Pension Funding Risks
&
Possible Method Changes
Alan Milligan
Chief Actuary
Agenda
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What’s happening?
Discussion of funding risks
Possible changes to funding methods
Impact on contribution rates
2
What’s Happening?
Accounting Changes
• GASB Statement No. 67
- Applies to plans (CalPERS)
- Replaces GASB Statements No. 25
• GASB Statement No. 68
- Applies to employers
- Replaces GASB Statements No. 27
4
Highlights of GASB 68
• Accounting ≠ Funding
• Have to Report Unfunded Liability on Balance Sheet
- Using market (fair) value of assets
• Pension expenses no longer the ARC
- Based on shorter amortization periods
- Very volatile
• Pooled Employers will have to report their share of the
pool’s UAL and pension expense
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Will CalPERS Provide the Information?
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Planning on it
Will require extensive changes
Cannot use trust fund money
Will have to charge employers asking for the information
Will be going to CalPERS Board this spring for approval to
proceed and charge employer
- GASB valuations will be done on request
- Not mandatory
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Potential GASB Implementation Issues
• Need actuarial computer system re-write
• Ability to hire staff
• Need to be ready by spring of 2015
- Most employers will need the information for June 30, 2015
CAFR
7
Pension Reform
• Its here!
• Best source of up to date info is CalPERS website
- FAQ, circular letters, member publications
• PEPRA rate letters were sent in December
- New PEPRA employer rate for pooled plans
- Blended rate for non-pooled plans
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Pension Reform – Clean Up
• CalPERS is pursuing regulations
• Clean up Legislation (SB 13)
- Issues
• Special compensation
• Contribution and benefit offsets
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Pension Reform – Employer Inquiries
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MOU impairment
Working after retirement
Member rate, EPMC
Compensation cap
- Will be stopping contribution above cap
- System changes needed
- Expected to be in place by end of June at the latest
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Pension Reform – Risk Pool Impact
• CalPERS Board created two new risk pools
- Miscellaneous 2% at 62
- Safety 2.7% at 57, 2.5% at 57 and 2% at 57
• Existing Pools are closed to new entrants
- Need to address amortization of side funds and pool
unfunded liability
• Looking at various solutions
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Total Normal Cost
Miscellaneous Plans
Benefit Formula
Low
Median
High
Current
Employee
Contribution
2% at Age 60
13.9%
13.9%
15.9%
7%
2% at Age 55
15.6%
16.1%
18.8%
7%
2.5% at Age 55
17.8%
18.3%
20.4%
8%
2.7% at Age 55
19.0%
19.7%
22.5%
8%
3% at Age 60
19.5%
20.2%
22.4%
8%
2% at Age 62
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12%
?
Total Normal Cost
Safety Plans
Benefit Formula
Low
Median
High
Current
Employee
Contribution
2% at Age 55
20.7%
20.7%
22.6%
7%
2% at Age 50
24.3%
24.3%
28.5%
9%
3% at Age 55
26.4%
27.3%
31.0%
9%
3% at Age 50
28.7%
29.6%
37.3%
9%
2% at Age 57
17%
?
2.7% at Age 57
21%
?
13
Asset Allocation and Discount Rate
• Board reviews asset allocation every 3 years
• Asset liability workshop scheduled for November 2013
- Final asset allocation will be adopted in December 2013
• Implications are potential changes to discount rate
assumption
- Would be adopted in February 2014
- Would impact 2013 valuation setting 2015-2016 rates
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Experience Study
• Review of demographic assumptions
• Once every 4 years
- Will work on new one in 2013.
- Expect to present result in early 2014.
• Future mortality improvement (i.e people living longer) will
be looked at
- Expected to result in higher contribution requirements
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Funding Risk
Risk
• Funding Risk report in March
• New risk analysis section in reports
• Discount Rate Sensitivity Analysis
- Employer rate under different discount rate
- 6.5% and 8.5% discount rate
• Investment Return Sensitivity analysis
- Projection of employer rate up to 2017-2018
- 5 scenarios
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Termination Liability
• CalPERS Board approved new asset allocation for
terminated plans in December
• Liabilities have been immunized using a fixed income
portfolio
• What does it mean in today’s low interest rate environment?
- Discount rate is much lower
- Termination liabilities much higher than funding liabilities
• Hypothetical termination liability was included in most recent
actuarial valuation report
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Example
• Plan with an asset to payroll ratio (volatility index) of 6
- Assume AVA = 120% of MVA
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• Need some graphics
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Possible Changes
Employer Contributions
• Exploring new ways to set contribution requirements
• Ideas
- Status quo
- Separate contribution rate per benefit formula
- Set a rate for normal cost and bill $ for any payment toward
an unfunded liability (and side fund)
- Set a $ amount each year
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Review of Smoothing and Amortization Methods
• CalPERS actuarial staff performing a review of existing
methods
- 15 year asset smoothing
- 30 year rolling amortization
• Results of review will be presented in March
• Potential for a recommendation to shorten asset smoothing
period and/or amortization period
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Issues with the Current Methods
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The Concept
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No corridor
Shorter (fixed) smoothing period
Fixed amortization periods
Smoothing the rate directly
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Directly Smoothing the Rate?
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Graph of Contribution Rate
• UAL pmt, single asset loss/ current versus new concept
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Impact on Employer Contributions
Accounting Changes
• No impact on employer contributions
• Will impact pension expense on your financial statements
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Pension Reform
• No impact at start
• Gradual phase in of lower normal cost
- As you hire new employees
• Member contribution rate increases
- Direct offset if/when implemented
- Consult your actuary as to timing
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New Assumptions
• Expect to recommend changes in early 2014
• May be effective for 2015-16 or 2016-17
• Mortality projection
- Impact of a 1% change is shown in your valuation report
• Discount rate
- Impact is 2% to 4% of payroll
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New Smoothing Methods
• Timing
• Impact
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Timeline of Pension Changes
GASB
AB340
Approval
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No impact on rates
Applies to Fiscal years beginning after June 15, 2014 for most Employers
Information needed Fall 2015
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Impacts rates of new Employees when hired (or shorty thereafter)
Approval
Impact on Rates*
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Assumption
Change
Impacts FY 2015-16 rates
Impacts discount rate in Valuations
Impacts mortality projections in the presentation
Impact on Rates*
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Impacts FY 2015-16 rates
Method
Change
Impact on Rates*
2012
2013
2014
2015
2016
*For illustrative purposes only
2017
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QUESTIONS?