The State of Retirement Plans May, 2011

1. The State of Retirement PlansMay, 2011 David S. Boomershine

2. 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

3. Background • Competitive • Attract employees • Tax break • Reward employees/employee appreciation • So employees can retire • Contribute to society Employers sponsor retirement plans – why?:

4. 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

5. Background Employers plans are changing – why?: Driving forces: • Federal legislation • Accounting rules • Asset performance • Cost/liability volatility • Economics • Stupidity

6. 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!

7. Recent Federal Legislative Changes • Pension Protection Act (PPA) – Impacts Private Sector • Defined Benefit Plans • Defined Contribution Plans • Hybrid Plans • Other – minor changes

8. 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!

9. 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

10. Recent Federal Legislative Changes-PPA • Hybrid Plans • “New Age” Discrimination Testing • Some past design issues resolved prospectively • Vesting • More viable plan design option now?

11. 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

12. 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

13. 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

14. Private Sector vs. Public Sector Let’s Review: Result: Increased volatility for Private Sector Pension Plans

15. 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

16. 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?

17. 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

18. 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

19. 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

20. 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

21. 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%

22. 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

23. 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

24. DC Plans

25. Current Public Sector Plan Debate June, 2010

26. 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

27. 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

28. 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

29. 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

30. ? Questions