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The State of Retirement Plans May, 2011

The State of Retirement Plans May, 2011. David S. Boomershine. Agenda. Background Recent Federal Legislative Changes Recent Accounting Standards Changes Significant Plan Asset Losses Recent Funding Relief Funding Relief Alternatives Survey Says Resulting Trends/Future Plan Prospects

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The State of Retirement Plans May, 2011

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  1. The State of Retirement PlansMay, 2011 David S. Boomershine

  2. Agenda • Background • Recent Federal Legislative Changes • Recent Accounting Standards Changes • Significant Plan Asset Losses • Recent Funding Relief • Funding Relief Alternatives • Survey Says • Resulting Trends/Future Plan Prospects • Current Public Sector Plan Debate • Conclusions

  3. Background • Competitive • Attract employees • Tax break • Reward employees/employee appreciation • So employees can retire • Contribute to society Employers sponsor retirement plans – why?:

  4. Background Ideal employer sponsored retirement program: • Defined Benefit Plan (DB) – Base • Defined Contribution Plan (DC)– Supplemental Combined program provides blend of security, flexibility for employees

  5. Background Employers plans are changing – why?: Driving forces: • Federal legislation • Accounting rules • Asset performance • Cost/liability volatility • Economics • Stupidity

  6. Employer Plans Recent Events: • Increased, restrictive federal legislation • More onerous accounting regulation • And then, asset losses too! This means……Retirement Crisis! – Right? • Yes! Freeze the Plans! • Well, change them somewhat ….. • Well, maybe ….? Let’s Review!

  7. Recent Federal Legislative Changes • Pension Protection Act (PPA) – Impacts Private Sector • Defined Benefit Plans • Defined Contribution Plans • Hybrid Plans • Other – minor changes

  8. Recent Federal Legislative Changes-PPA • Defined Benefit Plans (DB) • Funding Rules: Long term to short term funding – Key! • Amortize Unfunded Liability over seven years • Sets valuation interest rate basis: currently around 6% • Only allows 2 year smoothing for investment gains/losses (vs. 5 years) • Pension Benefit Guaranty Corporation (PBGC) premiums • Many other provisions • Net major result: increased cost/liability volatility!

  9. Recent Federal Legislative Changes-PPA • Defined Contribution Plans (DC) • Vesting • Automatic Contribution Arrangements (ACA) – optional • Default investment options – optional • Investment advice • Combined DB/DC plan in 2010 – for 500 employees or less

  10. Recent Federal Legislative Changes-PPA • Hybrid Plans • “New Age” Discrimination Testing • Some past design issues resolved prospectively • Vesting • More viable plan design option now?

  11. Recent Accounting Standards Changes • Private Sector: FAS 158 • Covers Pension and Retiree Medical plans • Increases Balance Sheet Liability • Compares quasi-future actuarial liability vs. current plan asset value – Key! • Public Sector: GAS 45 • Covers Retiree Medical plans • Account for annual cost, current liability • Funding is not required, but strongly encouraged • Unfunded liability growth • Discount rate • Bond rating agencies

  12. Significant Plan Asset Losses • DB Plans • Asset Losses: 20% - 35% of Market Value in 2008 • Increase in Unfunded Actuarial Liability • Significant funding requirement increases • DC Plans: • Account balance losses • Employees delaying retirement

  13. Significant Plan Asset Losses • Investment consultants say: • There will be an asset recovery • When? ……..? 3 to 7 years? • Returns: 8% + long term, including recovery • Crisis is short term, temporary - ? • Depends on the economy

  14. Private Sector vs. Public Sector Let’s Review: Result: Increased volatility for Private Sector Pension Plans

  15. Sources of Cost/Liability Volatility - DB Plans • Plan Asset gains/losses – issue exacerbated by PPA • Valuation interest rate basis – issue exacerbated by PPA • Accounting Discount Rate basis – set by FAS

  16. Recent Pension Funding Relief Passed • Impact Private Sector Pension Plans only • IRS final PPA funding regulations – relaxed funding rules for 2009: 1 year only • Relaxed funding rules passed in 2010: • Amortization of unfunded liability: up to 15 years • Short term basis - use for two years • Limited Relief – Lose relief if: • “Excessive” compensation to employees • “Excessive” payments to shareholders • Needed relief for prior year actuarial losses > KEY • Net Result: Where’s the relief?

  17. Funding Relief Alternatives • Impact Public Sector: • Pension Plans: due to asset/losses • Retiree Medical: due to new accounting requirements • Alternatives (check State restrictions) • Amortization basis – Level % of pay • Amortization period – to 30 years • Asset smoothing corridor – to 130% of Market Value • Asset smoothing – to 10 years • Phase-in funding increase: 5 years? • Utilize on short term basis • Ability to recover on a long term basis

  18. Survey Says Recent International Foundation of Employee Benefits Survey - Pension Plans: Impact of the Financial Crisis, September 2009 Top Concerns: • Market losses/underfunded Plans • Decreased job security • Changes to health care system • Delayed Retirement • . • . • . • Eliminated employer-sponsored retirement benefits

  19. Survey Says Other Results • Worst of financial crisis over? – Split decision • Slower recovery? – Yes • Long Term Impact of Crisis • DB Plans: Moderate • DC Plans: Moderate • DB Plan investment policy changes

  20. Survey Says DB Plan Changes: • Reviewed assumptions/plan design - 70% • Discontinued benefits - 9% • Closed plan to new hires - 9% Update: • Public Sector: ½ of States have “Soft Frozen”/ closed their DB plans – new plans for new hires • Public Sector – increased employee contributions

  21. Survey Says DC Plan Changes: • Reduce/suspend match - 8% • Restore match within 12 months - 44% Plan Participants’ Actions: • Decrease/stop contributions - 80% • Reduce equity exposure - 42% • Hardship withdrawals - 45% • Loans - 39% • Postponing retirement - 51%

  22. Resulting Trends/Future Plan Prospects • Increased communications: Financial Education campaign • More plan design analysis – short term • Funding relief – short term • Increased plan costs • Some more frozen DB plans – due to volatility • Increased funding – Public Sector Retiree Medical plans • Employer matching restoration • Employee savings increase/decrease – depends on economic recovery • Investment re-balancing • DB to DC plan trend continues – DC plans with DB/annuity features? • More DB/DC emphasis re-balancing? • More hybrid plans? Finally - postponed retirement - phased retirement

  23. Hybrid Plans • Private Sector: some past design issues resolved prospectively under PPA • Primarily Cash Balance Plan – DB plan that looks like a DC plan • More viable option now? Other Approach: • Provide a basic DB plan with a supplemental DC plan

  24. DC Plans

  25. Current Public Sector Plan Debate June, 2010

  26. Actuarial Cost Viewpoint - Current Issue: Government Budgets cannot afford current Plans/volatility Three Phases for Pension and OPEB Plans • Baseline Actuarial Cost • Funding Alternatives • Plan Design Alternatives Concerns/Interested Parties: • Budgets • Taxpayers • Unions • Bond Rating Agencies

  27. Actuarial Valuation Process Other Post Employment Plans (OPEB) – Retiree Medical: Major Cost Drivers • Actuarial Assumptions • Discount rate assumption (for DB plans also) • Healthcare trend rate assumption • Retirement • Plan Design • Retiree cost sharing • Eligibility (Retirement) • Spousal coverage

  28. Plan Design Changes Pension Plan Design Changes – significant cost/liability impact: • Increase employee contribution levels • Retirement eligibility • COLA’s • Revise benefit structure • Final average pay • DROP’s Other • Soft Freeze – State Protections • DC Plans • Hybrid Plans

  29. Conclusions – The State of Retirement Plans? • Private Sector – Changes have calmed down • Public Sector – Changes are raging! • Some recovery going on • Overall – not good • Getting attention

  30. ? Questions

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