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

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The State of Retirement Plans May, 2011

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The state of retirement plans may 2011

The State of Retirement PlansMay, 2011

David S. Boomershine


The state of retirement plans may 2011

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

  • Current Public Sector Plan Debate

  • Conclusions


The state of retirement plans may 2011

Background

  • Competitive

  • Attract employees

  • Tax break

  • Reward employees/employee appreciation

  • So employees can retire

  • Contribute to society

Employers sponsor retirement plans – why?:


The state of retirement plans may 2011

Background

Ideal employer sponsored retirement program:

  • Defined Benefit Plan (DB) – Base

  • Defined Contribution Plan (DC)– Supplemental

    Combined program provides blend of security, flexibility for employees


The state of retirement plans may 2011

Background

Employers plans are changing – why?:

Driving forces:

  • Federal legislation

  • Accounting rules

  • Asset performance

  • Cost/liability volatility

  • Economics

  • Stupidity


The state of retirement plans may 2011

Employer Plans

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!


The state of retirement plans may 2011

Recent Federal Legislative Changes

  • Pension Protection Act (PPA) – Impacts Private Sector

    • Defined Benefit Plans

    • Defined Contribution Plans

    • Hybrid Plans

  • Other – minor changes


The state of retirement plans may 2011

Recent Federal Legislative Changes-PPA

  • 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!


The state of retirement plans may 2011

Recent Federal Legislative Changes-PPA

  • 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


The state of retirement plans may 2011

Recent Federal Legislative Changes-PPA

  • Hybrid Plans

    • “New Age” Discrimination Testing

    • Some past design issues resolved prospectively

    • Vesting

    • More viable plan design option now?


The state of retirement plans may 2011

Recent Accounting Standards Changes

  • 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


The state of retirement plans may 2011

Significant Plan Asset Losses

  • 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


The state of retirement plans may 2011

Significant Plan Asset Losses

  • 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


The state of retirement plans may 2011

Private Sector vs. Public Sector

Let’s Review:

Result: Increased volatility for Private Sector Pension Plans


The state of retirement plans may 2011

Sources of Cost/Liability Volatility -

DB Plans

  • Plan Asset gains/losses – issue exacerbated by PPA

  • Valuation interest rate basis – issue exacerbated by PPA

  • Accounting Discount Rate basis – set by FAS


The state of retirement plans may 2011

Recent Pension Funding Relief Passed

  • 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?


The state of retirement plans may 2011

Funding Relief Alternatives

  • 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


The state of retirement plans may 2011

Survey Says

Recent International Foundation of Employee Benefits Survey -

Pension Plans: Impact of the Financial Crisis, September 2009

Top Concerns:

  • Market losses/underfunded Plans

  • Decreased job security

  • Changes to health care system

  • Delayed Retirement

  • .

  • .

  • .

  • Eliminated employer-sponsored retirement benefits


The state of retirement plans may 2011

Survey Says

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


The state of retirement plans may 2011

Survey Says

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


The state of retirement plans may 2011

Survey Says

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%


The state of retirement plans may 2011

Resulting Trends/Future Plan Prospects

  • 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


The state of retirement plans may 2011

Hybrid Plans

  • 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


Dc plans

DC Plans


Current public sector plan debate

Current Public Sector Plan Debate

June, 2010


The state of retirement plans may 2011

Actuarial Cost Viewpoint -

Current Issue: Government Budgets cannot afford current Plans/volatility

Three Phases for Pension and OPEB Plans

  • Baseline Actuarial Cost

  • Funding Alternatives

  • Plan Design Alternatives

    Concerns/Interested Parties:

  • Budgets

  • Taxpayers

  • Unions

  • Bond Rating Agencies


The state of retirement plans may 2011

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


The state of retirement plans may 2011

Plan Design Changes

Pension Plan Design Changes – significant cost/liability

impact:

  • 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


Conclusions the state of retirement plans

Conclusions – The State of Retirement Plans?

  • Private Sector – Changes have calmed down

  • Public Sector – Changes are raging!

  • Some recovery going on

  • Overall – not good

  • Getting attention


The state of retirement plans may 2011

?

Questions


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