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Spring Conference Update on Pensions and Other Long Term Obligations April, 2012

Spring Conference Update on Pensions and Other Long Term Obligations April, 2012. David Boomershine. Agenda. Background Private Sector vs. Public Sector Recent Changes/Update: Pension Plans Funding: Cost Volatility Actuarial Assumptions Accounting Plan Design – Roundup Maryland

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Spring Conference Update on Pensions and Other Long Term Obligations April, 2012

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  1. Spring Conference Update on Pensions and Other Long Term Obligations April, 2012 David Boomershine

  2. Agenda • Background • Private Sector vs. Public Sector • Recent Changes/Update: Pension Plans • Funding: Cost Volatility • Actuarial Assumptions • Accounting • Plan Design – Roundup • Maryland • State Summary • Hybrids • DB vs. DC Plans • Recent Changes/Update: OPEB Plans • Funding • Actuarial Assumptions • Plan Design • Current Issues

  3. Background Interested Parties: Retirement Plans/Budget Concerns • Governing Bodies • Employees/Retirees • Unions • Taxpayers • Bond Rating Agencies • Federal Government -?

  4. Background U.S. Senate Committee on Finance State and Local Defined Benefit Pension Plans: The Pension Debt Crisis that Threatens America • Orrin Hatch (R-Utah)

  5. Background Hatch Report Highlights: • Pension liabilities are contributing to our nations debt crisis • Funding levels declining since 2000 • This is a Federal concern • Large State/Municipal insolvency risk • State/Municipal efforts – some DC plans • Federal efforts - “Public Employee Pension Transparency Act” • GASB Proposal • Conclusion: DB plans are inappropriate for State and Local Governments

  6. Private Sector vs. Public Sector Recent Changes Result: Increased cost and liability volatility for Private Sector Pension Plans

  7. Funding: Cost Volatility Cost Increases Asset losses Discount rate Unfunded Liability impact - examples Recent Changes/Update: Pension Plans ($ in millions) • Amortization costs increase 50%

  8. Recent Changes/Update: Pension Plans • Funding: Cost Volatility • Cost Decreases • Asset gains • Plan population limits (employment freeze, layoffs) • Compensation controls (freeze, decreases, furloughs) • Other Funding Approaches • Pension Obligation Bonds: pay off Unfunded Liability

  9. Recent Changes/Update: Pension Plans • Actuarial Assumptions • Discount Rate – Key • Median at 8.0% • Average at 7.8% • Trending down from 8.0% to 7.5% • CALPERS adopted 7.5% • Some at 7.0% • Other Economic Assumptions • Salary increases • COLAs • Mortality Table Update • Indicate Cost Increases

  10. Recent Changes/Update: Pension Plans • Accounting – GASB Proposal Update • Impacts: • Net pension liability • Discount rate basis - ? • Use of Entry Age Normal Cost Method • Amortization periods • Additional required information • Cost Sharing multiple employee plans • Accounting vs. Funding Separation – Less Clarity

  11. Recent Changes/Updates: Pension Plans • Plan Design – Roundup: Maryland • Prior plan changes: • Increased employee contributions • COLA cap • Normal/Early Retirement eligibility • Benefit formula • Current budget proposed changes: • Shift ½ of Teacher pension costs to Counties

  12. Recent Changes/Updates: Pension Plans • Plan Design – Roundup: Typical changes from 2008 to 2011 • State Sponsored Plans (2012 GAO Study) • Usually for new employees • Adjusted benefits – 24 States • Eligibility requirements – 29 States • COLAs – 18 States • Increased employee contributions – 25 States • Switched to Hybrid approach – 3 States

  13. Recent Changes/Update: Pension Plans # States including changes for current • Plan Design – Roundup: employees/retirees • State Plans: More Details • Adjusted Benefits 6 • Benefit % reduced • Increased pay averaging period • Eligibility requirements 6 • Increased retirement age/service • Vesting • COLAs 5/8 • Increased employee contributions 20 • Switched to Hybrid 0

  14. Recent Changes/Update: Pension Plans • Hybrids • In public sector: combination DB and DC plans • In private sector: Cash Balance Plan • 6 States and District of Columbia have DC or Hybrid primary plans • 1 State has a Cash Balance primary plan • 6 States offer DC or Hybrid optional alternatives to primary DB plans • Note definite private sector trend from DB to DC/Hybrid • Some public sector trend from DB to DC/Hybrid • Also note 1 State plan has cap on employer contribution commitment to DB plan • Clear interest in DC plans due to private sector trends

  15. DB vs. DC Plans • General Plan Comparisons

  16. DB vs. DC Plans Sample Plan Case Study: • DB Plan: Benefit Formula = 1.5% times final average pay times service, up to 35 years • DC Plan: Employer contribution formula = 7% of pay plus 50% match of employee’s 1st 6% of pay savings • CB Plan: Employer contribution credit = 10% of pay for each year of service

  17. DB vs. DC Plans Typical Benefit Accrual Patterns DB Accrued Benefit CB DC 35 45 55 65 Age (Hired at age 35)

  18. DB vs. DC Plans Retirement Benefit Comparisons • Replacement Ratios: % of final pay replaced with lifetime pension benefits • Actuarial Assumptions: • Mortality: RP2000 Table • Interest: 6%

  19. DB vs. DC Plans Cost comparisons as a % of payroll: • DB Plan 8.5% • DC Plan 9.0% • CB Plan 8.0%

  20. DB vs. DC Plans Why are DB plans more cost efficient? • Reward long service – back loading due to final average pay • Forfeitures remain in plan – more with DB plans • Younger terminations – similar to forfeitures

  21. DB vs. DC Plans Conclusions of Case Study: • For similar long-term plan costs, traditional DB plans provide about 130% of lifetime benefits provided by DC plans • Other studies claim traditional DB plans provide up to 150% more in benefits for the same cost vs. DC plans • Career average DB plans provide about 20% more in benefits for the same cost vs. DC plans

  22. Recent Changes/Update: OPEB Plans • Funding: Cost Volatility • Contribution Policy • Continue pay-as-you-go (Paygo) • Partial funding • Full funding • Discount rate basis • Healthcare cost trending • Reduced funding vs. original plan • Other funding approaches: OPEB Bonds – pay off Unfunded Liability

  23. Recent Changes/Update: OPEB Plans • Actuarial Assumptions • Discount rate basis: sample ARC comparison • Paygo 4% $ 120 M • Partial Funding 6% 100 M • Full Funding 8% 75 M • Healthcare trending • Mortality Table Update

  24. Recent Changes/Update: OPEB Plan • Plan Design: variety of changes • Cost sharing: retirees’ % share of costs • Eligibility requirements • Tiered coverage/subsidies: years of service • Employer contribution caps • Hard cap • Increasing cap • Spouse/family coverage • Cost containment provisions • Wellness programs • Access only • Mostly Soft Freeze approach: • Future new hires • Future retirees • Future retirees not close to retirement • Buyout of benefits

  25. Current Issues • Comparison vs. Private Sector Plans • Taxpayer Concerns • DB plans • OPEB plans • Union Reactions • Pension Plan Changes • Soft freezes • Employee contributions • COLAs • DC plans • Capping employer contribution commitment • Valuation Discount Rate Basis/Reduction

  26. Current Issues Current Questions • Not enough cost reduction? • Cost/liability volatility concerns remain; especially vs. Private Sector? • Changing workforce? • More changes coming? • Future of economy?

  27. Questions?

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