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MMAAA Actuarial Update

MMAAA Actuarial Update. Dan Sherman, ASA, EA, MAAA Sherman Actuarial Services, LLC www.ShermanActuary.com. Topics. Actuarial Valuations COLAs Funding Schedules Assessments Pension Reform GASB 67 & 68 . Actuarial Valuations. Valuations are performed annually or bi-annually

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MMAAA Actuarial Update

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  1. MMAAAActuarial Update Dan Sherman, ASA, EA, MAAA Sherman Actuarial Services, LLC www.ShermanActuary.com

  2. Topics • Actuarial Valuations • COLAs • Funding Schedules • Assessments • Pension Reform • GASB 67 & 68

  3. Actuarial Valuations • Valuations are performed annually or bi-annually • New Funding Schedules at least once every 2 years • State encourages frequent examination • For 2013, most systems still have finally recognized all of the 2008 asset losses • Actuarial value of assets typically were at 104% to 107% of market value, now at 94% to 97% • 2012 returns were very good • Expect an asset loss for your 2013 actuarial valuation, despite the good year. 2014 valuations should generate a small gain or loss

  4. Actuarial Valuations

  5. Actuarial Valuations S&P 500 Rolling 10 year average returns

  6. Actuarial Valuations • Expectations for 2014 are actuarial: • Small asset gain or loss • Gains on salary increases • Actuarial Standards Board issued a new Actuarial Statement of Practice: #35 • Must assume additional improvements in mortality • New tables will increase liabilities by 4% - 6% • Due to leverage with the assets, the unfunded liability may go up from 6% to 12% • Due to leverage with the employee deductions, the employer normal cost may go up from 6% to 14%

  7. Actuarial Valuations • Other than salary increases, all signs are pointing to significant increases in pension appropriations beyond the expected increase for FYE15. • Mitigation efforts are common • Limit the increase to x% for a number years • Increase the amortization period

  8. COLAs • Retirement Board decides the percentage increase for a COLA each year. Increase may be from 0% to 3%. • Actuaries assume that the annual increase will be 3%. Any decision for less will create an actuarial gain and reduce future funding.

  9. COLAs • 2010 legislation permits plan sponsors to increase the COLA base • Any amount is eligible as long as it is a multiple of $1000 • Increases can be authorized at anytime, there are no sunset provisions • Appropriations generally increase by about 1.25% per $1000

  10. Funding Schedules • A schedule comprises two pieces • Normal Cost – Value of one year accrual • Amortization of Unfunded Liability – Paying for the past experience • Due to unexpected increases in costs, expect a significant increase in appropriations for FYE 15 • Amortization is limited to 2040

  11. Funding Schedules

  12. Assessments • Payroll Based - Assessments to members of a retirement system are based purely on the payroll of the members, adjusted for any Early Retirement Incentives (Most systems) • Actuarial Based – Assessments to members of a retirement system are based on the Normal Cost, Accrued Liability and Early Retirement Incentive of each unit (Plymouth County, Salem and others)

  13. Assessments • Payroll based assessments ignore all of the other factors that affect the costs of a plan • Retirees and their liability • Age • Sex • Group (Fire and Police versus General) • Credited Service • Veterans • Actuarial based assessments are more fair, but do not quite go all the way to treating the member units as a separate system due to the assets

  14. Assessments • Although Actuarial based assessments are more equitable, making the change is problematic • Member units with many Fire and Police could see a significant increase in appropriations • Which means those without Fire and Police will generally see a decrease (e.g. Housing Authorities)

  15. Pension Reform • Provisions do not affect pre- April 2, 2012 actives and retired participants in a material way • No Funding Schedule relief for several years • Present Value of Future Benefits for new hires will be about 12% lower • 4% savings for Final 5 year Average Pay • 4% savings for Later Retirement Ages • 4% savings for Lower Early Retirement Subsidy • Employer Normal Costs will decrease between 25% and 35% over the next 40 years • No impact on the Unfunded Accrued Liability

  16. Pension Reform - Expectations • Lower costs in the distant future • Later retirements (could be an issue for Public Safety) • Higher turnover

  17. Retirement Board Decisions • Funding related items that the Retirement Board has direct input or makes the decision: • Selection of service providers • Actuarial assumptions and methods if not using PERAC actuary • Selection of funding schedule amortization and relief • COLA percentage increase

  18. Retirement Board Decisions • Funding related items that the Retirement Board has no or little input: • Plan benefit at retirement • COLA Base increase • Eligibility of employees • Costs related to Teachers

  19. GASB 67 & 68 • Existing standards (GASB 25 & 27) issued in 1994 • Final statements approved by GASB in June 2012 – • 2 statements – employer perspective and plan perspective • Upon issuance – this is GAAP for governmental entities • Effective Dates: • GASB Statement No.67 (for plans) – Fiscal 2014 • GASB Statement No.68 (for employers) – Fiscal 2015

  20. GASB 67 & 68 Summary • New standard is for financial reporting – not funding – the new standard “delinks” financial reporting from funding methodologies • Actuarial method – entry age normal as a level % of pay is the only permitted method • Asset valuation – fair value at balance sheet date - no smoothed market value (e.g., – 5 year) used in determining the pension liability • Discount rate – a “single” or blended rate in some instances • Expected long term rate of return on the assets as long as the plan net position is expected to be able to pay all promised benefits • Use of high quality long term municipal bond index rate after projected asset depletion • Reporting of unfunded pension liability on balance sheet • Single employer and agent plans • Cost sharing multiple employer plans – report proportionate liability (teachers)

  21. Funding versus Accounting • Current accounting standards focuses on the ARC – the ARC is determined based on the adopted actuarial methods to fund the plan • The ARC is then used to drive amounts reported on the financial statements – if 100% of ARC is contributed, no liability is recorded on financial statements • Under Chapter 32, ARC = Pension Appropriation • The new standards do not use the ARC as the basis for financial reporting amounts • pension expense and liabilities reported on the financial statements are derived using GASB’s defined parameters • this will be different from adopted funding methodologies

  22. GASB 67 & 68 Actuarial Method • Current standards permits multiple actuarial methods • New standards for financial reporting purposes limits the permitted method to just one – entry age normal – level percent of pay • This is the most common method used now by most plans, and all plans governed by Chapter 32 • Funding methodologies could use a different actuarial method but for financial reporting entry age normal would be required

  23. GASB 67 & 68 Assets • Most plans currently use a smoothed market approach to determine the actuarial value of assets – this smoothens the impact of significant market value changes • The new standard requires – for financial reporting - to determine the pension liability based on assets at fair value (market value) at the balance sheet date (e.g., June 30). • In years where there are significant market swings – there will be a similar swing in the pension expense and liability reported

  24. GASB 67 & 68 Discount Rate • Current standards – the discount rate to present value future benefits is the assumed rate of return on investments • New standards – single discount rate that reflects: • (1) The long-term expected investment return to the extent current and projected assets are sufficient to pay projected benefits and to the extent not sufficient (2) a high-quality municipal bond index rate

  25. GASB 67 & 68 Unfunded Liability • Under the new standards the full pension liability will be required to be presented on the government-wide balance sheet (statement of net assets) • This is a significant liability to include on the balance sheet • Total pension liability – plan net position (market value) = net pension liability • The new standards require that certain actuarial changes be reflected immediately and others deferred and amortized • Will likely be different from the unfunded liability reported for funding purposes • Non-investment gains/losses and assumption changes amortized over expected remaining service lives • Investment gains/losses are amortized over 5 years • Immediate recognition of plan changes

  26. GASB 67 & 68 • Inclusion of the net pension liability on the balance sheet will likely be a very material liability • The recorded net pension liability will likely be volatile since it will reflect the fair (market) value of assets • Pension expense recorded on the financial statements will be significantly different from actuarially determined contributions reflecting funding methodologies, and be volatile

  27. Supplementary Information • Support for discount rate selection • Statement of Fiduciary Net Position • Assets held by class, including receivables and payables • Statement of Changes in Fiduciary Net Position • Additions – Contributions by employees and employer, net appreciation, investment earnings • Deductions – Benefit payments and expenses • Net position beginning of year, end of year

  28. Supplementary Information • Comprehensive plan description • Administration • Membership • Benefits provided • Contribution policies • Investments • Policy • Concentrations • Rate of Return, including long-term expected real rate of return for each asset class • Net Pension Liability • Actuarial Assumptions • Sensitivity (+ - 1% on discount rate)

  29. Supplementary Information • Schedule of changes in Net Pension Liability and Related Ratios (Funded Ratio & Net Pension Liability as a % of Payroll) for past 10 years • 10 year history of the Actuarially Determined Contribution (Pension Appropriation), actual contribution, payroll and ratio • 10 year history of investment returns

  30. Frequency • Must be done at least every two years, annually encouraged • If bi-annual, estimated net pension liability and disclosures must be completed

  31. Wakefield

  32. Wakefield – What if? Assumes 2006 adoption of GASB Statements 67 & 68, all actuarial assumptions are met, except for investment return

  33. Wakefield – What if? • 2011 ERIP included one person, this increased the liability and expense by $47,000 • If we increased COLA base to $15,000, it would add about $1.7 million to the expense in the year of implementation

  34. Questions?

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