KPERS Death and Disability Benefit Program · 2015. 6. 30. · I, Daniel D. Skwire, FSA, MAAA, am a...

KPERS Death and Disability Benefit Plan

Annual Report and Interim Actuarial Valuation As of June 30, 2015

Prepared by: Daniel D. Skwire, FSA, MAAA Principal and Consulting Actuary Milliman, Inc. Tasha S. Khan, FSA, MAAA Consulting Actuary Milliman, Inc. March 17, 2016

Table of Contents Actuarial Certification Letter Section 1: Introduction and Executive Summary .............................................................. 3 Section 2: Interim Valuation .............................................................................................. 6 Section 3: Cashflow Projections ...................................................................................... 12 Appendices

A. Data for the Valuation

B. Summary of Plan Provisions

C. Actuarial Methods and Assumptions

D. Experience Exhibits

E. Gain-Loss Exhibit for 7-1-2014

March 17, 2016 Page 1

March 17, 2016 Board of Trustees Kansas Public Employees Retirement System 611 S. Kansas Ave., Suite 100 Topeka, KS 66603 Re: KPERS Death and Disability Interim Valuation as of June 30, 2015 The actuarial valuation of the KPERS Death and Disability Plan (“Plan”) under the requirements of GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, is performed in alternate years at the request of the KPERS Board of Directors. Since a full valuation was performed last year, we have performed an interim actuarial valuation of the KPERS Death and Disability Plan as of June 30, 2015. The major findings of the interim valuation are contained in this report. This report reflects the benefit provisions and contribution rates in effect as of June 30, 2015. In preparing this report we relied, without audit, on information (some oral and some in writing) supplied by KPERS staff. This information includes, but is not limited to, statutory provisions, employee data and financial information. In our examination of these data, we have found them to be reasonably consistent and comparable with data used for other purposes. Since the valuation results are dependent on the integrity of the data supplied, the results can be expected to differ if the underlying data is incomplete or missing. It should be noted that if any data or other information is inaccurate or incomplete, our calculations may need to be revised. On the basis of the foregoing, we hereby certify that, to the best of our knowledge and belief, this report is complete and accurate and has been prepared in accordance with generally recognized and accepted actuarial principles and practices which are consistent with the Actuarial Standards of Practice promulgated by the Actuarial Standards Board and the applicable Guides to Professional Conduct, amplifying Opinions, and supporting Recommendations of the American Academy of Actuaries. We further certify that all costs, liabilities, rates of interest, and other factors used or provided in this report have been determined on the basis of actuarial assumptions and methods which are individually reasonable (taking into account the experience of the Plan and reasonable expectations); and which, in combination, offer our best estimate of anticipated experience affecting the Plan. This interim valuation report is only an estimate of the Plan’s financial condition as of a single date. It can neither predict the Plan’s future condition nor guarantee future financial soundness. Actuarial valuations do not affect the ultimate cost of Plan benefits, only the timing of Plan contributions. While the valuation is based on an array of individually reasonable assumptions, other assumption sets may also be reasonable and valuation results based on those assumptions would be different. No one set of assumptions is uniquely correct. Determining results using alternative assumptions is outside the scope of our engagement.

March 17, 2016 Page 2

Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as the following: plan experience differing from that anticipated by the economic or demographic assumptions; changes in economic or demographic assumptions; increases or decreases expected as part of the natural operation of the methodology used for these measurements (such as the end of an amortization period or additional cost or contribution requirements based on the plan's funded status); and changes in plan provisions or applicable law. Due to the limited scope of our assignment, we did not perform an analysis of the potential range of future measurements. The Board of Trustees has the final decision regarding the appropriateness of the assumptions and actuarial cost methods, and the Board has adopted them as indicated in Appendix C.

Milliman’s work is prepared solely for the use and benefit of KPERS for a specific and limited purpose. To the extent that Milliman’s work is not subject to disclosure under applicable public record laws, Milliman’s work may not be provided to third parties without Milliman’s prior written consent. Milliman does not intend to benefit or create a legal duty to any third party recipient of its work product. Milliman’s consent to release its work product to any third party may be conditioned on the third party signing a Release, subject to the following exceptions:

(a) KPERS may provide a copy of Milliman’s work, in its entirety, to its professional service advisors who are subject to a duty of confidentiality and who agree to not use Milliman’s work for any purpose other than to benefit KPERS; and

(b) KPERS may provide a copy of Milliman’s work, in its entirety, to other governmental

entities as required by law. The consultants who worked on this assignment are actuaries. Milliman’s advice is not intended to be a substitute for qualified legal or accounting counsel. We respectfully submit the following report, and we look forward to discussing it with you. I, Daniel D. Skwire, FSA, MAAA, am a consulting actuary for Milliman, Inc. I am a member of the American Academy of Actuaries and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. I, Tasha S. Khan, FSA, MAAA, am a consulting actuary for Milliman, Inc. I am a member of the American Academy of Actuaries and meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein. Sincerely,

Daniel D. Skwire, FSA, MAAA Tasha S. Khan, FSA, MAAA Consulting Actuary Consulting Actuary

This work product was prepared solely for KPERS. It may not be appropriate to use for other purposes. Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work. 3

Section 1: Introduction and Executive Summary This report contains the June 30, 2015 interim actuarial valuation for the KPERS Death and Disability Plan. This plan provides two primary benefits to active members:

1. Group life insurance equal to 150% of annual compensation, which is provided through an insurance contract with Minnesota Life.

2. Self-insured long term disability (LTD) benefits equal to 60% (for claims incurred

prior to 1/1/2006, 66 2/3%) of annual compensation, offset by other benefits. Members receiving LTD benefits also receive service credit toward their retirement benefits under KPERS (which does not affect calculations for the Death and Disability Plan) and have their group life insurance coverage continued under the waiver of premium provision. For those employees covered under the waiver of premium provision, the group life insurance benefit is increased annually for inflation, at a rate equal to the consumer price index less one percent, beginning five years following the date of disability.

The scope of the interim annual actuarial valuation includes the LTD and waiver benefits described in Item 2 above. They do not include the fully-insured group life insurance benefit. This report contains only the historical analysis and cashflow projections based on our illustrative reserve basis. Because the actuarial valuation of the plan under the requirements of GASB Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, is performed in alternate years at the request of the KPERS Board of Directors, this report provides an interim valuation as of June 30, 2015. A full valuation under GASB 43 will be performed as of June 30, 2016. Elements included in the GASB 43 valuation, but not in the interim valuation, include calculation of the actuarial liability pertaining to active lives, calculation of the annual required contribution (ARC) and preparation of the required disclosure schedules. Also note that GASB has adopted new accounting standards: GASB 74 will replace GASB 43 for fiscal years beginning after June 15, 2016, and GASB 75 will replace GASB 45 for fiscal years beginning after June 15, 2017. These new accounting standards will have a significant impact for the KPERS Death and Disability Plan and the government-wide financial statements of participating employers in the plan. The impact of adopting GASB statements 74 and 75 is outside the scope of our assignment. The key results from each section of this report are summarized below. Interim Valuation

• The historical analysis shows a decreasing pattern in LTD claims and LTD claim payments over the past nine years. Waiver death benefits in 2014-2015 are consistent with historical patterns. The downward trend for LTD claims may be driven by lower claim incidence, as well as an increasing focus on managing LTD claims and assisting claimants in rehabilitation and return to work. They may also

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be driven by the gradual impact on overall experience of the lower benefit percentage on new claims incurred 1/1/2006 and later. Generally, however, we expect to see a modestly increasing trend in LTD and waiver benefits due to the aging of the population and the increasing salaries of active members.

• The valuation assumptions have been updated as of 6/30/2015 to reflect recent trends in plan experience as well as industry best practice. Claim termination rates for LTD have been increased, along with an increase in estimated Social Security offsets. These changes have resulted in a modest decrease in the LTD liability estimates. The mortality and recovery rates for life waiver have also been updated for recent experience, though the impact of these changes on the open claim liability estimate is negligible. These changes are discussed in more detail in the letter dated March 17, 2016.

• Under the prior valuation basis (2014 KPERS Basis), the total disabled life liability decreased from $151.4 million to $144.0 million from 6/30/2014 to 6/30/2015, due primarily to a reduction in the number of open LTD claims. When the 6/30/2015 liabilities are recomputed using the new basis (2015 KPERS Basis), the total disabled life liability decreases to $138.4 million.

• Liability runoff tests performed on the illustrative liability balances for LTD and

waiver claims indicate that the 6/30/2014 balances were sufficient to fund the actual and projected future costs that emerged during the 2014-2015 fiscal year with respect to members disabled as of 6/30/2014.

Projected Cashflows Table 1.1 contains the projected cashflows for the KPERS Death and Disability Fund for the next five years:

Table 1.1 Five-Year Cashflow Projection

Expected Benefits and Expenses v. Expected Contributions (millions) Excludes Group Life Insurance for Active Members

Excludes Impact of Funding Moratoriums Plan Year Projected Benefits and Expenses Projected Contributions 2015-2016 $29.1 $57.6 2016-2017 $30.4 $59.4 2017-2018 $32.0 $61.1 2018-2019 $33.5 $63.0 2019-2020 $35.0 $64.9

Table 1.1 indicates that the projected contributions are expected to exceed the projected benefits and expenses for each of the next five years, according to the assumptions used for the actuarial valuation, and assuming that the current contribution rate of 1.00% (which includes approximately 0.20% of payroll for group life insurance) remains unchanged. This pattern would result in an increase in plan assets over the 5-year time horizon. Any contribution moratoriums implemented by the Legislature will have the impact of spending down increases in the plan’s assets. The Legislature has approved a contribution moratorium which is scheduled to begin on 4/1/2016, and continue through 6/30/2017.

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The cashflow projections include self-insured benefits only. They do not include the cost of insurance premiums for the fully insured group life benefit or the projected contributions intended to cover those premiums. Also, the projections are on a “best-estimate” basis consistent with the liability calculations, which means they do not include an explicit margin. To the extent that KPERS requires a more conservative benefit projection for the purpose of determining funding contributions, it may wish to consider adding a margin of 5-10% to the benefits and expenses projected.


Section 2: Interim Valuation This section of the report provides an historical experience analysis, addressing recent claim trends, the recommended change in valuation assumptions for 2015, and an analysis of liability balances and runoffs pertaining to disabled lives. Claim Trends Table 2.1 below shows the number of open LTD claims at the end of each plan year, and the amount of LTD benefit payments made during each plan year:

Table 2.1 LTD Claims and Payments (Payments in millions)

Plan Year Open LTD Claims LTD Claim Payments 2001-2002 2,683 $24.6 2002-2003 2,890 $25.9 2003-2004 2,955 $26.7 2004-2005 3,116 $27.6 2005-2006 3,098 $29.0 2006-2007 3,097 $28.5 2007-2008 2,995 $28.2 2008-2009 2,889 $26.3 2009-2010 2,882 $24.8 2010-2011 2,833 $24.6 2011-2012 2,781 $24.1 2012-2013 2,641 $22.1 2013-2014 2,521 $21.4* 2014-2015 2,401 $21.3

* NOTE: The 2013-2014 LTD claim payments have been restated due to a data issue affecting last year’s results. Table 2.1 shows a decreasing trend in both the number of LTD claims and the amount of LTD claim payments over the past 9-10 years. This decreasing pattern may result, at least in part, from a greater focus on managing LTD claims and assisting claimants in rehabilitation and return to work, as well as the gradual impact on overall experience of plan changes such as the reduction in the benefit percentage (from 66 2/3% to 60%) for claims incurred in 2006 and later. There is also evidence that the plan is experiencing lower than expected claim incidence rates, meaning there are fewer new claims per 1,000 employees. Over the long term, however, we expect the increasing trend to resume (though perhaps at a more modest rate than in the past) since claim volumes for a plan tend to increase as a population either increases in size, or remains of similar size but increases in age. In addition, LTD claim payments are prone to increase as the result of higher salaries, even for a population that remains otherwise unchanged.


Table 2.2 below shows the number and amount of waiver death claims during recent plan years:

Table 2.2 Waiver Death Claims and Payments (Payments in millions)

Plan Year Waiver Death Claims Waiver Claim Payments 2001-2002 122 $5.2 2002-2003 152 $6.6 2003-2004 143 $6.2 2004-2005 135 $5.8 2005-2006 105 $4.9 2006-2007 106 $5.2 2007-2008 107 $5.2 2008-2009 129 $6.7 2009-2010 81 $3.9 2010-2011 103 $5.3 2011-2012 103 $5.0 2012-2013 110 $5.6 2013-2014 89 $4.8 2014-2015 99 $5.1

The number and amount of waiver death claims in 2014-2015 is consistent with historical trends. There will be annual variation in mortality rates, measured by both claim count and benefit amount, on a population of this size. In general, we expect a stable or increasing trend in future waiver claim payments, reflecting the impact of an aging population, salary increases and indexing of death benefits, partially offset by gradual mortality improvement and slower growth in the number of outstanding long term disability claims. Additional data on LTD and waiver claims from the 2014-2015 plan year is contained in Appendix D. We have included the 2013-2014 experience in this same format for comparative purposes. Updated Valuation Assumptions We have implemented new valuation assumptions for the Death and Disability plan, to be effective as of 6/30/2015. These assumptions are provided in Appendix C of this report, and the development of these assumptions is discussed in the letter dated March 17, 2016. The objectives for the new assumptions included the following:

• To reflect recent historical experience trends for the plan;

• To produce estimates of plan liabilities that will more accurately reflect the expected actuarial present value of future benefits; and

• To produce cashflow projections that are consistent with recent historical trends

and that will serve as a useful tool for planning and budgeting purposes.


The new assumptions include the following three items:

1. Claim termination rates 2. Mortality for life waiver claims 3. Estimated benefit offsets

Each of the new assumptions is described below, with further detail in Appendix C.

Claim Termination Rates Claim termination rates are used to project the death and recovery rates for disabled lives when determining the liability for disabled lives and projecting future cashflows. The updated assumption was developed from a study of actual claim terminations in 2010-2014. The results of this study indicated that there had been modest changes in claim termination rates relative to the prior valuation assumption. There is also a new industry claim termination rate table available (the 2012 Group Long-Term Disability Table) which represents more recent industry experience, and which is reflected in the updated valuation basis. When the new industry table is adjusted for KPERS experience, the result is a modest decrease in LTD claim liabilities. Mortality for Waiver Claims The mortality assumption for life waiver claims is used to project the amount of death benefits paid to disabled lives. The updated assumption for 6/30/2015 was developed from a study of actual waiver death claims from 7/1/2011 through 6/30/2015. The pattern of actual deaths relative to the number of deaths predicted by the industry table, by gender and by duration of claim, was somewhat different than what was assumed under the prior valuation assumptions. The updated valuation basis therefore reflects updated modifications to the 2005 Society of Actuaries Life Waiver Table. Estimated Benefit Offsets LTD benefits paid under the Death and Disability Plan are reduced by the amount of benefits a claimant receives from the Social Security Disability Insurance (SSDI) program. Although claimants are eligible to receive SSDI benefits after 5 months of disability, it often takes many years to be approved by the Social Security Administration to receive these benefits. For claims within the first three years of disability that have not yet been approved for SSDI, an estimated SSDI offset is reflected in the liability calculations. These estimated offsets are based on the probability of ultimately receiving SSDI benefits, combined with the likely amount of these benefits. A study of recent plan experience revealed that both the probability and the amount of SSDI offsets has increased since the prior study, so the table of estimated offset factors reflected in the 6/30/2015 valuation basis has


been updated to reflect this more recent plan experience. This updated table is expected to produce future projected cashflows on disabled lives that are more consistent with the expected payments.

The net impact of the new valuation basis is a modest reduction to the liability balances for the plan and to the projected cashflows. The proposed basis produces results that are more in line with recent experience and industry best practices, and are therefore a better estimate of liabilities and of future cashflows. Historical Disabled Life Liability Balances Table 2.3 below provides the LTD and Waiver liability balances for disabled lives for 2014 and 2015. The liability balances shown below are for the purposes of historical comparison only. They are a subset of the total liability amounts, since they do not include the liability for active lives or for administrative expenses.

The liabilities in Table 2.3 fall into two broad categories: approved claims and incurred but not reported (IBNR) claims. The liabilities for approved claims reflect the expected future benefit costs for those members who are already receiving disability benefits. (The waiver liability for approved claims reflects expected future death benefits to be paid out of the Death and Disability Fund to currently disabled members). The liabilities for incurred but not reported claims reflect the expected benefit costs, both past due and future payments, for members who have already become disabled, but whose claims have not yet been reported to or approved for payment by KPERS. Under the 2014 KPERS valuation basis (prior to updates), the total disabled life liability decreased from $151.4 million to $144.0 million from 6/30/2014 to 6/30/2015, due primarily to a reduction in the number of open LTD claims. When the 6/30/2015 liabilities are recomputed using the 2015 KPERS basis, the total disabled life liability decreases to $138.4 million.

Table 2.3 Disabled Life Liability Balances for Death and Disability Fund

Liability Item

2014 KPERS Basis

2015 KPERS Basis

6/30/2014 6/30/2015 6/30/2015 Open Claims: LTD $113,738,555 $106,845,106 $103,048,015 Open Claims: LTD Amount Recoverable (1,601,872) (1,405,584) (1,405,584) Open Claims: Waiver 21,514,183 20,262,164 20,275,070 IBNR Claims: LTD Future Benefits 14,112,066 14,535,428 12,874,236 IBNR Claims: LTD Past Benefits 146,346 150,736 133,509 IBNR Claims: Waiver Benefits 3,460,889 3,571,851 3,433,497 Total Disabled Life Liability 151,370,167 143,959,701 138,358,743 Open LTD Claims 2,521 2,401 2,401


Liability Runoff Test In order to validate the assumptions used to develop the 6/30/2015 disabled life liabilities, we performed a liability runoff test on the liability for approved claims on the LTD plan as of 6/30/2014. The results of this test are shown in Table 2.4 below:

Table 2.4 Liability Runoff Test for Approved LTD Claims at 6/30/2014

PV as of 6/30/2014 (A) Liability for approved claims as of 6/30/2014 $109,780,907 (B) PV of payments for 2014-2015 plan year, on claims open at 6/30/2014 19,192,115 (C) PV of 6/30/2015 liability for claims open on 6/30/2014 88,451,236 (D) Margin in liability calculation (A-B-C) $2,137,556

NOTE: “PV” means the present value at 4.0% interest The goal of a liability runoff test is to determine whether the liability computed on a given date with a certain set of assumptions would have been sufficient to fund the cost of actual and expected future payments for the claims open on that date. Row A of Table 2.4 is the liability for open claims at 6/30/2014, restated using the 2015 valuation assumptions. Rows B and C, taken together, are the cost of actual claims paid through 6/30/2015 and expected future payments for those claims after 6/30/2015. Row D is the excess of the 6/30/2014 liability over the actual and expected future payments. The fact that Row D is a positive value means that the 6/30/2014 liability for approved LTD claims, as calculated under the updated valuation assumptions, was more than sufficient to fund the actual and projected future costs that emerged during the 2014-2015 plan year. A liability margin of 1% to 5% of the starting liability balance is a reasonable target for this type of plan. It is important to note, however, that experience will vary from year to year. Margins outside this range for a given time period warrant closer review. When margins outside of this range persist, future updates to the assumptions may be appropriate. The margin of $2,137,556 shown in Table 2.4 represents 1.9% of the starting liability of $109,780,907. In other words, Table 2.4 indicates that the updated claim termination rates used by Milliman in computing the 6/30/2015 LTD liabilities are in the aggregate a reasonable representation of the actual claim termination experience between 6/30/2014 and 6/30/2015. We performed a similar runoff analysis for the waiver of premium liability. The results of the waiver runoff test are shown in Table 2.5 below:


Table 2.5

Liability Runoff Test for Approved Waiver of Premium Claims at 6/30/2014 PV as of 6/30/2014

(A) Liability for open claims as of 6/30/2014 $21,506,723 (B) PV of payments for 2014-2015 plan year, on claims open at 6/30/2014 3,867,612 (C) PV of 6/30/2015 liability for claims open on 6/30/2014 16,880,742 (D) Margin in liability calculation (A-B-C) $758,369

NOTE: “PV” means the present value at 4.0% interest The positive margin shown in Table 2.5 represents 3.5% of the starting liability balance. This margin is within our suggested target range of 1% to 5%.


Section 3: Cashflow Projections Because the Death and Disability Plan is now being managed so that the bulk of annual contributions are required to pay that year’s benefits, it is important to consider the expected future benefit cashflows in order to determine the appropriate contribution levels. Table 3.1 below contains the projected benefit cashflows developed by Milliman, using the same updated assumptions that were used in the development of the actuarial liabilities as of 6/30/2015:

Table 3.1 Projected Benefit Cashflows for Death and Disability Fund

Self-Insured Benefits Only, Excluding Expenses Plan Year LTD Waiver Total

2010-2011 (Actual) $24,601,786 $5,259,671 $29,861,457 2011-2012 (Actual) $24,116,091 $5,049,916 $29,166,007 2012-2013 (Actual) $22,084,961 $5,644,305 $27,729,266 2013-2014 (Actual) $21,356,090* $4,767,326 $26,123,416 2014-2015 (Actual) $21,286,579 $5,138,023 $26,424,602

2015-2016 $21,493,399 $6,328,814 $27,822,213 2016-2017 $22,358,718 $6,654,077 $29,012,795 2017-2018 $23,386,784 $7,214,831 $30,601,614 2018-2019 $24,247,069 $7,792,458 $32,039,527 2019-2020 $24,958,408 $8,445,279 $33,403,687

* NOTE: The 2013-2014 LTD claim payments have been restated due to a data issue affecting last year’s results. The projected benefit payments are the sum of LTD and waiver payments, with waiver payments representing death benefits paid to disabled members. For the LTD and waiver projections, there are three components to the projected payments:

• Payments on open and approved claims • Payments on incurred but not reported claims • Payments on new claims incurred in future plan years

The projections in Table 3.1 do not include any expected increase in population size, since KPERS expects its membership to remain approximately level in the near future. They do, however, include assumed annual payroll growth as well as a gradual aging of the population. Overall, the total projected payments follow an increasing pattern as the result of these assumptions. They are consistent with the longer-term trends, however, that were the basis for developing the assumptions used for the actuarial valuation. Table 3.1 shows only benefit cashflows and does not include administrative expenses. Table 3.2 below provides projected cashflows for benefits and expenses combined, along with projected contributions, assuming no change in the current contribution rate and no contribution moratoriums. The projected contributions exclude that portion of the contribution rate that pertains to the group life insurance premiums paid for the insured plan that covers active employees.


Table 3.2

Five-Year Cashflow Projection Expected Benefits and Expenses v. Expected Contributions (millions)

Excludes Group Life Insurance for Active Members Excludes Impact of Funding Moratoriums

Plan Year Projected Benefits and Expenses Projected Contributions 2015-2016 $29.1 $57.6 2016-2017 $30.4 $59.4 2017-2018 $32.0 $61.1 2018-2019 $33.5 $63.0 2019-2020 $35.0 $64.9

Table 3.2 indicates that the projected contributions are expected to exceed the projected benefits and expenses for each of the next five years, according to the assumptions used for the actuarial valuation, and assuming that the current contribution rate of 1.00% (which includes approximately 0.20% of payroll for group life insurance) remains unchanged. This pattern would result in an increase in plan assets over the 5-year time horizon. Any contribution moratoriums implemented by the Legislature will have the impact of spending down increases in the plan’s assets. The Legislature has approved a contribution moratorium which is scheduled to begin on 4/1/2016, and continue through 6/30/2017. In developing its own financial projections and budgets, KPERS should consider the following items with regard to the projections in Tables 3.1 and 3.2:

• The projections include self-insured benefits only. They do not include the cost of insurance premiums for the fully insured group life benefit.

• The projections include the estimated impact of plan design changes that became effective

1/1/2006.

• The projections in Table 3.1 include benefit payments only and do not include any expenses or third-party fees. The projections in Table 3.2 do include expenses, however.

• The projections are on a “best-estimate” basis consistent with the liability calculations, and

they do not include an explicit margin. To the extent that KPERS requires a more conservative benefit projection for the purpose of determining funding contributions, it may wish to consider adding a margin of 5% to 10% to the benefits and expenses projected in Tables 3.1 and 3.2.

• The projections do not reflect the impact of any contribution moratoriums.


Appendix A: Data For the Valuation In performing the actuarial valuation, we relied, without audit, on certain data and information provided by UnitedHealthcare (UHC) and KPERS. To the extent any of the data or other information is inaccurate or incomplete, our calculations may need to be revised. The data we used included:

• LTD active claims listing provided by UHC

• LTD claim payment detail provided by UHC

• Death claim listing provided by UHC

• Additional research by KPERS and UHC for claims with missing or incomplete data

• Plan descriptions provided by KPERS

• Active member data provided by KPERS as of 12/31/2014


Appendix B: Summary of Plan Provisions The KPERS Death and Disability Plan is a cost-sharing multiple employer plan that provides long term disability (LTD) and life insurance benefits to eligible employees. Eligible employees consist of all individuals who are:

1. Currently active members of KPERS;

2. Employees of an educational institution under the Kansas Board of Regents as defined in K.S.A. 74-4925;

3. Elected officials. The plan provides a group life insurance benefit for active members through a fully-insured plan with Minnesota Life Insurance Company. (The coverage will be transitioned to Standard Insurance Company as of July 1, 2016.) Because this benefit is fully insured, it is not included in the scope of this actuarial valuation. The plan also provides a self-funded LTD benefit and a self-funded life insurance benefit for disabled members (referred to as “group life waiver of premium”). These items are considered “Other Post-Employment Benefits” (OPEBs) under GASB accounting rules, and they are included in this actuarial valuation. The key provisions of the LTD benefit include the following:

• Definition of Disability: For the first 24 months following the end of the benefit waiting period, a member is totally disabled if the member is unable to perform the material and substantial duties of his or her regular occupation due to sickness or injury. Thereafter, the member is totally disabled if the member is unable to perform the material and substantial duties of any gainful occupation due to sickness or injury.

• Benefit Waiting Period: For approved claims, benefits begin on the later of (a) the

date the member completes 180 continuous days of total disability; or (b) the date the member ceases to draw compensation from his or her employer.

• Monthly Benefit: The monthly benefit is 60% of the member’s monthly rate of

compensation, with a minimum of $100 and a maximum of $5,000. The monthly benefit is subject to reduction by deductible sources of income, which include Social Security primary disability or retirement benefits, worker’s compensation benefits, other disability benefits from any other source by reason of employment, and earnings from any form of employment.


• Maximum Benefit Period: If the disability begins before age 60, benefits are

payable while disability continues until the member’s 65th birthday or retirement date, whichever first occurs. If the disability occurs at or after age 60, benefits are payable while disability continues, for a period of five years or until the date of the member’s retirement, whichever first occurs.

• Limitation for Mental Illnesses and Substance Abuse: Benefit payments for

disabilities caused or contributed to by substance abuse or non-biologically-based mental illnesses are limited to the term of the disability or 24 months per lifetime, whichever is less.

• There are no automatic cost-of-living increase provisions. KPERS has the authority

to implement an ad hoc cost-of-living increase. The key provisions of the group life waiver of premium benefit include the following:

• Benefit Amount: Upon the death of a member who is receiving monthly disability benefits, the plan will pay a lump-sum benefit to eligible beneficiaries. The benefit amount will be 150% of the greater of (a) the member’s annual rate of compensation at the time of disability, or (b) the member’s previous 12 months of compensation at the time of the last date on payroll. If the member had been disabled for five or more years, the annual compensation or salary rate at the time of death will be indexed before the life insurance benefit is computed. The indexing is based on the consumer price index, less one percentage point.

• Accelerated Death Benefit: If a member is diagnosed as terminally ill with a life

expectancy of 24 months or less, he or she may be eligible to receive up to 100% of the death benefit rather than having the benefit paid to the beneficiary.

• Conversion Right: If a member retires or disability benefits end, he or she may

convert the group life insurance coverage to an individual life insurance policy.


Appendix C: Actuarial Methods and Assumptions

Rate of Investment Return 4.0% per annum, net of expenses

LTD Claim Termination Rates

Table C.1 Claim Termination Rates as % of 2012 Group Long-Term Disability Table

(Based on Actual KPERS Experience) Age at

Disability Claim Duration (Months)

1-12 13-24 25-36 37-48 49-60 61-120 121+ Under 30 50% 80% 80% 100% 80% 100% 150%

30-39 50% 80% 80% 100% 80% 100% 150% 40-49 50% 80% 80% 100% 80% 100% 150% 50-59 80% 100% 100% 150% 150% 300% 300%

60 and Over 300% 300% 300% 300% 300% 300% 300%

All claim termination rates for claims in months 121 and later are assumed to be 300% of the table for attained ages 60 and older.

Other LTD Assumptions

• IBNR Reserve: 60% of expected claim cost for year

• Overpayment Recovery: 65% of overpayment balance

• Future Payroll Growth: 4.0% long-term growth for actuarial valuation. 3.0% near-term growth for cashflow projections.

• Projected Future Claim Cost as % of Payroll (used in cashflow projections): 0.31% in 2015-2016, which increases in future due to aging.

• Administrative Expenses: 4.65% of claims

• Estimated Offsets: Estimated approval rate of 50% to 80% for claims in first three

years of disability that do not yet have Social Security offsets. Estimated offset amount of 50% of gross benefit.


Waiver Mortality and Recovery Rates

Table C.2 Mortality Rates as % of 2005 SOA Group Life Waiver Table

(Based on Actual KPERS Experience)

Gender Claim Duration (Months)

1-12 13-24 25-36 37-48 49-60 61-120 121+ Male 100% 75% 75% 75% 75% 100% 100%

Female 100% 75% 75% 75% 75% 100% 90%

Table C.3 Recovery Rates as % of 2005 SOA Group Life Waiver Table

(Based on Actual KPERS Experience)

Gender Attained Age

Under 60 60 and Older Male 100% 300%

Female 100% 300% Other Waiver Assumptions

• Benefit Indexing: Historical indexing is based on actual retirement plan calculations. Indexing for 2016 and later uses a rate of 2.0%, which is equivalent to a 3% annual assumed increase in the consumer price index, less 1.0% as specified by the plan.

• Projected Future Claim Cost as % of Payroll (used in cashflow projections): 0.10%

in 2015-2016, which increases in future due to aging.

• IBNR: 12.5% of expected claim cost for year


Appendix D: Experience Exhibits

KPERS Death and Disability Valuation Experience Exhibits as of 6/30/2015

Death Claims by Death Benefit Paid

2013-2014 2014-2015 Death Benefit Paid Count % of Claims Count % of Claims

0-9,999 0 0% 0 0% 10,000-19,999 6 7% 7 7% 20,000-29,999 9 10% 6 6% 30,000-39,999 13 15% 20 20% 40,000-49,999 20 22% 26 26% 50,000-59,999 15 17% 12 12% 60,000-69,999 9 10% 13 13% 70,000-79,999 5 6% 6 6% 80,000-89,999 4 4% 3 3% 90,000-99,999 2 2% 3 3%

100,000+ 6 7% 3 3%

Total 89 100% 99 100%

Death Claims by Age at Death

2013-2014 2014-2015

Age at Death Count % of Claims Count % of Claims 20-29 0 0% 2 2% 30-39 2 2% 0 0% 40-49 10 11% 11 11% 50-59 40 45% 47 47% 60-64 36 40% 29 29% 65+ 1 1% 10 10%

Total 89 100% 99 100%


Active LTD Claims by Age at Disability

2013-2014 2014-2015

Age at Disability Count % of Claims Count % of Claims <20 1 0% 2 0%

20-29 87 3% 82 3% 30-39 449 18% 437 18% 40-49 973 39% 921 38% 50-59 854 34% 807 34% 60-64 134 5% 132 5% 65+ 23 1% 20 1%

Total 2,521 100% 2,401 100%

Active LTD Claims by Attained Age

2013-2014 2014-2015 Attained Age Count % of Claims Count % of Claims

<20 0 0% 0 0% 20-29 7 0% 5 0% 30-39 86 3% 78 3% 40-49 368 15% 316 13% 50-59 1,251 50% 1,201 50% 60-64 735 29% 730 30% 65+ 74 3% 71 3%

Total 2,521 100% 2,401 100%


Active LTD Claims by Net Benefit Amount

2013-2014 2014-2015 Net Monthly Benefit Count % of Claims Count % of Claims

0-499 1,080 43% 1,038 43% 500-999 851 34% 781 33%

1,000-1,499 348 14% 342 14% 1,500-1,999 143 6% 138 6% 2,000-2,499 53 2% 54 2% 2,500-2,999 32 1% 31 1% 3,000-3,499 11 0% 12 0% 3,500-3,999 2 0% 4 0% 4,000-4,499 1 0% 1 0% 4,500-4,999 0 0% 0 0%

5,000+ 0 0% 0 0%

Total 2,521 100% 2,401 100%

Active LTD Claims by Diagnosis

2013-2014 2014-2015

Diagnosis Count % of Claims Count % of Claims Back/Neck 414 16% 393 16% Cardiovascular 268 11% 249 10% Musculoskeletal 463 18% 447 19% Neurological 352 14% 336 14% Gastrointestinal 52 2% 46 2% Genitourinary 37 1% 34 1% Glandular 74 3% 63 3% Respiratory 82 3% 86 4% Aids 8 0% 6 0% Cancer 132 5% 124 5% Eyes, Ears and Nose 53 2% 50 2% Complications of Pregnancy 5 0% 5 0% Mental/Nervous 342 14% 331 14% Substance Abuse/Addiction 0 0% 0 0% Misc/Other 239 9% 231 10%

Total 2,521 100% 2,401 100%


New LTD Claims by Age at Disability

2013-2014 2014-2015 Age at Disability Count % of Claims Count % of Claims

<20 0 0% 1 0% 20-29 4 2% 1 0% 30-39 23 10% 23 9% 40-49 63 27% 42 17% 50-59 103 44% 132 54% 60-64 32 14% 43 17% 65+ 7 3% 4 2%

Total 232 100% 246 100%

New LTD Claims by Attained Age

2013-2014 2014-2015

Attained Age Count % of Claims Count % of Claims <20 0 0% 0 0%

20-29 3 1% 1 0% 30-39 21 9% 18 7% 40-49 56 24% 31 13% 50-59 107 46% 127 52% 60-64 37 16% 60 24% 65+ 8 3% 9 4%

Total 232 100% 246 100%


New LTD Claims by Net Benefit Amount

2013-2014 2014-2015 Net Benefit Count % of Claims Count % of Claims

0-499 70 30% 101 41% 500-999 62 27% 44 18%

1,000-1,499 38 16% 48 20% 1,500-1,999 29 13% 22 9% 2,000-2,499 17 7% 16 7% 2,500-2,999 12 5% 8 3% 3,000-3,499 4 2% 5 2% 3,500-3,999 0 0% 2 1% 4,000-4,499 0 0% 0 0% 4,500-4,999 0 0% 0 0%

5,000+ 0 0% 0 0%

Total 232 100% 246 100%

New LTD Claims by Diagnosis

2013-2014 2014-2015

Diagnosis Count % of Claims Count % of Claims Back/Neck 35 15% 36 15% Cardiovascular 23 10% 30 12% Musculoskeletal 48 21% 44 18% Neurological 30 13% 30 12% Gastrointestinal 5 2% 4 2% Genitourinary 3 1% 3 1% Glandular 3 1% 2 1% Respiratory 7 3% 19 8% Aids 2 1% 0 0% Cancer 28 12% 26 11% Eyes, Ears and Nose 9 4% 5 2% Complications of Pregnancy 0 0% 1 0% Mental/Nervous 22 9% 24 10% Substance Abuse/Addiction 0 0% 0 0% Misc/Other 17 7% 22 9%

Total 232 100% 246 100%


Terminated LTD Claims by Term Reason

2013-2014 2014-2015 Term Reason Count % of Claims Count % of Claims

Death 103 26% 113 27% Recovery 88 22% 65 16%

Retirement 167 41% 208 50% Expiry 45 11% 31 7%

Total 403 100% 417 100%


LTD Offset Approval Rates by Attained Age

Attained Age 6/30/2014 6/30/2015 20-29 71% 80% 30-39 76% 71% 40-49 80% 80% 50-59 90% 89% 60-64 95% 94% 65+ 96% 90%

Total 89% 89%

LTD Offset Approval Rates by Claim Duration

Duration of Claim 6/30/2014 6/30/2015 1 61% 66% 2 76% 70% 3 88% 85% 4 92% 91% 5 94% 94%

6-10 96% 96% 11+ 89% 89%

Total 89% 89%


Average LTD Offset by Attained Age

Attained Age 6/30/2014 6/30/2015

20-29 1,271.52 1,318.25 30-39 1,033.87 1,053.87 40-49 1,046.05 1,074.28 50-59 1,042.19 1,059.42 60-64 1,032.42 1,044.98 65+ 1,213.45 1,198.79

Total 1,045.35 1,061.08

Average LTD Offset by Claim Duration

Duration of Claim 6/30/2014 6/30/2015 1 1,323.35 1,274.56 2 1,213.51 1,289.67 3 1,238.06 1,200.35 4 1,172.89 1,235.05 5 1,174.63 1,168.52

6-10 1,091.34 1,121.57 11+ 862.85 882.88

Total 1,045.35 1,061.08


Appendix E: Gain-Loss Exhibit for 7-1-2014 Changes in the unfunded actuarial accrued liability occur for various reasons. The net decrease in the unfunded actuarial accrued liability from July 1, 2012 to July 1, 2014 was $31.5 million. The components of this net change are shown in the table below (in millions): Unfunded Actuarial Accrued Liability, July 1, 2012 $ 249.5 • Impact of new claim experience different from expected $ (29.2) • Impact of terminated claim experience different from expected $ (6.6) • Impact of change in assumptions* $ 4.6 • Impact of new entrants (active) $ 4.1 • Other liability experience and asset experience $ (4.4) Unfunded Actuarial Accrued Liability, July 1, 2014 $ 218.0 *Beginning with the 6/30/2014 valuation, the interest rate used to discount future benefit payments has been reduced from 4.5% to 4.0%. Since the 6/30/2015 valuation is an interim valuation, this information is carried over from the prior GASB 43 valuation.

KPERS Death and Disability Benefit Program · 2015. 6. 30. · I, Daniel D. Skwire, FSA, MAAA, am a...

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