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South Dakota Retirement System

Effective Benefit Management Analysis of Normal, Special and Early Retirement Benefits September 6, 2012 . South Dakota Retirement System. Effective Benefit Management Steps. Define the amounts needed to maintain actuarial balance

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South Dakota Retirement System

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  1. Effective Benefit ManagementAnalysis of Normal, Special and Early Retirement BenefitsSeptember 6, 2012 South Dakota Retirement System

  2. Effective Benefit Management Steps • Define the amounts needed to maintain actuarial balance • Determine what subsidies, inequities, inefficiencies, higher costs, and above competitive practices exist and significance • Analyze and prioritize • Consider legislative changes for 2013 Legislation

  3. Retirement Eligibility Terms and Early Retirement Reductions Normal, Special Early, and Early Retirement Benefits identified as good initial example for Board review because: • These benefits represent a very significant part of SDRS costs • They potentially represent subsidies, inequities, higher costs than anticipated, above competitive practices, and conflicts with good public policy and/or Human Resource objectives, but the Board needs to make that decision • Changes in eligibility requirements for these benefits, or higher reductions for Early Retirement, may be preferable to other potential benefit changes since members can delay their retirement to avoid suffering a reduction in benefits • They become more valuable as life expectancy improves and they may provide incentives that conflict with workforce objectives

  4. Relative Cost of SDRS BenefitsCurrent Benefit Design and Assumptions

  5. Current Retirement Provisions • Current retirement eligibility for Class A is: • Normal Retirement: Age 65 with three years of service • Early Retirement: Age 55 with three years of service • Special Early Retirement: Rule of 85 (age and service total at least 85) and age 55 • Earned benefit is paid without reduction at Normal Retirement or Special Early Retirement • Earned benefits are reduced by 3% per year at Early Retirement Date from the earlier of: • Normal Retirement Age, or • the age equal to 85 less the member’s service

  6. Issues with Retirement Provisions • Increase in life expectancies has resulted in an extension of the period during which retirees are receiving retirement benefits • Social Security is gradually raising Normal Retirement to age 67, and additional increases have been proposed • Changes in retirement eligibility are common in State pension reform proposals • Encouraging earlier retirement may conflict with workforce issues confronting employers • Significant subsidies (increases in value over the Normal Retirement Benefits) exist for Early Retirements and Special Early Retirements • A true actuarial reduction from 65 to 55 would average approximately 5% per year • A significant amount of the total SDRS funding costs are directly and exclusively related to the Early and Special Early Retirement subsidies • The availability of the Level Income Option may be increasing the utilization of the Early Retirement and Special Early Retirement subsidies

  7. Alternatives to Current Retirement Provisions • The following examples demonstrate the expected cost impact of certain possible changes to the retirement provisions • These changes are examples of modifications to the current retirement provisions that reduce the current subsidies, but are only a few of the many possible modifications to the retirement provisions • Note that the reduction in Present Value of Benefits (PVB) assumes the change would apply to all active members for all periods of service • In practice, it would be advisable to phase-in these changes to allow members ample time to adjust their retirement plans; any phase-in would reduce the cost savings and the longer the phase-in the smaller the savings • Any changes would apply to new members

  8. Current Retirement Provisions Under current provisions, the percentage of earned benefit payable to Class A members based on age and service at retirement is:

  9. Step 1 – Increase Normal Retirement Age to 67 Increasing the Normal Retirement Age to 67 would change the percentages of earned benefit payable to: Applying this change to all current active members would result in a PVB reduction of approximately $100M (2.1% of active PVB, 1.1% of total PVB)

  10. Step 2 – Also Increase Early Retirement Age to 57 and Increase Reduction to 5% per Year Increasing the Early Retirement Age to 57 and increasing the Early Retirement Reduction to 5% per year would change the percentages of earned benefit payable to: Applying this change to all current active members would result in an additional PVB reduction of approximately $160M (3.3% of active PVB, 1.7% of total PVB)

  11. Step 3 – Also Increase Special Early Retirement Requirement to Rule of 90 (Minimum Age of 57) Increasing the Special Early Retirement requirement to Rule of 90 (minimum age of 57) would change the percentages of earned benefit payable to: Applying this change to all current active members would result in an additional PVB reduction of approximately $140M (2.9% of active PVB, 1.5% of total PVB)

  12. Summary of Analysis • Applying all three changes to the entire earned benefits of all current active members would reduce the PVB by approximately $400M (8.4% of active PVB or 4.3% of total PVB) and reduce the Unfunded Liabilities and Normal Cost • Applying all three changes to the entire earned benefits of all active members would increase the Market Value Funded Ratio (MVFR) by approximately 4% • The Normal Cost for new members would be lowered by about 1.2% of pay—providing an increasing margin for unexpected costs in other areas or additions to the Reserve • These changes would reflect the improvement in life expectancy and reduce the subsidies for early retirement (both Special Early requirements and Early Retirement reductions), impact the allocation of the Normal Costs and shrink the total cost to be allocated – the pie chart on page 3 would be smaller and divided differently • As discussed, any phase-in of these changes and the exact details of the changes could substantially reduce the impact on PVB and MVFR

  13. Summary of Analysis • The retirement eligibility provisions and the Early Retirement reduction have been analyzed as an example for Board information only for the reasons outlined, and do not represent a recommendation or priority for action • Other SDRS benefits and terms have been identified as potential areas for discussion, evaluation, and analysis also and should be considered by the Board • Next steps—continue to: • Define the amounts needed to maintain actuarial balance • Determine what subsidies, inequities, inefficiencies, higher costs, and above competitive practices exist and significance • Analyze and prioritize • Consider legislative changes for 2013 Legislation

  14. Effective Benefit Management Appendix

  15. Estimated Impact of Early Retirement Subsidy Under current provisions, the percentage of earned benefit payable based on age and service at retirement with the subsidy in the Early Retirement reductions eliminated: Applying this change to all current active members would result in a PVB reduction of approximately $85M (1.8% of active PVB, 0.9% of total PVB)

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