111 pd, stress db system ea, - soa · session 111 pd, financial stress in the db retirement system...

 Session 111 PD, Financial Stress in the DB Retirement System 

 Moderator: 

Lisa A. Schilling, FSA, EA, FCA, MAAA  

Presenters: Christopher M. Bone, FSA, EA, MAAA Theodore A. Goldman, FSA, EA, MAAA Lisa A. Schilling, FSA, EA, FCA, MAAA 

SOA Antitrust Disclaimer SOA Presentation Disclaimer 

111PD Financial Stress in theDB Retirement SystemTed Goldman, FSA, EA, MAAAChris Bone, FSA, EA, MAAALisa Schilling, FSA, EA, FCA, MAAAOct. 25, 2016

Ted Goldman, FSA, EA, MAAA111PD Financial Stress in the DB Retirement SystemOct. 25, 2016

Today’s Agenda

• Define DB financial stress• Factors leading to stress• Three perspectives – Single Employer,

Multiemployer, and Public Sector• Signs/measures of stress• Data, data, data• SOA research findings• Stress reduction considerations • Wrap-up

3

Defining DB Financial Stress

4

The risk that a pension plan will not be able to deliver the “promised” benefits to some or all of the participants.

**

Stress Factors

Maturing plans

Market fluctuations

Changing capital markets

Funding strategies

5

Three Perspectives – Similar, but Different States of StressSingle Employer Plans Multiemployer Plans Public Plans

• Many frozen/ terminated replaced with DC only

• Risk transfers – lump sum offers, annuity purchases

• Aggregate 74% funded status

• PBGC program likely, but not certain, to reach surplus

• Continued commitment to DB

• Growth in severely underfunded plans

• Industry changes place pressures on withdrawal liabilities

• Aggregate 41% funded status

• PBGC program high likelihood of insolvency

• Benefit security redefined by MPRA

• Continued commitment to DB

• Competition for contribution dollars

• Media attention on underfunded plans and how to measure

• Aggregate 51% funded status

• Examples of benefit security being redefined

6

Signs/Measures of DB Financial Stress• Funded status• Sustainability• Ratio of inactives to actives• Previous benefit cost (SOA research) – unfunded liability

per active participant• Difference between benefit cash outflows and

noninvestment cash inflows• Ratio of plan assets to the revenue base or financial

resources of the plan sponsor• Ratio of liabilities to contributions• Duration of the benefit payment stream

7

Christopher M. Bone, FSA, EA, MAAA111PD Financial Stress in the DB Retirement SystemOct. 25, 2016

Systemic Stresses

9

Coverage of Active Wage and Salary Workers by Pensions in the Private Sector

10

28.8%

10.2%

8.2%

3.3%

0%5%

10%15%20%25%30%35%40%

1980

1985

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Active Participants as a Percentage of Wage and Salary Workforce

MultiemployerActiveParticipants

Single-EmployerActiveParticipants

Source: PBGC 2014 Databook Table S-33

Single-Employer Insured Plans by Industry―2013

11

AGRICULTURE, MINING, AND

CONSTRUCTION, 8.4%

MANUFACTURING, 23.0%

TRANSPORTATION

AND PUBLIC

UTILITIES, 3.8%

INFORMATION, 2.7%

WHOLESALE TRADE, 7.4%

RETAIL TRADE, 4.5%

FINANCE, INSURANCE, AND REAL

ESTATE, 17.7%

SERVICES, 29.2%

NON-PROFIT ORGANIZATIONS, 3.4% AGRICULTURE, MINING,

AND CONSTRUCTION, 1.7%

MANUFACTURING, 43.8%

TRANSPORTATION AND PUBLIC UTILITIES, 7.8%

INFORMATION, 6.6%

WHOLESALE TRADE, 2.4%

RETAIL TRADE, 4.9%

FINANCE, INSURANCE,

AND REAL ESTATE, 12.8%

SERVICES, 19.4%

NON-PROFIT ORGANIZATIONS, 0.7%

Insured Plans Insured Participants

Multiemployer Insured Plans by Industry―2013

12

AGRICULTURE, 0.2% MINING, 1.0%

CONSTRUCTION, 37.3%

MANUFACTURING, 9.4%

TRANSPORTATION AND PUBLIC

UTILITIES, 14.6%

INFORMATION, 2.1%

WHOLESALE TRADE, 0.5%

RETAIL TRADE, 15.3%

SERVICES, 19.5%

AGRICULTURE, 0.6%

MINING, 0.3%

CONSTRUCTION, 53.8%

MANUFACTURING, 10.0%

TRANSPORTATION AND PUBLIC

UTILITIES, 10.3%

INFORMATION, 2.3%

WHOLESALE

TRADE, 1.7%

RETAIL TRADE,

6.0%

SERVICES, 15.1%

Insured Plans Insured Participants

Stress Differential not due to Dependency Ratios

13

Active 37%

Retired 35%

Separated Vested

28%Active 37%

Retired 33%

Separated Vested

30%

Active , 47%

Retired, 32%

Other, 21%

Sources: Single-employer and multiemployer universe of plans – PBGC 2014 Databook, Public sector – Publicplansdata.org

Public Plans 2015

Single-Employer 2013Multiemployer 2013

Funding of US Employer-based Pension Systems―Estimated Market Basis

14

Sources: Single-employer and multiemployer time series – PBGC 2014 Databook, Public sector estimates for FY 2014 (Rauh, Hoover Institute April 2016) and FY 13/14 (Biggs, AEI, September 2015)

123%

162%

123%

106%

144%

101% 89%

72% 74% 77%

116%103%

88%

105%

77%

62%

41%

41%Public sector

estimate Biggs, 2015 (median), 49%

Public sector estimate Rauh,

2016, 51%

1980

1985

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Aver

age

fund

ing

leve

l

Multiemployer System Funding

Single-Employer System Funding

Plans by Funding Ratio―2013

15

Source: PBGC 2014 Databook Tables M-13 and S-48

468 487

238

7238

10 8 3 1 2 1 1 40

100

200

300

400

500

600

Less Than 40%

40% - 49%

50% - 59%

60% - 69%

70% - 79%

80% - 89%

90% - 99%

100% - 109%

110% - 119%

120% - 129%

130% - 139%

140% - 149%

150% or M

ore

247766

3,832

6,377

4,737

2,386

1,123

1,951

309206 141 92

1,232

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Less Than 40%

40% - 49%

50% - 59%

60% - 69%

70% - 79%

80% - 89%

90% - 99%

100% - 109%

110% - 119%

120% - 129%

130% - 139%

140% - 149%

150% or M

ore

Multiemployer Single-Employer

Participants by Funding Ratio―2013

16

5,148

2,955

1,852

176 56 51 10 3 1 1 3 1 10

1,000

2,000

3,000

4,000

5,000

6,000

Less Than 40%40%

- 49%50%

- 59%60%

- 69%70%

- 79%80%

- 89%90%

- 99%

100% - 109%

110% - 119%

120% - 129%

130% - 139%

140% - 149%

150% or M

ore

192628

2,825

9,418

11,113

5,290

1,402454 280 107 114 9 68

0

2,000

4,000

6,000

8,000

10,000

12,000

Less Than 40%

40% - 49%

50% - 59%

60% - 69%

70% - 79%

80% - 89%

90% - 99%

100% - 109%

110% - 119%

120% - 129%

130% - 139%

140% - 149%

150% or M

ore

ThousandsMultiemployer Single-Employer

Source: PBGC 2014 Databook Tables M-8 and S-38

Growth in severe underfunding in multiemployer plans (Plans less than 40% funded)―2013 Projections report

17

Source: PBGC 2013 Projections Report (based on 2002-2012 Databooks Table M-13)

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

($0)

($20)

($40)

($60)

($80)

($100)

($120)

Num

ber o

f Par

ticip

ants

Millions

Und

erfu

ndin

g ($

bill

ions

)

15 Plans(2001)

54 Plans(2004-2005)

228 Plans(2010)

Participants

Growth in severe underfunding in multiemployer plans (Plans less than 40% funded)―Updated

18

Source: PBGC 2002-2014 Databooks Table M-13

0.00.51.01.52.02.53.03.54.04.55.05.5

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

($0)

($50)

($100)

($150)

($200)

($250)

($300)

($350)

($400)

Num

ber o

f Par

ticip

ants

Millions

Und

erfu

ndin

g ($

bill

ions

)

15 Plans(2001)

54 Plans(2004-2005)

228 Plans(2010)

468 Plans(2013)

Insured Private Sector Plans -- Insurance Program Impact

19

PBGC’s Single-employer Program Likely, But not Certain, to Reach Surplus

20

Source: PBGC 2015 Projections Report

PBGC’s Multiemployer Program Faces Ongoing Deficits…

21

Source: PBGC 2015 Projections Report

Actual(historic dollars)

Projected “High/Low” Range

Projected Mean

…and a High Likelihood of Running out of Funds

22

Source: PBGC 2015 MPRA Report

Most likely to Exhaust Funding in 2024 - 2025

23

Source: PBGC 2015 MPRA Report

If Guarantee Solvency Addressed by Raising Premiums, Considerable Increases are Needed

24

Source: PBGC 2015 MPRA Report

And Assessing Premiums Carefully Is Important to Protect Benefits

25

Source: PBGC 2015 MPRA Report

Lisa Schilling, FSA, EA, FCA, MAAA111PD Financial Stress in the DB Retirement SystemOct. 25, 2016

Single Employer System

27

SE: Counts2009 2010 2011 2012 2013 2014

(partial)

Plans(thousands) 29.1 28.4 28.0 27.3 27.1 25.2

Total Participants

(millions)27.7 27.6 26.1 25.6 23.1 20.0

Active Participants

(millions)12.0 11.5 10.9 10.2 9.1 7.7

28

Source: Forms 5500 Schedule SB as of Jan 5., 2016

SE: Counts Compared to 2009

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013

Plans

TotalParticipants

ActiveParticipants

29

Source: Forms 5500 Schedule SB as of Jan 5., 2016

SE: Aggregate Unit Credit Liabilities and Funded Status

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0.00

$0.25

$0.50

$0.75

$1.00

$1.25

$1.50

$1.75

$2.00

$2.25

$2.50

2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

Disc

ount

Rat

e

Liab

ilitie

sTr

illio

ns

UnfundedLiability

FundedLiability

Liab-wtdDiscountRate

Funding Target Liabilities and AVA

Est. Liabilities at Unsmoothed Rates and MVA

30

Source: Forms 5500 Schedule SB as of Jan 5., 2016

SE: Aggregate Contributions and Benchmarks

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

2009 2010 2011 2012 2013 2014*

Billi

ons

MRC AfterOffsets

NC + Intereston UFT

NC + 7-yrAmortization ofUFT

ActualContribution

31

Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting

SE: Aggregate Contributions and Benchmarks

$0

$20

$40

$60

$80

$100

$120

$140

2009 2010 2011 2012 2013 2014*

Billi

ons

MRC AfterOffsets

NC + Interest onUFT

NC + 7-yrAmortization ofUFTEst. MV: maintainUL

Est. MV: 7-yramortization

ActualContribution

32

Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting

SE: Aggregate Contributions and Benchmarks

$0

$20

$40

$60

$80

$100

$120

$140

2009 2010 2011 2012 2013 2014*

Billi

ons

MRC

NC + Intereston UFT

UFT: InterestOnly

Est. MV:maintain UL

Est. MV:Interest Only

ActualContribution

33

Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting

SE System General Observations Over 2009−2013• The system is shrinking

• Plans are exiting the system, or• Positioning to exit

• Under current funding rules:• Aggregate funding levels were 92%−99%• Contributions significantly exceed both MRC and

simplified funding benchmarks• Estimated market value funded status:

• Aggregate funding levels would have been 82%−93%• Starting with 2012, actual contributions would not have

been enough to maintain unfunded liabilities

34

Multiemployer System

35

ME: Counts2009 2010 2011 2012 2013 2014

(partial)

Plans 1,344 1,325 1,308 1,311 1,301 757

Total Participants

(millions)9.31 9.32 9.61 9.49 9.62 7.15

Active Participants

(millions)3.88 3.68 3.65 3.52 3.58 2.60

36

Source: Forms 5500 Schedule MB as of Jan 5., 2016

ME: Counts Compared to 2009

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012 2013

Plans

TotalParticipants

ActiveParticipants

37

Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting

ME: Aggregate Unit Credit Liabilities and Funded Status

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

2009 2010 2011 2012 2013 2009 2010 2011 2012 2013

Disc

ount

Rat

e

Aggr

egat

e Li

abili

ties

Billi

ons

UnfundedLiability

FundedLiability

Liab-wtdDiscountRate

PPA Zone Determination(Actuary’s Discount and AVA)

Current Liability and MVA

38

Source: Forms 5500 Schedule SB as of Jan 5., 2016

ME: Number of Inactive Participants per Active Participant

1.40

1.75

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2009 2010 2011 2012 2013 2014*

39

Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting

ME: Previous Benefit Cost (PBC)

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

2009 2010 2011 2012 2013 2014* 2009 2010 2011 2012 2013 2014*

Thou

sand

s

85th-95th75th-85th50th-75th25th-50th15th-25th5th-15th0-5thMedian

Plan Actuary Discount Rates Current Liability Discount Rates

40

Source: Forms 5500 Schedule SB as of Jan 5., 2016

ME: Observations on Unfunded Liabilities Relative to Active Participants• Aggregate unfunded liabilities (unit credit and MVA):

• Significant but stable around $115 billion for PPA Zone• Much greater and increasing as measured by Current Liability

($385 billion for 2009 to $500 billion for 2013)

• While aggregate ratio of inactive to active participants increased

• 1.40 in 2009• 1.75 in 2014 (partial year of reporting for 2014)

• Unfunded liability per active participant (PBC) varies across plans:

• While stress is high, most plans are improving, but• The most highly stressed plans are getting worse

41

ME: Aggregate Contributions and Benchmarks

$0

$5

$10

$15

$20

$25

$30

2009 2010 2011 2012 2013 2014*

Billi

ons

MRC

NC + Interest onUALNC + 30-yr pmton UALActual

2009 Actual + CPI

42

Source: Forms 5500 Schedule MB as of Jan 5., 2016 * Partial Year of Reporting

ME: Aggregate Contributions and Benchmarks

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

2009 2010 2011 2012 2013 2014*

Billi

ons

MRC

NC + Intereston UAL

NC + 30-yr pmton UAL

NC + Intereston UCL

NC + 30-yr Pmton UCL

Actual

43

Source: Forms 5500 Schedule MB as of Jan 5., 2016 * Partial Year of Reporting

ME: Aggregate Contributions and Benchmarks

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

2009 2010 2011 2012 2013 2014*

Billi

ons

MRC

NC + Intereston UAL

Interest on UAL

NC + Intereston UCL

Interest on UCL

Actual

44

Source: Forms 5500 Schedule MB as of Jan 5., 2016 * Partial Year of Reporting

ME: Aggregate Contribution Observations 2009−2013• Contributions increased faster than inflation

• Greatly exceeded Minimum Required Contribution, yet• Were insufficient to maintain existing unfunded liabilities,

let alone pay down unfunded liabilities• Credit balances enable phenomenon

• PPA Zone aggregate funding stability stemmed from market returns and benefit reductions, not contributions

45

Ted Goldman, FSA, EA, MAAA111PD Financial Stress in the DB RetirementSystemOct. 25, 2016

Stress Reduction Considerations

• Actuaries have an important role to play with plan sponsors

• Risk management is our forte• Adopt funding and investment approaches early• Early detection is critical – but nuances exist• Disclose and explain the significance of appropriate

metrics• Use projections to check for sustainability• Scenario test the projections of targeted metrics

47

Stress Reduction Considerations (cont’d)

• Fully fund and immunize liabilities for inactives, e.g.• Automatically adjust the level of risk as a plan ages and the retiree

population grows• Immunize liability for next X years of payments• Or immunize Y% of retiree payments, based on funded status

• Link amortization periods to size and remaining working lifetime of the active workforce

• Long amortization periods can cause problems especially if the funding source does not grow or diminishes

• Shorter amortization periods may help• Stay abreast of current market signals

• Set realistic/conservative perspective on asset return forecasts• Plan for interaction when needed

48

The Data Indicates Significant Financial DB Stress Exists Across Single Employer, Multiemployer, and Public Plans

DB financial stress, if not addressed, can lead to

the need to reduce benefits…

…First for future participants, then future

accruals for current participants…

…Even for current benefits for active

participants and retirees.

We have learned a lot from weathering

economic ups and downs, aging workforces,

and maturing plans.

We need to strengthen the role we play with

plan sponsors.

These are exciting and important changes for

the actuarial profession to embrace.

49

Questions and Discussion

50