1. finance
2. personal finance
3. financial planning
4. retirement and pension

The Winding Yellow Brick Road
Emerging Trends for Retirement Security
2015 Klausner Conference
March 17, 2015
Cathie Eitelberg
Rocky Joyner
8076089v3/96060.906
Copyright © 2015 by The Segal Group, Inc. All rights reserved.
Topics for Today
Ruby slipper measurements
News from Oz
When dreams go up in a cloud of dust
Multiple yellow brick roads
• National Institute for Retirement Security, Better Bang
Part Two, “Still a Better Bang for the Buck”
• A Canadian Plan to De-Risk Retirement Liabilities
• Multiemployer Pension Reform Act of 2014 (MEPRA)
Key Compass Points for Trustees
1
Slipper candidate number one
GASB
Ready or not GASB changes have arrived:
Statement 67 for plan reporting: Effective for all plans for plan
years beginning after June 15, 2013 (2013/2014 for fiscal year
plans)
Statement 68 for employer reporting: Effective for fiscal years
beginning after June 15, 2014
(2014/2015 fiscal years)
2
Slipper candidate number one
GASB
Major “Game Changers” in the
new rules—measure expense:
Net pension liability reported on the
balance sheet
Expense and funding are uncoupled
from one another
Faster and more volatile changes
in pension liabilities
Expansion of Disclosure Information
3
Slipper candidate number one
GASB
Two key points regarding the new GASB disclosures:
One: The underlying financial position of your entity has not
changed. Accounting numbers have been rearranged in the financial
statement.
Two: The new pension expense is not intended and is not
appropriate for use in determining plan funding. Contribution
requirements will be determined in compliance with the plan’s
adopted funding policy.
4
Slipper candidate number one
GASB
The faster—often immediate—recognition of net pension liability
changes introduces much greater volatility in the reported expense.
• This volatility will be reflected directly on the income statements of plan sponsors.
This volatility is what disqualifies this new expense as a basis for
determining a funding policy.
5
Slipper candidate number one
GASB
SIMPLE DIVORCE OR TRAIN WRECK
Sponsors must review funding policies in response
to GASB’s divorce of plan expensing and funding.
6
Slipper candidate number one
GASB
The following graph is based on:
An open and ongoing Plan
The funding % on an actuarial asset basis is 92%
The Plan has a funding policy that amortizes its unfunded actuarial
accrued liability over 10 years as a level dollar
The current investment return assumption is 7.75% and inflation is
assumed at 3.50%
The projected cash flow will allow the Plan to use the long-term
expected rate of return on assets
7
Slipper candidate number one
GASB
20 YEAR DEMONSTRATION OF EXPENSE
VOLATILITY UNDER THE NEW STANDARDS
30%
% of Salary
20%
10%
0%
-10%
-20%
0
1
2
3
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19 20
Sample ARC 1990s
11% 14% 14% 14% 14% 14% 13% 12% 11% 10% 8% 7% 7% 8% 8% 9% 9% 9% 10% 17% 16%
Sample Expense 1990s 11% 15% 12% 11% 11% 11% 8% 2% -5% -15% -16% -7% 10% 29% 30% 22% 17% 6% 12% 27% 27%
8
Slipper candidate number two
Moody’s
Moody’s has created its own method for evaluating Public sector
retirement plans.
The changes include:
Actuarial accrued liability discounted using a high-grade long-term
corporate bond index rate
• Initially the rate used 5.50% (5.50% is used in the following illustration); for
December 2014 the reported rate was 3.72%
Asset smoothing is eliminated—results are based on fair (market)
value
9
Slipper candidate number two
Moody’s
The changes include:
Annual pension contributions
• Based on 5.5% discount rate
• Unfunded actuarial accrued liability amortized over 17 years as a level dollar
amount
Multiple employer cost-sharing pension plans
• Liabilities allocated proportionally based on employer’s share of total contribution
• Similar to GABS 68 allocation of NPL and expense
10
Slipper candidate number two
Moody’s
2011 Valuation Results
Reflecting Moody’s Adjustments
Long-term discount rate
8.00%
Long-term discount rate
8.00%
Short-term discount rate
n/a
Short-term discount rate
5.50%
Actuarial Accrued Liability
$17.0 bil
Actuarial Accrued Liability
$23.0 bil
Actuarial Value of Assets
$10.0 bil
Market Value of Assets
$10.3 bil
Unfunded Liability
$12.7 bil
Unfunded Liability
$7.0 bil
Funded Percentage
59%
Funded Percentage
45%
Employer Normal Cost
$124 mil
Employer Normal Cost
$185 mil
Amortization Payment
$387 mil
Amortization Payment
$1,100 mil
Annual Contribution
$511 mil
Annual Contribution
$1,295 mil
11
Slipper candidate number three
Your funding policy
Each Public Sector retirement plan will have to develop a funding
policy. This policy will establish:
• The funding method—entry age, projected unit credit, aggregate or other
reasonable actuarial method that best fits the entity’s funding reality
• The asset smoothing method—including period and corridors
• Amortization policy—establishes length and style for paying off any plan
unfunded liabilities
• Assumptions—the policy will establish a framework for choosing assumptions
Note that the funding policy is designed to specifically fit the needs
and specifics of the entity in question.
• It is not a one size fits all determination
12
Which ruby slipper fits best?
Obviously it is the one designed for you.
• That is your personally designed funding policy
But beware the wicked witches out there will try to force your foot
into a one size fits all mentality such as
• GASB—Developed based on the new GASB standards as indicated earlier.
These results are for accounting purposes only. Expect liability and expense
volatility.
• Moody’s—Developed by Moody’s from published plan information. The results
can be anticipated to fluctuate greatly from period to period. Reportedly to be
used only for plan comparison purposes by Moody’s.
• Other bond rating entities and the federal government may also develop their
own internal determinations for various purposes.
• To emphasize, Beware when trying to compare the various measurements
– Only your funding policy is designed to meet the needs of your entity and its
tax base.
– The other measures to one extent or another are attempting to create a onesize-fits-all disclosure
13
News from Oz
Defined Contribution changes under discussion
•
•
•
•
Coordination of contribution limitations for 403(b) 457(b) plans
Application of the 10% early withdrawal penalty on 457(b) plans
Eliminate Required Minimum Distributions for Roth type accounts
Allow Roth IRA rollovers to other Roth type accounts
Development of retirement savings options
• At the federal level proposals or actions include
– MyRA, designed for low income savings as an entry into more traditional
vehicles
– USA Retirement, Senator Harkin’s proposal for universal coverage to
supplemental current pension plans
– SAFE, Senator Hatch’s proposal for extensive coverage using the life insurance
industry to pay benefits
– Administration looking at a combined tax-deferred cap on contributions to both
DC and DB plans
– Administration proposal for a Federal payroll deduction, auto enrollment IRA for
employees without access to an employer-sponsored plan
14
News from Oz
State Considerations
Pension Obligation Bonds are becoming a topic of conversation in
some circles.
The New Jersey is suggesting a new governance structure for the
states legacy and newly formed cash balance plans.
Additional reform of existing plans to include transition to a defined
contributions plans or options
Derisking through adjustable benefits
Shifting pre-Medicare retirees to health exchanges
Leveraging ACA Medicaid expansion for some workers
15
News from Oz
Development of public
administration of private
pension options
At the state level new actions and
proposals are developing rapidly
The following map shows some
states involved in consideration
of private sector initiatives
16
News from Oz
Source: Pension Rights Center
17
News from Oz
States that have enacted some form of SCP legislation.
State
Year
Action
California
2012
Enacted bill (SB 1234) to create a state-sponsored payroll
deduction IRA for employees of employers with 5 or more
employees that don’t offer a retirement plan. Assets would be
pooled and professionally managed, with a privately-underwritten
guarantee. Board has issued a Request for Information, must
conduct a market analysis and feasibility study and obtain
authorization from state legislature as well as approval from federal
Dept. of Labor and IRS before opening plan for participation.
Massachusetts
2012
Enacted bill (HB 3754) to create a state-sponsored 401(k) for nonprofits with 20 employees or less, to be administered by the State
Treasurer. The plan has received it federal tax qualification. In the
process of implementation.
Oregon
201415
SB 615 creates the Oregon Retirement Savings Board, to conduct
a study to develop a private-sector worker trust that would be
voluntary, portable and professionally invested for consideration by
the Legislature in 2016. A Task Force reported in January 2015 to
the State legislature recommending that the State create a privatesector retirement security program that encompasses nine
principles, conduct market research, reach out to small businesses,
and comply with federal and state law.
18
News from Oz
The latest.
State
Illinois
Year
2015
Action
A payroll deduction- Roth IRA bill, SB 2758,The Secure Choice
Savings Program, partly modeled on California’s SB 1234,
adopted in January 2015 to be effective in 2017. Businesses
with 25 or more employees will be required to auto enroll
workers without access to an employment based retirement
plan, employees can opt out, and investments will be
professionally managed. The law is effective on June 2015
when appointments to a seven person board will be made to
administer the program.
19
News from Oz
States that have or are considering the issue.
State
Year
Action
Arizona
2014
Rep. Quezada & others introduced HB 2063 modeled after California’s SB
1234. The legislature adjourned without taking any action.
Colorado
2014
HB 1377, which would have created the Colorado Retirement Security Task
Force to develop recommendations to provide greater retirement security for
state residents, passed the House but lost by 1 vote in the Senate.
Connecticut
2014
Legislature passed budget bill creating the Connecticut Retirement Security
Board and appropriating $400,000 to conduct a market feasibility study and
develop an implementation plan for a public retirement plan. The board has
been appointed and held its first meeting on August 6, 2014. An RFP has
been issued to conduct a feasibility with the goal of selecting consultant by
March 2015.
Indiana
2014
Sen. Walker introduced SB 66 to create a state-assisted retirement plan
under IRS Section 401(a) for employers and employees that do not have a
workplace retirement plan. The bill would provide a 1-time $250 tax credit to
participants who have not previously participated in a retirement plan. The
legislature adjourned its session without further action.
Kentucky
2015
HB261, would create the Kentucky Retirement Account, for private sector
workers without access to an employer-sponsored retirement plan. A Board,
appointed by the State Treasurer and Governor would select a Third Party
Administrator. Investments are pooled, and auto-payroll deductions optional
for employers and employees.
20
News from Oz
State
Year
Action
Maine
2013
Rep. Russell introduced LD 1473 modeled on California’s SB 1234, which died
in committee.
Maryland
2014
SB 921, which would create Secure Choice Retirement Savings Plan modeled
after California’s, was introduced in House and Senate. The legislature
adjourned its session without further action. The Governor signed an executive
order creating a task force to study retirement insecurity in Maryland . The
Task Force report is expected in February 2015. Newly elected Governor
Hogan indicated that he will not support the implementation of a statewide
plan.
Minnesota
2014
HF 2419 directs the Minnesota Management and Budget to conduct a
feasibility study for a state-administered retirement plan similar to California
Secure Choice. The MMB is considering RFP responses to conduct a
feasibility study.
Nebraska
2013
The Retirement Systems Committee introduced LR 344 to conduct a study of
the availability and adequacy of retirement savings of Nebraska private
sector workers. The committee held a hearing on December 20, 2013. The
legislature took no further action before adjourning.
Ohio
2013
Sen. Kearney introduced SB 199 in October modeled after California’s SB
1234. The billed died at the end of the session.
21
News from Oz
State
Year
Action
Vermont
2014
FY 2015 Appropriations Bill creates a Public Retirement Plan Study
Committee to study the feasibility of establishing a public retirement plan.
Washington
2014
A bi-partisan bill called START, Saving Toward a Retirement Today, was
introduced in both houses, HB 2474 and SB 6294. HB 2474 passed the
House on Feb. 14 but the legislature adjourned its session without further
action.
West
Virginia
2014
HB 4375 passed the House, but the legislature adjourned its session without
further action. The bill would have created the WV Voluntary Employee
Retirement Accounts (VERA) Program, a savings plan under the state
treasurer open to private employers with 100 employees or less who don’t
offer a retirement plan. Following the session, the legislature adopted a
resolution creating an interim study commission (SCR 91) enabling the Joint
Standing Committee on Finance and the Joint Standing Committee on
Pensions and Retirement to study the retirement readiness of the citizens of
West Virginia and a group government-managed retirement savings plan
(VERA).
Wisconsin
2014
Sen. Dave Hansen and Rep. Eric Genrich introduced LRB 3894-1, the
Wisconsin Private Secure Retirement Act on Feb. 19th. The bill would create
a board charged with creating a private plan as similar as possible to the
Wisconsin Retirement System. The bill died at the end of the session.
22
News from Oz
MyRA Provisions
Concept introduced in President Obama’s 2014 State of the Union address
Similar to a Roth IRA employee contributions are made after-tax, grow taxfree and are not taxed when distributed at retirement. Income limits to
determine participation eligibility are the same as for a Roth IRA
Maximum amount the account balance can grow to $15,000/or be in place
30 years, whichever comes first
Single investment option the G-Fund is a federal savings bond indexed to
the CPI
Value of the investment is protected and interest is at a floating rate
Pilot program is under way with Coamerica the selected plan administrator
with wide availability expected by the end of 2015
Participation is voluntary for both employees and employers
Website myra.treasury.gov provides individuals with a guide to calculate
contributions, demonstrates how the account grows, and a link to sign up.
It also directs employers on how to set up a payroll deduction plan.
23
When dreams go up in a cloud of dust
Bankruptcy Issues
Despite the gloom and doom reports following the 2008 economic debacle,
municipal bankruptcies remain extremely rare.
From 2008 to 2012, seven municipalities successfully file for bankruptcy:
• Westfall Township, PA
• Moffett, OK
• Prichard, AL
• Central Falls, RI
• Jefferson County, AL
• Stockton, CA
• San Bernardino, CA
24
When dreams go up in a cloud of dust
Bankruptcy Issues
Since then the big bankruptcy has been Detroit, MI.
Comparatively, almost 400,000 commercial bankruptcies were filed
in the same period.
Bankruptcy is a long and torturous path and even though a few local
governments continue to struggle with budgets and debt, it appears
but a few will turn to bankruptcy as a last resort.
25
Protecting the dream
Plan Design—NIRS, Better Bang Part Two
In December 2014, the NIRS released an update
of their 2008 study “Better Bang for the Buck”.
In spite of some discussions proposing to use DC
plans as the base retirement in the public sector,
this study shows that the DB model is inherently
more cost-efficient than DC plans.
26
Protecting the dream
Plan Design—NIRS, Better Bang Part Two continued
These efficiencies in delivering benefits are
due to three structural advantages.
• Longevity risk pooling
• Asset allocation
• Low fees and professional management
Consequently, any savings from shifting
from a DB plan to a DC plan results from
decreasing retirement income.
27
Protecting the dream
NIRS, Better Bang Part Two
Since 2008, improvements have been
made in benefit delivery for some DC
plans.
The Better Bang paper refers to these as
“ideal DC” plans, also known as pooled
DC plans.
These plans remove asset allocation and
selection from the individual to a
professional manager.
Even with this improvement DB plans are
29% more efficient than an “ideal” DC plan.
28
Protecting the dream
NIRS, Better Bang Part Two
The chart on the following page from
“Still a Better Bang for the Buck”
illustrates the impact of these structural
efficiencies inherent in DB plans.
For an individually managed DC plan,
a DB plan is 48% more cost effective
in delivering benefits.
As noted on the prior page, the
efficiency is 29% better than an “ideal”
DC plan
29
Protecting the dream
NIRS, Better Bang Part Two
COST OF DB AND DC PLAN AS A PERCENTAGE OF PAYROLL
30
Protecting the dream
But only IF
• We have learned the following lessons
Fund Required Contributions
Use Reasonable and Fact-based Assumptions
Beware Retroactive Benefit Expansions
Flexible COLA programs
• Tied to actual performance
• Prefund formulaic “ad hocs”
31
Canadian Plan to De-Risk
Canada is facing a retirement
income problem
“…Canadian experience of the
past ten years particularly, is that
cost volatility largely driven by the
inherent volatility of global
capital markets understandably
scares employers.”
—Further to Benoit Mandelbrot’s
The (Mis)Behavior of Markets
who characterized all markets as
“inherently unstable and
inevitably subject to bubbles”
32
Canadian Plan to De-Risk
But What If…
a plan was designed to fix the
employer cost but pool investment,
interest rate and longevity risk
for members?
33
Canadian Plan to De-Risk
Targeted Benefit Plans
In Canada, this is what has long been called a multiemployer pension
plan—largely pioneered in North America
A potential de-risking strategy since key DB advantages are retained
although the benefit is subject to certain revisions
Effectively manages investment, interest and longevity risk by a means that
is otherwise not available to plan sponsors or individuals
Jointly governed Board of Trustees involving the participation of all parties
who bear risk under the plan (active, retiree and other plan beneficiaries
should have voting rights)
Board of Trustees would be required to act solely in the best interests of the
plan members
Plan documents negotiated between employer, members and retirees
Actuaries call it “pooling of risks”
34
Canadian Plan to De-Risk
Impact of Risk Pooling on the Distribution of Retirement Income Adequacy
Defined Contribution
Probability
Probability
Defined Benefit
Retirement Income Adequacy
Retirement Income Adequacy
No risk pooling or guarantee
Risk pooling with ER guarantee
Probability
Target Benefit
Retirement Income Adequacy
Risk pooling without ER guarantee
35
Canadian Plan to De-Risk
Funding Policy
New Brunswick was the first jurisdiction to enact both legislation
and regulations
No Solvency (mark-to-market) funding requirement, but required
for disclosure.
Stress-testing also required for disclosure
Funding test would be either:
• Going-concern funding with a provision for adverse deviation based on asset
allocation/maturity; or
• A probabilistic approach
– e.g., 90% base benefits not reduced and 75% ancillary benefits not reduced
36
Canadian Plan to De-Risk
Documented Detailed Deficit Recovery Plan
Contain the triggering measures;
Timing for implementation; and
A description of all the required actions and their prioritization in
order to achieve the desired level of funding
Once started  no
consent of members
37
Canadian Plan to De-Risk
Questions and Issues
Plan design is very flexible, it is essentially any defined benefit type
design.
The “risk sharing” is among the plan participants, the employers do
not share in the risk.
No benefits are “guaranteed”, however by pooling the noted risk
elements, the likelihood of making the “target” is much better than
with a defined contribution plan.
The lack of a guarantee may impact future retirement patterns. This
will have to play out.
38
Multiemployer Pension Reform Act
Remediation for Deeply Troubled Plans
Projected insolvency within 15 years (20 years if 2/3’s inactives and
less than 80% funded)
Trustees have taken all “reasonable” measures to avoid insolvency
Accrued benefits may be “suspended” (i.e. reduced) with limitations
and conditions
This is a major change from past ERISA
regulations.
39
Multiemployer Pension Reform Act
Remediation for Deeply Troubled Plans
No benefit may be reduced below 110% of PBGC guarantees
No participant over age 80 may be touched
Participants between 75 and 80 the reduction is phased
Trustees may consider a myriad of factors
Treasury and participant approval is required
Continuum of strategies for managing DB pension risk.
A suspension is not easy to obtain and its application is limited
but there are certain key multiemployer plans that this will help.
40
Key Compass Points for Trustees
One size does not fit all. Your funding policy is the only
measurement designed for your plan.
Do not expect much legislative action on the Federal level but watch
for the evolving interest at the state level on improving the retirement
options for private sector workers.
While specific bankruptcies will continue to make the front page, this
is not expected to become epidemic. Most entities continue to adopt
sound financial principles for their constituents.
41
Key Compass Points for Trustees
There is nothing better or more efficient for delivering retirement
benefits than the DB plan model that covers almost 90% of public
sector workers.
However, de-risking retirement costs (i.e. limiting contribution
fluctuations) is hot now.
• The Canadian target benefit option has been implemented in New Brunswick and
its getting some serious consideration throughout Canada.
• On the U.S. side, MEPRA has established a systematic methodology for dealing
with deeply troubled plans.
Use your brain, heart and
courage to find solutions
42
Thank you!
Cathie Eitelberg
Senior Vice President
Director Public Sector Market
202-833-6470
[email protected]
Leon F. (Rocky) Joyner, Jr.
Vice President and Actuary
678-306-3119
[email protected]
43