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
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
Ted Goldman, FSA, EA, MAAA 111PD Financial Stress in the DB Retirement System Oct. 25, 2016
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
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
Stress Factors Maturing plans Market fluctuations Changing capital markets Funding strategies 5
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
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
Christopher M. Bone, FSA, EA, MAAA 111PD Financial Stress in the DB Retirement System Oct. 25, 2016
Systemic Stresses 9
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% 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Multiemployer Active Participants Single- Employer Active Participants Source: PBGC 2014 Databook Table S-33 10
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
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
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
Funding of US Employer-based Pension Systems Estimated Market Basis 1980 1985 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 123% 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
Plans by Funding Ratio 2013 600 Multiemployer 7,000 6,377 Single-Employer 500 468 487 6,000 400 300 200 100 238 72 38 10 8 3 1 2 1 1 4 5,000 4,000 3,000 2,000 1,000 3,832 766 247 4,737 2,386 1,123 1,951 1,232 309 206 141 92 0 0 150% 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% 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
Participants by Funding Ratio 2013 6,000 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 1,000 0 176 56 51 10 3 1 1 3 1 1 2,000 0 192 628 1,402 454 280 107 114 9 68 150% 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% 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 (2004-2005) Participants 228 Plans (2010) Millions 2.4 2.0 1.6 1.2 0.8 0.4 Number of Participants ($0) 0.0 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 Source: PBGC 2013 Projections Report (based on 2002-2012 Databooks Table M-13) 17
Underfunding ($ 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 2002 2003 54 Plans (2004-2005) 2004 2005 2006 2007 2008 228 Plans (2010) 2009 2010 2011 468 Plans (2013) 2012 2013 Millions 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Number of Participants Source: PBGC 2002-2014 Databooks Table M-13 18
Insured Private Sector Plans -- Insurance Program Impact 19
PBGC s Single-employer Program Likely, But not Certain, to Reach Surplus Source: PBGC 2015 Projections Report 20
PBGC s Multiemployer Program Faces Ongoing Deficits Actual (historic dollars) Projected High/Low Range Projected Mean Source: PBGC 2015 Projections Report 21
and a High Likelihood of Running out of Funds Source: PBGC 2015 MPRA Report 22
Most likely to Exhaust Funding in 2024-2025 Source: PBGC 2015 MPRA Report 23
If Guarantee Solvency Addressed by Raising Premiums, Considerable Increases are Needed Source: PBGC 2015 MPRA Report 24
And Assessing Premiums Carefully Is Important to Protect Benefits Source: PBGC 2015 MPRA Report 25
Lisa Schilling, FSA, EA, FCA, MAAA 111PD Financial Stress in the DB Retirement System Oct. 25, 2016
Single Employer System 27
SE: Counts 2009 2010 2011 2012 2013 2014 (partial) Plans (thousands) 29.1 28.4 28.0 27.3 27.1 25.2 Total Participants (millions) 27.7 27.6 26.1 25.6 23.1 20.0 Active Participants (millions) 12.0 11.5 10.9 10.2 9.1 7.7 Source: Forms 5500 Schedule SB as of Jan 5., 2016 28
SE: Counts Compared to 2009 100% 80% 60% 40% 20% 0% 2009 2010 2011 2012 2013 Plans Total Participants Active Participants Source: Forms 5500 Schedule SB as of Jan 5., 2016 29
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% 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 9% 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., 2016 30
SE: Aggregate Contributions and Benchmarks Billions $90 $80 $70 $60 $50 $40 $30 $20 $10 $0 2009 2010 2011 2012 2013 2014* 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
SE: Aggregate Contributions and Benchmarks Billions $140 $120 $100 $80 $60 $40 $20 $0 2009 2010 2011 2012 2013 2014* 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
SE: Aggregate Contributions and Benchmarks Billions $140 $120 $100 $80 $60 $40 $20 $0 2009 2010 2011 2012 2013 2014* 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
SE System General Observations Over 2009 2013 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
Multiemployer System 35
ME: Counts 2009 2010 2011 2012 2013 2014 (partial) Plans 1,344 1,325 1,308 1,311 1,301 757 Total Participants (millions) 9.31 9.32 9.61 9.49 9.62 7.15 Active Participants (millions) 3.88 3.68 3.65 3.52 3.58 2.60 Source: Forms 5500 Schedule MB as of Jan 5., 2016 36
ME: Counts Compared to 2009 100% 80% 60% 40% 20% 0% 2009 2010 2011 2012 2013 Plans Total Participants Active Participants Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting 37
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 $0 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 0% Source: Forms 5500 Schedule SB as of Jan 5., 2016 38
ME: Number of Inactive Participants per Active Participant 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 1.40 1.75 2009 2010 2011 2012 2013 2014* Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting 39
ME: Previous Benefit Cost (PBC) Plan Actuary Discount Rates Current Liability Discount Rates Thousands $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 2009 2010 2011 2012 2013 2014* 2009 2010 2011 2012 2013 2014* 85th-95th 75th-85th 50th-75th 25th-50th 15th-25th 5th-15th 0-5th Median Source: Forms 5500 Schedule SB as of Jan 5., 2016 40
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 2009 1.75 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
ME: Aggregate Contributions and Benchmarks Billions $30 $25 $20 $15 $10 $5 $0 2009 2010 2011 2012 2013 2014* 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
ME: Aggregate Contributions and Benchmarks Billions $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 2009 2010 2011 2012 2013 2014* 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
ME: Aggregate Contributions and Benchmarks Billions $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 2009 2010 2011 2012 2013 2014* 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
ME: Aggregate Contribution Observations 2009 2013 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
Ted Goldman, FSA, EA, MAAA 111PD Financial Stress in the DB Retirement System Oct. 25, 2016
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
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
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
Questions and Discussion 50