the state of retirement plans may, 2011
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The State of Retirement Plans May, 2011. David S. Boomershine. Agenda. 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 - PowerPoint PPT PresentationTRANSCRIPT
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