One way forward is pay off the UAAL by 2032 (current agreement)... SERS Funded Ratio under Alternative Funding Methods, % 100% 80% 60% 40% 20% Current agreement Level-dollar 0% Source: Authors calculations based on various actuarial valuations for Connecticut SERS.

24 Billions 23 but costs will remain high for next two decades. ARC under Alternative Funding Methods, $8 $6 Current agreement Level-dollar $4 $2 $ Source: Authors calculations based on various actuarial valuations for Connecticut SERS.

25 Billions 24 Poor investment experience relative to the assumed could make matters much worse. ARC under Alternative Funding Methods and Investment Returns, $8 Current agreement, 5.5-percent return Level-dollar, 5.5-percent return Current agreement, 8-percent return $6 $4 $2 $ Source: Authors calculations based on various actuarial valuations for Connecticut SERS.

26 25 Relaxing the requirement to pay off the UAAL by 2032 will delay full funding... SERS Funded Ratio under Alternative Funding Methods, % 100% 80% 60% 40% 20% Level-dollar, 15-yr open, 8-percent return Current agreement, 8-percent return 0% Source: Authors calculations based on various actuarial valuations for Connecticut SERS.

27 Billions 26 but will reduce annual costs significantly over the next 20 years. ARC under Alternative Funding Methods, $8 $6 Level-dollar, 15-yr open, 8-percent return Current agreement, 8-percent return $4 $2 $ Source: Authors calculations based on various actuarial valuations for Connecticut SERS.

28 Billions 27 Even with a more conservative investment return assumption, costs remain lower. ARC under Alternative Funding Methods and Assumed Returns, $8 $6 Current agreement, 8% Discount Rate Level Dollar, 15-yr open, 8% Discount Rate Level Dollar, 15-yr open, 7% Discount Rate $4 $2 $ Source: Authors calculations based on various actuarial valuations for Connecticut SERS.

29 28 Can Connecticut address the UAAL in other ways?.

30 Billions 29 Almost $11 billion of SERS $15 billion UAAL is associated with Tier I benefits. $ Unfunded Liability for SERS, by Tier Tier I benefits accrued prior to pre-funding Tier I benefits accrued after pre-funding Tiers II, IIA, III benefits $12 $4.2 $8 $5.5 $4 $5.2 $0 Source: CRR calculations based on data from SERS Actuary and Connecticut SERS 2014 Valuation.

31 30 And the majority of Tier I members are now retired Membership for Tier I 2014 Accrued Liability for Tier I, in billions 2,281 $1.3 $ ,214 Actives Retirees Actives Retirees Source: CRR calculations based on data from SERS Actuary and Connecticut SERS 2014 Valuation.

32 31 Separately financing Tier 1 benefits over a longer period is another option. Recognizes the historical difference in the funding of benefits for Tier 1 members when compared to other Tiers. Distributes the burden of unfunded liabilities from the pay-go years more equitably across generations. Makes the pension costs for current employees clearer by separating costs attributable to a closed system that, for the most part, now services retired state employees.

33 32 What about the less controllable factors? Investment risk can be shared equitably among the plan stakeholders through a predetermined pattern of contribution increases and benefit cuts. Incremental increases to the normal cost due to revised actuarial assumptions can be shared evenly between employees and employers.

34 33 Conclusions SERS current troubles are mainly the result of: 1. Burdensome legacy costs 2. Inadequate contributions 3. Poor investment performance compared to the assumed investment return since Actuarial Experience The key to the future is making full required contributions. But paying off the UAAL by 2032 comes at a significant cost. Extending the payment horizon, specifically for SERS Tier I benefits, could distribute the UAAL costs more equitably. Lowering the assumed return and instituting procedures that automatically respond to bad outcomes would mitigate risk going forward.

35 34 The Center for Retirement Research at Boston College Public Plans Database (PPD) State and Local Pension Research Jean-Pierre Aubry Assistant Director of State and Local Research