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Effective Benefit Management and Allocation of SDRS Resources

This report discusses the effective benefit management and resource allocation of the South Dakota Retirement System (SDRS), highlighting sustainability equations, current challenges, and potential corrective actions to restore balance and ensure financial health.

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Effective Benefit Management and Allocation of SDRS Resources

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  1. South Dakota Retirement System Effective Benefit Management and Allocation of SDRS Resources September 5-6, 2012

  2. Minimum SDRS Sustainability Equation

  3. Ideal SDRS Sustainability Equation

  4. Unsustainable Equation

  5. The SDRS Sustainability Equation Contributions+ Investment Return = Benefits + Expenses • Historically in balance except for 2009-2010; Board recommended corrective actions • SDRS has frequently met ideal standard with healthy Cushion • Currently, SDRS expected to be slightly out of balance due to: • Board adopted assumption changes • Expected smaller future Investment Return and less Income • Relatively small Cushion • Fixed contributions and commitment to manage SDRS within current resources • Review of Benefits one option to restore balance

  6. July 1, 2011 Funding Requirements Amortization and Interest 0.98% Expense .25% Normal Cost 11.25% Funding Policy Contribution Rate: 12.48% of Pay Total Anticipated Contribution Rate: 12.48% of Pay

  7. Relative Cost of SDRS BenefitsCurrent Benefit Design and Assumptions

  8. First Step in Benefit Review Identify: • Subsidies • Inequities • Inefficiencies • Higher costs than anticipated • Above/below competitive practices • Conflicts with good public policy and/or HR objectives

  9. Subsidies? Board Review of the Following Potential Subsidies • Special Early Retirement • Early Retirement • Benefits for: • Married members • Large families • Young spouses • Class A/Class B • Alternate Formula • Retire/rehire • Pre-retirement Survivor and Disability Benefits .

  10. Benefit Inequities? Board Review of the Following Potential Inequities • Higher benefits for married members and large families • Class A/Class B • Alternate Formula • Retire/Rehire • Final Average Pay (salary spiking) .

  11. Benefit Inefficiencies? Board Review of the Following Potential Inefficiencies • Pre-retirement Survivor Benefits • Pre-retirement Disability Benefits • COLA in excess of CPI .

  12. Higher Costs than Anticipated? Board Review of the Following Potential Areas of Higher Costs than Anticipated • Retire/Rehire • Final Average Pay • Alternate Formula • Class A/Class B • Lifetime benefits due to improving life expectancy .

  13. Benefits Above/Below Competitive Practices

  14. Conflicts with Good Public Policy and/or Human Resource Objectives? Board Review of the Following Potential Conflicts with Good Public Policy and/or Human Resource Objectives • Normal Retirement eligibility • Early Retirement incentives • COLA that exceeds inflation • Total Survivor and Disability Benefits that exceed 100% of pay • PRO benefits for non-vested members • Alternate Formula .

  15. Other Issues: Varying Benefits with Funded Status or Economic Measures Why? SDRS costs would automatically reduce in bad times and increase in good times • Current examples: • COLA is indexed to Funded Status and partially to CPI • Interest on accumulated contributions indexed to T-Bill rate • Possible additional applications • Performance Account for additional benefit improvements • Index retirement age to improved life expectancy • Introduce DC component to SDRS plan design with smaller DB component

  16. What Next? • 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

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