Transcript Slide 1

The Real Value of a TMRS Benefit
Presented by
David Rodriguez, Regional Manager
Leslee Hardy, ASA,EA,MAAA, Actuarial Services Director
TMRS’ Value
 Why TMRS Makes “Dollars & Sense…”
 To Cities…
 To the Public…
 To Members…
 Cost Benefit Comparisons
 TMRS DB Plan vs. 401(k)-Type DC Plan
 What do city’s and employee’s dollars buy?
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Why TMRS Makes
“Dollars and Sense”
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TMRS Makes Dollars & Sense to Cities
 Plan of choice for Texas cities; voluntary
statewide retirement plan
 Defined benefit (cash balance) plan
 Benefits are funded by mandatory employee
deposits, city contributions, and investment
income
 Operates by local control: Each participating
city controls employer costs by choosing its own
options
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System Soundness + City Choices
SYSTEM
CITY
 All TMRS benefits are
fully advance-funded
over each employee’s
active working career
 Contribution rates* vary
depending on benefits
(e.g., 2.34% for cities with
5% / 1:1 match with no
COLA, vs. 16.08% for cities
with a 7% / 2:1 match and
repeating COLAs)
 Average contribution rate
for all cities for 2013 is
13.22%
 TMRS’ System funded
ratio is 85.1% and
System-wide UAAL is
$1.7 billion
*Average rates weighted by payroll
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Makes Sense to Cities, cont.
 Each city is funded as separate entity; assets
are pooled for investment purposes
 Each city has its own assets and liabilities and
Funded Ratio
 TMRS increases a city’s competitive edge in
hiring: 849 cities have chosen to participate in
TMRS, and the number increases each year
 TMRS benefits are effectively portable across
participating cities to help attract
experienced employees
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Flexible, Local Control
Menu of benefits provides cities with over 1,400
possible combinations. Cities control these four major
cost drivers of their plans:
1. Employee deposit rate: 5%, 6%, or 7% (by law, employees must agree, by 2/3 vote, to lower deposit rate)
2. Employer match of contributions at retirement: 1:1;
1.5:1; or 2:1
3. Retiree COLAs: Adopt, change, or rescind a repeating
or ad hoc COLA at either 30%, 50%, or 70% of CPI
4. Updated Service Credit: May be adopted at either 50%,
75%, or 100% of the calculated credit, and can be
modified or rescinded by employer
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TMRS Makes Dollars & Sense to the Public
 The majority of a retiree’s benefit is funded by
investment earnings on member and city
contributions over the member’s career
 TMRS’ administrative costs are low —
approximately 0.15% of assets in 2011 (compared
to a median “all-in” fee of 0.78% for 401(k)s)*
 TMRS’ actuarial investment return assumption (net
of expenses) is 7% — one of the lowest in the
country for large public sector plans
* Source: Deloitte/Investment
Company Institute, 2011
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Makes Sense to the Public, cont.
 TMRS is a “cash balance” or “savings-based” plan
that receives no state funding
 Decisions that affect costs are made locally
 TMRS invests $18.5 billion (as of 12/31/11) in the
markets― providing capital for the national economy
 In 2011, TMRS paid more than $810 million in
retirement benefits, which circulate through local
economies
 For example, a 2007 study by the Perryman Group showed
that TMRS benefits resulted in $1.32 billion in annual
spending, most of it in the communities from which
members retired
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Makes Sense to the Public, cont.
 TMRS determines each city’s Annual Required
Contribution (ARC) based on benefit plan
chosen by city
 Cities must pay the ARC every year, or reduce
benefits if ARC is not sustainable
 ARC = the cost of the current year’s accruals
(Normal Cost Rate) + amortization of the UAAL
(Prior Service Rate)
 No pension contribution “holidays”
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TMRS Makes Dollars & Sense to Members
 System assets are secure, and the System-wide
funded ratio has increased over the past 4 years
 TMRS members’ contributions provide a “savings
plan” for the benefit of the employee
 The member’s account gains a 5% interest credit
each year, guaranteed by law
 Fluctuations in the plan’s value do not directly
affect the benefit amounts promised to members
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Makes Sense to Members, cont.
 After retirement, members draw a
guaranteed annuity for life
 After retirement, retirees may receive a
COLA based on their
city’s plan choices
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Makes Sense to Members, cont.
 As members, city employees are rewarded by the
prudent, diversified investment policies of the
System (as opposed to relying on outside
investment advisors or making investment
decisions alone)
 A pension plan provides greater stability and less
vulnerability to market fluctuations
 Retirement savings of TMRS members were not
affected by the stock market crash of 2008;
whereas 401(k) asset values declined more than
25% on average
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Retirement Components
 Retirement is traditionally described as a
“three-legged” stool, comprising:
 Retirement Program
 Social Security (86% of TMRS cities have
Social Security)
 Personal Savings
 401(k)s and similar DC
plans were never
intended to be the
primary retirement vehicle
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DB vs. DC vs. TMRS
Defined Benefit
Defined Contribution TMRS
Benefit based on
Benefit based on
member’s contributions
Benefit based on
formula; not based
and city’s matching funds.
employee
solely on actual
PLUS has defined benefit
contributions
contributions
features –
USC & COLA
Lifetime annuity
Not a lifetime annuity Lifetime annuity
Money pooled and
professionally
invested
Self-directed
investments
Money pooled and
professionally invested
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Cost Benefit Comparisons
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Basic Formula for All Pension Plans
C+I=B+E
C= Employee and Employer Contributions
I = Investment Income
B= Benefit Payments
E= Expenses
so
B=C+I–E
Total benefit payments must be paid from the total
employee and employer contributions plus total net
investment income
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Built-in Cost Savers of TMRS’ DB Plan
Versus 401(k)-Type DC Plan
 Longevity Risk Pooling: 15% savings
 TMRS: Benefits are paid over the average life
expectancy of all retirees
 401(k)s: Individual must “over-save” so as to not
outlive their retirement income
 Maintenance of diversified portfolio over time:
5% savings
 TMRS: investment returns reflect the advantage of the
maintaining balanced portfolios over generations of
workers — asset portfolio is “forever young”
 401(k)s: Individuals shift toward lower risk/return
assets as they age and approach retirement —
individual asset portfolio has a finite life
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Built-in Cost Savers of TMRS’ DB Plan
Versus 401(k)-Type DC Plan, cont.
 Superior Investment Returns: 26% savings
 TMRS: Assets are pooled for investment
purposes and professionally managed, resulting
in higher returns and lower fees/administrative
expenses
 401(k)s: Individual participant account fees and
administrative expenses are significantly higher
due to assets lacking economies of scale
 Total combined cost savings of DB Plan relative
to 401(k)-type DC Plan is estimated to be 46%,
according to a 2008 study by National Institute
on Retirement Security
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Example Plan 1 – TMRS...compared to
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Example Plan 1 – 401(k)-type plan
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Cost Breakdown Comparison —
Example Plan 1
TMRS Plan
401(k)- type Plan
12%
7%
Proportion of Total
Benefit paid by:
26%
Employer ER
Contrib.
Employee EE
Contrib.
Investment
Earnings
67%
7%
81%
Remember the formula: C + I = B + E
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Example Plan 2 – TMRS...compared to
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Example Plan 2 – 401(k)-type plan
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Cost Breakdown Comparison —
Example Plan 2
TMRS Plan
401(k)-type Plan
12%
Proportion of Total
Benefit paid by:
9%
26%
Employer ER
Contrib.
Employee EE
Contrib.
Investment
Earnings
65%
9%
79%
Remember the formula: C + I = B + E
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Ex. Plan 3 – TMRS... compared to
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Ex. Plan 3 – 401(k)-type plan
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Cost Breakdown Comparison —
Example Plan 3
TMRS Plan
401(k)-type Plan
11%
Proportion of Total
Benefit paid by:
10%
25%
Employer ER
Contrib.
Employee EE
Contrib.
Investment
Earnings
65%
10%
79%
Remember the formula: C + I = B + E
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TMRS Versus 401(k)-Type Plan —
Employer Cost Summary
401(k)
Cost
Ratio
Plan 1: 7%; 2:1
12.50%
100% USC; 70% CPI COLA
26.50%
47%
Plan 2: 7%; 2:1
100% USC; NO COLA
9.25%
20.30%
46%
Plan 3: 7%; 2:1
NO USC; NO COLA
7.75%
17.50%
44%
TMRS
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Questions?
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