Transcript www.fwretirement.org

Seventeenth Annual National Pension
and Institutional Investor Summit
Breakout Panel 2:
Defending Your Defined Benefit Plan
Leon F. (Rocky) Joyner, Jr.
The Segal Company
678-306-3119
Breakout Panel 2:
Defending Your Defined Benefit Plan
Lets Play
Truth
or
Scare
2
Breakout Panel 2:
Defending Your Defined Benefit Plan
Scare
1. Public employee benefits
are bankrupting states.
2. Public pensions are overly
generous.
3. Benefits are highest in the
states where public
employees can collectively
bargain.
4. Public retirement plans
use an unrealistic investment
earnings rate, on average
8%.
5. Public pension plans have
an unfunded liability of $3
trillion due today.
6. Many public plans will run
out of funds by 2020.
3
Breakout Panel 2:
Defending Your Defined Benefit Plan
Truth
4. Over the past 30 years, public
plans have earned over 8.0%
annually.
1. Less than 4% of state budgets are
spent on pension benefits.
2. The average state employee’s and
teacher’s benefit is $22,000 annually.
3. When measured by pre-retirement
replacement rates there is little
correlation between collective bargaining
and benefit levels. Colorado and Georgia
are ranked as numbers 1 and 3 for
replacing income, Wisconsin is number
6.
5. Unfunded liabilities are
$700 billion and will be
financed over the system’s
amortization period—in
other words, not due today.
6. These estimates are based on
flawed assumptions, such as no
additional contributions and low
long-term investment returns.
Public funds hold $3 trillion in
assets to pay future benefits.
4
Breakout Panel 2:
Defending Your Defined Benefit Plan
Survey Statistical Summary
Public Fund Scorecard
An Executive Summary of the
Public Fund Survey as of
11/13/2011
Systems in the Public Fund
Survey:
Combined Market Value of
System Assets (trillion):
100
$2.30
Active Member Participants:
Annuitants:
13,207,367
7,055,231
Median Fiscal Year-End Date:
6/30/10
Actuarial Funding
Aggregate for the 100 plans in the Survey
Source: National Association of State Retirement Administrators (NASRA)
Actuarial
Funding
Ratio
Actuarial
Assets
(000's)
Actuarial
Liabilities
(000's)
Unfunded
Liability
(Surplus)
(000's)
77.2%
$2,593,297,524
$3,360,006,736
$766,709,212
5
Breakout Panel 2:
Defending Your Defined Benefit Plan
Print
TV/Cable News
Internet—Blogs
Opinion Research
 Pew Center
 Manhattan Institute
 Rauh—Kellogg
National Institute for
Retirement Security
Center on Budget and Policy Priorities
Center for State & Local Government
Excellence
Attention Shows No Signs of Slowing
6
Breakout Panel 2:
Defending Your Defined Benefit Plan
Principles of Retirement Security
Stable Contributions
Equalize Risk
Committed Funding
Universal Retirement Plan
Coverage
Replace Adequate Income
Efficient and Transparent
Governance
When time allows, cooler heads prevail,
resulting in better outcomes.
7
Breakout Panel 2:
Defending Your Defined Benefit Plan
Defense based on:
Plan Design Efficiencies
Mission Applicability
Economic Functionality
Funding Flexibility and Resiliency
Sample System 1
Sample System 2
8
Breakout Panel 2:
Defending Your Defined Benefit Plan
Defense based on:
Plan Design Efficiencies
9
Breakout Panel 2:
Defending Your Defined Benefit Plan
In the Public Sector, Pension/Retirement Plans fall into two
broad categories:
•Defined Benefit (DB) Plans, which focus on benefit security,
and
•Defined Contribution (DC) Plans, which focus on wealth accumulation.
So how do we assess which is appropriate for a
given entity?
10
Breakout Panel 2:
Defending Your Defined Benefit Plan
Assessing the Appropriateness of a Plan
Design
 Measure against retirement philosophy
 Adequacy at retirement (replacement ratios)
 Purchasing power into retirement
 Talent Management
 Assess risk components
 Is risk in its proper place?
 Can the risk be managed by the State or Locality?
– Investment risk
– Longevity risk
– Short-term vs. long-term benefit risk (Is a short-term issue being solved
at the expense of creating a long-term problem?)
 Measure against funding policy
 Stability
 Amount
 Analyze investment options
 Sufficient number and variety
 Sufficient safeguards
11
11
Breakout Panel 2:
Defending Your Defined Benefit Plan
DB Plans are intrinsically more efficient in providing benefits.
 The article “A Better Bang for the Buck: The Economic Efficiencies of DB
Plans” revealed that DB plans are more cost effective than DC plans at
delivering retirement benefits as shown below. (Source, National Institute
for Retirement Security)
 The illustrations below are based on 1,000 teachers retiring at age 62
after 30 years with a benefit that replaces about 83% of pay.
12
Breakout Panel 2:
Defending Your Defined Benefit Plan
Cost effectiveness of a Texas F&P Plan.
 A Texas public safety DB plan provides for a benefit that replaces about
83% of final pay after 33 years of service. The normal cost is about 26% of
pay and they do not participate in Social Security.
 The illustration on the next slide compares the replacement ratio for the
DB plan compared with a DC plan with a contribution rate of 26% of pay.
 To provide the same level of benefit the DC plan contribution rate would
have to be about 40% of pay.
13
Breakout Panel 2:
Defending Your Defined Benefit Plan
90%
DB Plan with a
normal cost rate
of 26%
Replacement Ratios
DC Plan 2 with a
contribution
rate of 40%
80%
DC Plan 1 with a
contribution
rate of 26%
70%
60%
50%
40%
83%
30%
83%
57%
20%
10%
0%
DB Plan
DC Plan 1
DC Plan 2
14
Breakout Panel 2:
Defending Your Defined Benefit Plan
Investment Return/Expense
Professionally managed DB plans earn typically earn at least 1% per year
more than individually managed DC plans
Investment expenses are typically 0.5% more for DC plans
As a result, with equal contributions a DB plan is anticipated to provide
greater benefits at retirement than a DC plan
Leakage
Studies have shown that much of the money in DC plans is spent prior to
retirement
Supplemental Benefits
A DC plan death or disability benefit is the account balance
Death benefits and disability benefits would need to be provided outside the
DC plan to be comparable to what the DB plan currently provides
15
Breakout Panel 2:
Defending Your Defined Benefit Plan
Defense based on:
Mission Applicability
16
Breakout Panel 2:
Defending Your Defined Benefit Plan
The Mission of Government is to Provide Services
DB plans provide steering mechanisms to encourage career behaviors that
better mesh with the entity’s service parameters.
DC plans are often favored by younger, short-service employees who will
take their balance and terminate employment, often contrary to the entity’s
goals.
At the end of a career, a DC plan will often encourage an employee to stay
beyond their most productive career years.
Other career/personnel incentive programs (such as early retirement
windows) that are routine with DB plans are either nonexistent or greatly
limited with DC plans.
Retirement plan goals and objectives should mesh with the mission of the
entity.
The following slides provide context for design discussion.
17
Breakout Panel 2:
Defending Your Defined Benefit Plan
What’s the “right” plan design?
How do we mitigate
financial risk?
Are employees
capable of handling
risk?
How do I balance
perceived and real
value?
Is adequacy of
retirement income
an issue?
Who am I competing
with for talent?
Will that change? What are
they doing?
What are my future talent
requirements? What type
of retirement programs
supports those needs?
Are benefits—and in
particular retirement
benefits—important in
attracting and retaining
employees?
The “right” design requires answers to some tough questions.
18
Breakout Panel 2:
Defending Your Defined Benefit Plan




Compensation
 Base salary
 Incentives
 Cash recognition
 Premium pay
 Pay process
Benefits
 Health
 Retirement
 Recognition
 Perquisites
Affiliation
Organization
commitment
Culture
Citizenship
Trust
Employee
Value
Proposition
The Employee Value
Proposition—What do
employees want?
Work Content
 Variety
 Challenge
 Tools
 Teamwork
 Manager support
Career
 Advancement
 Personal growth
 Training
 Employment
security
Plan Design Implications:
1. Several of the most
important components
are the least managed
2. Some employers are starting
to turn focus from tangible
(compensation and benefits)
to intangible (affiliation, work
content, and career)
3. The holistic vantagepoint:
Employee Engagement
19
Breakout Panel 2:
Defending Your Defined Benefit Plan
Defense based on:
Economic Functionality
20
Breakout Panel 2:
Defending Your Defined Benefit Plan
Economic Impact
Over $150 billion in benefits are paid annually from public sector plans.
This has an economic footprint that totals almost $400 billion. (Now that is
economic stimulus.)
DB plans provide regular, sustainable and substantial annual economic
impact.
Annuitants from these plans contribute to the economy of every state and
locality in which they abide.
As indicated earlier, DC plans do not and cannot pack the economic impact
possessed by DB plans.
21
Breakout Panel 2:
Defending Your Defined Benefit Plan
Comparing DB and DC spending patterns
Since DB plans provide regular sources of income, annuitants can be active
participants in the local economy.
Often with DC plans, one of two scenarios may unfold:
 First is a tendency to use the DC balance to maintain one’s life style until the
money runs out.
 Second is to hoard the DC resources for later.
 Neither scenario provides economic stimulus for local government.
A recent study indicated that as many as 75,000 jobs are supported in
Texas every year due to DB plan annuity payments.
22
Breakout Panel 2:
Defending Your Defined Benefit Plan
Defense based on:
Funding Flexibility and Resiliency
Sample System 1
Sample System 2
23
Breakout Panel 2:
Defending Your Defined Benefit Plan
Flexibility
Conservatively designed actuarial funding policies provide public entities
great flexibility to respond to events that may stress an entity’s resources.
These events include economic and natural disasters (e.g. 2008, storms,
tax base changes)
Resiliency
Public sector pension plans have decades long track records of funding and
supplying benefits to their participants.
These plans have endured the Great Depression, WW II, the oil crisis of the
70’s, and everything the 2000’s could throw at them and still, as shown
earlier in this presentation, they are well funded and are by and large not a
significant drain on public resources.
In point of fact, they greatly contribute to the public good.
The following presents two case studies of plans that are well funded.
24
Breakout Panel 2:
Defending Your Defined Benefit Plan
Two Systems
that have
planned for the
Future
25
Breakout Panel 2:
Defending Your Defined Benefit Plan
Summary of Valuation Results System 1
Municipal Employees, Social Security
Valuation date
2010
Recommended Contribution
as a percent of expected payroll
net amortization period as of the valuation date (level $)
12.0%
10 years
Funding elements as of valuation date:
Normal Cost, including administrative expenses
7%
Total Actuarial Accrued Liability
1,500,000,000
Total Market Value of Assets
1,030,000,000
Total Actuarial Value of Assets
1,250,000,000
Total Unfunded/(Surplus) Actuarial Accrued Liability
Funded Ratio
250,000,000
83%
26
Breakout Panel 2:
Defending Your Defined Benefit Plan
Projected System 1 Contribution Rate
16.0%
As contributions are made and the %
funded increases, the recommended
contribution will approach the average
Normal Cost, which is currently about 7%.
14.0%
Recommended Contribution Rate
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
29
28
27
26
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
t
-1
en
C
ur
r
-2
-3
-4
0.0%
Duration
The above projections assume that plan experience will match current assumptions and that the
number of active employees, their age and service will remain relatively consistent from year to year.
27
Breakout Panel 2:
Defending Your Defined Benefit Plan
Projected System 1 Funded Percentage
100%
95%
% Funded
90%
85%
The funding % is expected to improve over the
next 10 years, then gradually approach 100%.
80%
75%
70%
-4
-3
-2
nt
rre
u
C
-1
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
Duration
The above projections assume that plan experience will match current assumptions and that the
number of active employees, their age and service will remain relatively consistent from year to year.
28
Breakout Panel 2:
Defending Your Defined Benefit Plan
Projected System 1 Net Amortization Period
12
Net Amortization Period
10
8
6
4
2
29
28
27
26
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
9
10
8
7
6
5
4
3
2
1
nt
-1
re
C
ur
-2
-3
-4
0
Duration
The above projections assume that plan experience will match current assumptions and that the
number of active employees, their age and service will remain relatively consistent from year to year.
29
Breakout Panel 2:
Defending Your Defined Benefit Plan
Summary of Valuation Results System 2
Municipal Fire and Police, No Social Security
Valuation date
2010
Expected Contributions
as a percent of expected payroll
net amortization period as of the valuation date (level %)
37%
9 years
Funding elements as of valuation date:
Normal Cost, including administrative expenses
26%
Total Actuarial Accrued Liability
2,500,000,000
Total Market Value of Assets
1,950,000,000
Total Actuarial Value of Assets
2,250,000,000
Total Unfunded/(Surplus) Actuarial Accrued Liability
Funded Ratio
250,000,000
90%
30
Breakout Panel 2:
Defending Your Defined Benefit Plan
Projected System 2 Funding Percentage and Amortization Period
Valuation Year
Funded Percentage
Amortization
Years
2010
90.7%
9.09
2011
89.0%
11.31
2012
87.9%
13.19
2013
87.0%
14.72
2014
86.5%
15.92
2015
86.2%
16.81
2016
86.1%
17.42
2017
86.1%
17.78
2018
86.2%
17.91
2019
86.4%
17.85
2020
86.7%
17.63
The above projections assume that plan experience will match current assumptions and that the
number of active employees, their age and service will remain relatively consistent from year to year.
31
Breakout Panel 2:
Defending Your Defined Benefit Plan
32
32
Breakout Panel 2:
Defending Your Defined Benefit Plan
Leon F. (Rocky) Joyner, Jr. FCA, ASA
Vice President and Actuary
[email protected]
678 306 3119
www.segalco.com
33