Transcript RS Valuation for 2004

Florida Electric Cooperative
Accounting Association
May 2010
Topics
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•
•
•
•
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Retirement Security (RS) Plan Update
Form 990 Calculations
Post Retirement Benefit Valuation Services
New Annuity Option
Health Care Legislation
BTA Coverage
2
The RS Advantage
Founded in 1948
Designed to serve the electric cooperative
industry
Assists with attracting and retaining employees
Designed with the co-op employee in mind
Provides industry portability
Provides a comfortable standard of retirement living for
employees who spend their careers with the co-op
870 participating cooperatives with 63,000
individual participants
3
Funding Calculations
Two calculations needed to determine required contributions:
1. Regular ERISA funding – normal funding calculation
needed each year. Benefits funded over the average
future working lifetime of employees.
2. Deficit Reduction Contribution (DRC) – applies only if
funded ratio is below a certain level. The DRC requires a
shorter funding period.
The required contribution is the larger of these two amounts.
4
Increase in Contribution Rates for 2010
• Base contribution rates for 2010 increased by 35%.
Actual increase for a co-op will varied with changes in
average age for that co-op.
• Due to 26.4% return on investment plus co-op
prepayment of 2010 contributions, the DRC will not apply
for 2010.
5
Investment Return for 2008 - 2009
2008
Actual Return
Expected Return
Difference
- 27.2 %
8.5 %
- 35.7 %
2009
Actual Return
Expected Return
Difference
26.4 %
8.5 %
17.9 %
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Assets 2008 and 2009
Market Value of Assets 12/31/2007
Expected MV of Assets 12/31/2008
Market Value of Assets 12/31/2008
Unrealized Investment Loss
$4.96 Billion
$5.19 Billion
$3.47 Billion
$1.72 Billion
Market Value of Assets 12/31/2009
$4.10 Billion
7
RS Plan Investment Return History
Year
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
Return
26.4%
(27.2)%
4.9%
14.9%
8.6%
13.3%
23.7%
(6.6)%
2.2%
7.3%
5.8%
13.8%
21.4%
16.0%
Negative
Positive but less than assumed
Greater than assumed 8.5%
Year
Return
1995
26.0%
1994
(0.1)%
1993
15.9%
1992
9.7%
1991
21.1%
1990
(0.9)%
1989
21.0%
1988
16.3%
1987
3.0%
1986
23.9%
1985
26.0%
1984
6.0%
1983
18.4%
1982
24.2%
Negative
Positive but less than assumed
Greater than assumed 8.5%
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RS Plan Asset Allocation
(Varies over time)
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•
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•
Domestic Equity
International Equity
Bonds
Cash
50%
10%
35%
5%
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Concern for 2011
• With continued phase in of the 2008 investment loss,
the DRC is very likely to apply for 2011 unless there is
superior investment performance for 2010 as well as
2009.
• However, legislation is being pursued to address this
issue. We are combining our efforts with other plans
which are under PPA and are facing an even more
serious problem.
10
Accounting of DRC – Statement 71
• Statement 71 applies to the DRC Contribution.
• RUS has indicated this is acceptable to them, with
an amortization period of the average working
lifetime of plan participants.
• An amortization period of 10 years should be
acceptable.
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Long – Term Changes: 1982 to 2009
Plan
Age 65
Age 62
Age 62/30 Year
Age 60
COLA
Average Future Benefit Level
1982
65.8%
15.7%
18.5%
----0.0%
1.6%
2009
12.4%
52.0%
34.0%
1.6%
19.8%
1.8%
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RS Plan Changes 2006 - 2007
Benefit Level
Normal Retirement Age
COLA
Employee Contributions
New Plans
New Hires – Reduced Plan
New Hires – No Plan
Plan Freezes
Plan Terminations
Upgrade
39
1
1
3
7
Downgrade
1
1
1
6
15
9
None
None
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RS Plan Changes in 2008
Benefit Level
Normal Retirement Age
COLA
Employee Contributions
New Plans
New Hires – Reduced Plan
New Hires – No Plan
Plan Freezes
Plan Terminations
Upgrade
10
1
1
0
2
Downgrade
3
3
1
4
1
0
None
None
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RS Plan Changes Effective 1/1/2010
Benefit Level Changes
Benefit Level Increases
Number of Co-ops
4
Benefit Level Decreases
By 0% - 0.5%
By 0.51% - 1%
By more than 1%
Decreased Benefit Level for New Hires
Plan Freezes
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7
2
50*
11
2
* 5 co-ops downgraded their NRD. 2 co-ops increased employee
contributions.
15
RS Plan Changes Effective 1/1/2010
Normal Retirement Date Changes
Age 62/30 Years Actual to Normal
Age 62/30 Years Actual to Age 62
Age 62/30 Years Actual to Age 65
Age 62/30 Years Normal to Age 62
Age 62/30 Years Normal to Age 65
Age 62 to Age 65
Number of Co-ops
9
6
1
1
1
6
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16
RS Plan Changes Effective 1/1/2010
Other Plan Changes
Add COLA
Remove COLA
Number of Co-ops
1
6
Add 100% Death
Remove 100% Death
Increase Employee Contributions
Decrease Employee Contributions
1*
10**
3
1
* Also downgraded NRD
** One co-op also downgraded NRD and removed COLA
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Form 990 Calculations
• From 990 must show the actuarial value of the
increase in pension benefits for certain participants
• If requested, NRECA will calculate these amounts or
discuss alternative estimates once the co-op provides
the names of the participants
• Requests can be made with the names of the
appropriate participants through [email protected]
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Post Retirement Benefit Valuation
Services
• NRECA provides valuations, studies, and financial
statement disclosures of post-retirement (other than
pension) benefits on a fee for service basis
• Applicable financial standards are FAS 106, FAS 112,
FAS 132, and FAS 158
• Most common benefits considered are post retirement
medical, drug, dental, and life
• Consulting services on possible plan changes to
control costs are also provided
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Post Retirement Benefit Valuations
• The fee charged depends on the complexity of the
co-op’s plan and the number of participants
• Approximately one-third of co-ops pay a portion of
the retiree medical premium for at least some
employees
• Contact Howard Van Houten at 703-907-6453 or
[email protected]
20
New Optional Form
of Benefit Distribution
• During 2010, the RS Plan will develop a new
choice, the “Full Cash Refund Annuity,” to
offer to employees upon retirement at no
additional cost to Co-ops
• The retiree receives a guaranteed income for
life and, upon death, any excess of the lump
sum amount the retiree could have received
at retirement over payments actually received
is paid in a lump sum to the beneficiary
Use of Lump Sum Option
• Over 92% of retirees choose a lump
sum
• Is the lump sum the best choice for the
participant?
• Is the lump sum the best choice for the
plan?
Lump Sum Concerns and New
Annuity Option
• Retiree who takes lump sum is betting he
will die sooner rather than later
• Outliving retirement income is a real
possibility
• From the standpoint of the plan, the lump
sum is the most expensive option
• Does another annuity form exist that is
good for participants and good for the
plan?
A New Alternative:
Full Cash Refund Annuity (FCRA)
• The Full Cash Refund Annuity will provide a new
alternative that addresses some of these concerns
• The retiree receives a guaranteed income for life and,
upon death, any excess of the lump sum amount the
retiree could have received at retirement over
payments actually received is paid in a lump sum to
the beneficiary
• FCRA will be combined with Life only and one J&S
Annuity
• The following slide illustrates the new annuity choice
for a hypothetical retiree at age 62
A New Alternative:
Full Cash Refund Annuity
• Following is hypothetical monthly benefit*:
– $855 for life, and death benefit of $146,000 minus
payments received
* Approximate amounts; conversion factor for this
option has not yet been decided; initial death
benefit computed using 2009 rates
A New Alternative:
Full Cash Refund Annuity
• Example 1: Suppose the retiree on the
previous slide dies at age 67 after receiving
60 monthly payments of $855:
– Initial death benefit:
$146,000
– Payments received during retiree’s lifetime:
$855 x 60 = $51,300
– Death benefit to beneficiary:
$146,000 - $51,300 = $94,700
A New Alternative:
Full Cash Refund Annuity
• Example 2: Suppose the retiree on the
previous slide dies at age 82 after receiving
240 monthly payments of $855:
– Initial death benefit:
$146,000
– Payments received during retiree’s lifetime:
$855 x 240 = $205,200
– Death benefit to beneficiary:
$0, because payments received exceed initial
lump sum that participant could have elected
A New Alternative:
Full Cash Refund Annuity
• In some sense, the Full Cash Refund Annuity
offers the best of both worlds:
– A guaranteed lifetime income that the participant
cannot outlive
– A substantial death benefit payable in a lump sum
if the retiree dies prematurely
Health Care Reform Law
Provision generating the highest number of
inquiries and questions to date:
Non-Dependent Child
Coverage up to Age 26
Bill Construction Creates Confusion
Non-Dependent Child Coverage up to
Age 26
If employer (ER) covers dependents, now
required to cover non-dependent child “until
child turns 26 years of age”
– Unless child is eligible for other ER Plan (prior to
2014)
– Applies even if child is married; but not required to
cover the child’s spouse or child’s children
Simple So Far…But
• IRC provisions ensures ER-paid coverage (directly or via
cafeteria plan) for an adult child remains tax-free (i.e.,
excludable from employee [EE] income) for “any tax
year ending prior to the year in which such child attains
age 27.”
• So . . . .
1.
While coverage ONLY required “until the child
turns 26 years of age,” (so Co-op CAN cut off on
26th Birthday)
2.
IRS now permits tax exclusion until “such child
attains age 27” if Co-op permits EE to keep child on
until end of Plan Year (usually December 31) (to not
force children off plan mid-year)
Perhaps A Picture is Worth A Thousand
Words (or More Interpretations)
Does Co-op Offer
Dependent Coverage?
NO
YES
Must Permit EE to
cover “NDAC” Up to
Age 26 (Even if Child is
Married)
If no other offer of
Employer-Sponsored
Coverage
NOT
REQUIRED to
cover Child’s
spouse or
children
CAN Make EE
pay 100% of
Premium for
NDAC Coverage*
Co-op CHOICE on
“When to Terminate”
Coverage
(assuming nondiscrim. test met)
On 26th
Birthday
(minimum
required)
Through End
of Plan Year
(optional)
NO
IMPACT
on Co-op
I Got It...But
• Secretary Of HHS to issue Regs defining “dependent” for this
purpose – distinct from current IRS definition
– Date of Regulations to be determined (TBD)
• This is a new provision of Health Law – NOT Tax Code
– Need to figure out who is a “dependent” before creating new
designation of “non-dependent”
• While this could effectively eliminate all other restrictions
(age 19, still in school, etc.), it could create new certification
requirements to ensure that coverage is limited to eligible
individuals and employer costs are maintained.
•
•
Shift from verifying student status to verifying under age 26
Prior to 2014, employers will want to verify that these adult
children are not eligible for other employer coverage.
Waiting For “Clarifying” Regulations
• When Secretary Of HHS issues regulations
defining “dependent” for this purpose,
NRECA will review and analyze impacts
• Please Remember -
– No one knows WHEN Regs will be issued at this
point
– No impact on plans until January 1, 2011
How Did We Do Overall –
The Positives
• Preserves co-op ability to customize/tailor its
health benefits package as allowed now under
ERISA.
 ACHIEVES Focus of NRECA Resolution on Health Care
• Pushed out 40% “Cadillac Tax” Until 2018 – A
legislative lifetime away
 SUCCEEDED by including plans with “electric line
workers” like us in “high risk” classification, giving us
higher thresholds before tax kicks than most other plans.
• Permits stronger incentives for wellness & chronic
disease management to lower costs in the long run.
More Positives
• Brings all plans “up to” NRECA standards by
eliminating lifetime/annual benefits caps,
recessions, excluding pre-existing conditions
• Gets millions into coverage to reduce “cost
shift” to plans like ours from uncompensated
care provided to uninsured.
There Are Negative Aspects, Too
• Several aspects of the new law will increase, rather
than decrease, our health care costs; specifically:
 40% Excise Tax on “High Cost” Plans (even with delay
to 2018)
 New fees and taxes levied on drug companies, medical
equipment manufactures, health insurance
“companies” etc. will simply be passed on to electric coops that pay for these benefits.
• For all stakeholders there are many unknowns
• Already working to make improvements to the
new law with “Technical Corrections” proposals
and meetings with Regulators
Business Travel Accident Coverage
• Employee Coverage to increase to $100,000
for all classes of employees/directors
• 50 mile radius exclusion removed for
employees, managers, department heads
• Program enhancements effective with each
groups Annual enrollment starting 1/1/2011
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