The State of Retirement Plans May, 2011
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Transcript of The State of Retirement Plans May, 2011
The State of Retirement Plans
May, 2011
David S. Boomershine
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• Background
• Recent Federal Legislative Changes
• Recent Accounting Standards Changes
• Significant Plan Asset Losses
• Recent Funding Relief
• Funding Relief Alternatives
• Survey Says
• Resulting Trends/Future Plan Prospects
• Current Public Sector Plan Debate
• Conclusions
Agenda
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• Competitive
• Attract employees
• Tax break
• Reward employees/employee appreciation
• So employees can retire
• Contribute to society
Background
Employers sponsor retirement plans – why?:
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Ideal employer sponsored retirement program:– Defined Benefit Plan (DB) – Base
– Defined Contribution Plan (DC)– Supplemental
Combined program provides blend of security, flexibility for employees
Background
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Driving forces:
• Federal legislation
• Accounting rules
• Asset performance
• Cost/liability volatility
• Economics
• Stupidity
Background
Employers plans are changing – why?:
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Recent Events:– Increased, restrictive federal legislation
– More onerous accounting regulation
– And then, asset losses too!
This means……Retirement Crisis! – Right?– Yes! Freeze the Plans!
– Well, change them somewhat …..
– Well, maybe ….?
Let’s Review!
Employer Plans
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• Pension Protection Act (PPA) – Impacts Private Sector– Defined Benefit Plans
– Defined Contribution Plans
– Hybrid Plans
• Other – minor changes
Recent Federal Legislative Changes
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• Defined Benefit Plans (DB)– Funding Rules: Long term to short term funding – Key!
– Amortize Unfunded Liability over seven years
– Sets valuation interest rate basis: currently around 6%
– Only allows 2 year smoothing for investment gains/losses (vs. 5 years)
– Pension Benefit Guaranty Corporation (PBGC) premiums
– Many other provisions
– Net major result: increased cost/liability volatility!
Recent Federal Legislative Changes-PPA
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• Defined Contribution Plans (DC)– Vesting
– Automatic Contribution Arrangements (ACA) – optional
– Default investment options – optional
– Investment advice
– Combined DB/DC plan in 2010 – for 500 employees or less
Recent Federal Legislative Changes-PPA
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• Hybrid Plans– “New Age” Discrimination Testing
– Some past design issues resolved prospectively
– Vesting
– More viable plan design option now?
Recent Federal Legislative Changes-PPA
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• Private Sector: FAS 158– Covers Pension and Retiree Medical plans– Increases Balance Sheet Liability– Compares quasi-future actuarial liability vs. current plan
asset value – Key!
• Public Sector: GAS 45– Covers Retiree Medical plans– Account for annual cost, current liability– Funding is not required, but strongly encouraged
• Unfunded liability growth• Discount rate• Bond rating agencies
Recent Accounting Standards Changes
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• DB Plans– Asset Losses: 20% - 35% of Market Value in 2008
– Increase in Unfunded Actuarial Liability
– Significant funding requirement increases
• DC Plans:
– Account balance losses
– Employees delaying retirement
Significant Plan Asset Losses
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• Investment consultants say:– There will be an asset recovery
– When? ……..? 3 to 7 years?
– Returns: 8% + long term, including recovery
• Crisis is short term, temporary - ?– Depends on the economy
Significant Plan Asset Losses
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Private Sector vs. Public Sector
Impacts:
DB Plans DC Plans
Issue Private Sector Public Sector Private Sector
PensionRetiree Medical Pension
Retiree Medical
Federal Legislation
Accounting
Asset Losses
Result: Increased volatility for Private Sector Pension Plans
Let’s Review:
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• Plan Asset gains/losses – issue exacerbated by PPA
• Valuation interest rate basis – issue exacerbated by PPA
• Accounting Discount Rate basis – set by FAS
Sources of Cost/Liability Volatility - DB Plans
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• Impact Private Sector Pension Plans only• IRS final PPA funding regulations – relaxed funding
rules for 2009: 1 year only• Relaxed funding rules passed in 2010:
– Amortization of unfunded liability: up to 15 years– Short term basis - use for two years
• Limited Relief – Lose relief if:– “Excessive” compensation to employees– “Excessive” payments to shareholders– Needed relief for prior year actuarial losses > KEY
• Net Result: Where’s the relief?
Recent Pension Funding Relief Passed
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• Impact Public Sector:– Pension Plans: due to asset/losses– Retiree Medical: due to new accounting requirements
• Alternatives (check State restrictions)– Amortization basis – Level % of pay– Amortization period – to 30 years– Asset smoothing corridor – to 130% of Market Value– Asset smoothing – to 10 years– Phase-in funding increase: 5 years?
• Utilize on short term basis• Ability to recover on a long term basis
Funding Relief Alternatives
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Recent International Foundation of Employee Benefits Survey -Pension Plans: Impact of the Financial Crisis, September 2009
Top Concerns:1. Market losses/underfunded Plans2. Decreased job security3. Changes to health care system4. Delayed Retirement5. .6. .7. .8. Eliminated employer-sponsored retirement benefits
Survey Says
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Other Results
• Worst of financial crisis over? – Split decision
• Slower recovery? – Yes
• Long Term Impact of Crisis– DB Plans: Moderate
– DC Plans: Moderate
• DB Plan investment policy changes
Survey Says
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DB Plan Changes:
• Reviewed assumptions/plan design - 70%
• Discontinued benefits - 9%
• Closed plan to new hires - 9%
Update:
• Public Sector: ½ of States have “Soft Frozen”/ closed their DB plans – new plans for new hires
• Public Sector – increased employee contributions
Survey Says
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DC Plan Changes:• Reduce/suspend match - 8%• Restore match within 12 months - 44%
Plan Participants’ Actions:• Decrease/stop contributions - 80%• Reduce equity exposure - 42%• Hardship withdrawals - 45%• Loans - 39%• Postponing retirement - 51%
Survey Says
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• Increased communications: Financial Education campaign• More plan design analysis – short term• Funding relief – short term• Increased plan costs• Some more frozen DB plans – due to volatility• Increased funding – Public Sector Retiree Medical plans• Employer matching restoration• Employee savings increase/decrease – depends on economic recovery• Investment re-balancing• DB to DC plan trend continues – DC plans with DB/annuity features?• More DB/DC emphasis re-balancing?• More hybrid plans?
Finally - postponed retirement- phased retirement
Resulting Trends/Future Plan Prospects
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• Private Sector: some past design issues resolved prospectively under PPA
• Primarily Cash Balance Plan – DB plan that looks like a DC plan
• More viable option now?
Other Approach:• Provide a basic DB plan with a supplemental
DC plan
Hybrid Plans
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DC Plans
Private Sector Public Sector Other Trends• Matching Contributions –
reinstated
• Automatic Enrollment – 40% adopted- Increases participation- Improves
nondiscrimination testing
• Annuity option in DC plans?
– Public relations campaign
– Federal government involvement
– Default option?
• Some increased interest in DC, Hybrid plans under “Soft Freeze” approach
• Delayed Retirement
• Phased Retirement
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Current Public Sector Plan Debate
June, 2010
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Three Phases for Pension and OPEB Plans• Baseline Actuarial Cost• Funding Alternatives• Plan Design Alternatives
Concerns/Interested Parties:• Budgets• Taxpayers• Unions• Bond Rating Agencies
Current Issue: Government Budgets cannot afford current Plans/volatility
Actuarial Cost Viewpoint -
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Actuarial Valuation Process
Other Post Employment Plans (OPEB) – Retiree Medical:
Major Cost Drivers
• Actuarial Assumptions- Discount rate assumption (for DB plans also)- Healthcare trend rate assumption- Retirement
• Plan Design- Retiree cost sharing- Eligibility (Retirement)- Spousal coverage
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• Increase employee contribution levels• Retirement eligibility• COLA’s• Revise benefit structure• Final average pay• DROP’s
Other• Soft Freeze – State Protections• DC Plans• Hybrid Plans
Pension Plan Design Changes – significant cost/liabilityimpact:
Plan Design Changes
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• Private Sector – Changes have calmed down
• Public Sector – Changes are raging!
• Some recovery going on
• Overall – not good
• Getting attention
Conclusions – The State of Retirement Plans?
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?Questions