111 PD, Stress DB System EA, - SOA · Session 111 PD, Financial Stress in the DB Retirement System...
Transcript of 111 PD, Stress DB System EA, - SOA · Session 111 PD, Financial Stress in the DB Retirement System...
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Session 111 PD, Financial Stress in the DB Retirement System
Moderator:
Lisa A. Schilling, FSA, EA, FCA, MAAA
Presenters: Christopher M. Bone, FSA, EA, MAAA Theodore A. Goldman, FSA, EA, MAAA Lisa A. Schilling, FSA, EA, FCA, MAAA
SOA Antitrust Disclaimer SOA Presentation Disclaimer
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111PD Financial Stress in theDB Retirement SystemTed Goldman, FSA, EA, MAAAChris Bone, FSA, EA, MAAALisa Schilling, FSA, EA, FCA, MAAAOct. 25, 2016
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Ted Goldman, FSA, EA, MAAA111PD Financial Stress in the DB Retirement SystemOct. 25, 2016
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Today’s Agenda
• Define DB financial stress• Factors leading to stress• Three perspectives – Single Employer,
Multiemployer, and Public Sector• Signs/measures of stress• Data, data, data• SOA research findings• Stress reduction considerations • Wrap-up
3
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Defining DB Financial Stress
4
The risk that a pension plan will not be able to deliver the “promised” benefits to some or all of the participants.
**
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Stress Factors
Maturing plans
Market fluctuations
Changing capital markets
Funding strategies
5
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Three Perspectives – Similar, but Different States of StressSingle Employer Plans Multiemployer Plans Public Plans
• Many frozen/ terminated replaced with DC only
• Risk transfers – lump sum offers, annuity purchases
• Aggregate 74% funded status
• PBGC program likely, but not certain, to reach surplus
• Continued commitment to DB
• Growth in severely underfunded plans
• Industry changes place pressures on withdrawal liabilities
• Aggregate 41% funded status
• PBGC program high likelihood of insolvency
• Benefit security redefined by MPRA
• Continued commitment to DB
• Competition for contribution dollars
• Media attention on underfunded plans and how to measure
• Aggregate 51% funded status
• Examples of benefit security being redefined
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Signs/Measures of DB Financial Stress• Funded status• Sustainability• Ratio of inactives to actives• Previous benefit cost (SOA research) – unfunded liability
per active participant• Difference between benefit cash outflows and
noninvestment cash inflows• Ratio of plan assets to the revenue base or financial
resources of the plan sponsor• Ratio of liabilities to contributions• Duration of the benefit payment stream
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Christopher M. Bone, FSA, EA, MAAA111PD Financial Stress in the DB Retirement SystemOct. 25, 2016
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Systemic Stresses
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Coverage of Active Wage and Salary Workers by Pensions in the Private Sector
10
28.8%
10.2%
8.2%
3.3%
0%5%
10%15%20%25%30%35%40%
1980
1985
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Active Participants as a Percentage of Wage and Salary Workforce
MultiemployerActiveParticipants
Single-EmployerActiveParticipants
Source: PBGC 2014 Databook Table S-33
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Single-Employer Insured Plans by Industry―2013
11
AGRICULTURE, MINING, AND
CONSTRUCTION, 8.4%
MANUFACTURING, 23.0%
TRANSPORTATION
AND PUBLIC
UTILITIES, 3.8%
INFORMATION, 2.7%
WHOLESALE TRADE, 7.4%
RETAIL TRADE, 4.5%
FINANCE, INSURANCE, AND REAL
ESTATE, 17.7%
SERVICES, 29.2%
NON-PROFIT ORGANIZATIONS, 3.4% AGRICULTURE, MINING,
AND CONSTRUCTION, 1.7%
MANUFACTURING, 43.8%
TRANSPORTATION AND PUBLIC UTILITIES, 7.8%
INFORMATION, 6.6%
WHOLESALE TRADE, 2.4%
RETAIL TRADE, 4.9%
FINANCE, INSURANCE,
AND REAL ESTATE, 12.8%
SERVICES, 19.4%
NON-PROFIT ORGANIZATIONS, 0.7%
Insured Plans Insured Participants
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Multiemployer Insured Plans by Industry―2013
12
AGRICULTURE, 0.2% MINING, 1.0%
CONSTRUCTION, 37.3%
MANUFACTURING, 9.4%
TRANSPORTATION AND PUBLIC
UTILITIES, 14.6%
INFORMATION, 2.1%
WHOLESALE TRADE, 0.5%
RETAIL TRADE, 15.3%
SERVICES, 19.5%
AGRICULTURE, 0.6%
MINING, 0.3%
CONSTRUCTION, 53.8%
MANUFACTURING, 10.0%
TRANSPORTATION AND PUBLIC
UTILITIES, 10.3%
INFORMATION, 2.3%
WHOLESALE
TRADE, 1.7%
RETAIL TRADE,
6.0%
SERVICES, 15.1%
Insured Plans Insured Participants
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Stress Differential not due to Dependency Ratios
13
Active 37%
Retired 35%
Separated Vested
28%Active 37%
Retired 33%
Separated Vested
30%
Active , 47%
Retired, 32%
Other, 21%
Sources: Single-employer and multiemployer universe of plans – PBGC 2014 Databook, Public sector – Publicplansdata.org
Public Plans 2015
Single-Employer 2013Multiemployer 2013
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Funding of US Employer-based Pension Systems―Estimated Market Basis
14
Sources: Single-employer and multiemployer time series – PBGC 2014 Databook, Public sector estimates for FY 2014 (Rauh, Hoover Institute April 2016) and FY 13/14 (Biggs, AEI, September 2015)
123%
162%
123%
106%
144%
101% 89%
72% 74% 77%
116%103%
88%
105%
77%
62%
41%
41%Public sector
estimate Biggs, 2015 (median), 49%
Public sector estimate Rauh,
2016, 51%
1980
1985
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Aver
age
fund
ing
leve
l
Multiemployer System Funding
Single-Employer System Funding
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Plans by Funding Ratio―2013
15
Source: PBGC 2014 Databook Tables M-13 and S-48
468 487
238
7238
10 8 3 1 2 1 1 40
100
200
300
400
500
600
Less Than 40%
40% - 49%
50% - 59%
60% - 69%
70% - 79%
80% - 89%
90% - 99%
100% - 109%
110% - 119%
120% - 129%
130% - 139%
140% - 149%
150% or M
ore
247766
3,832
6,377
4,737
2,386
1,123
1,951
309206 141 92
1,232
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Less Than 40%
40% - 49%
50% - 59%
60% - 69%
70% - 79%
80% - 89%
90% - 99%
100% - 109%
110% - 119%
120% - 129%
130% - 139%
140% - 149%
150% or M
ore
Multiemployer Single-Employer
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Participants by Funding Ratio―2013
16
5,148
2,955
1,852
176 56 51 10 3 1 1 3 1 10
1,000
2,000
3,000
4,000
5,000
6,000
Less Than 40%40%
- 49%50%
- 59%60%
- 69%70%
- 79%80%
- 89%90%
- 99%
100% - 109%
110% - 119%
120% - 129%
130% - 139%
140% - 149%
150% or M
ore
192628
2,825
9,418
11,113
5,290
1,402454 280 107 114 9 68
0
2,000
4,000
6,000
8,000
10,000
12,000
Less Than 40%
40% - 49%
50% - 59%
60% - 69%
70% - 79%
80% - 89%
90% - 99%
100% - 109%
110% - 119%
120% - 129%
130% - 139%
140% - 149%
150% or M
ore
ThousandsMultiemployer Single-Employer
Source: PBGC 2014 Databook Tables M-8 and S-38
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Growth in severe underfunding in multiemployer plans (Plans less than 40% funded)―2013 Projections report
17
Source: PBGC 2013 Projections Report (based on 2002-2012 Databooks Table M-13)
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
($0)
($20)
($40)
($60)
($80)
($100)
($120)
Num
ber o
f Par
ticip
ants
Millions
Und
erfu
ndin
g ($
bill
ions
)
15 Plans(2001)
54 Plans(2004-2005)
228 Plans(2010)
Participants
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Growth in severe underfunding in multiemployer plans (Plans less than 40% funded)―Updated
18
Source: PBGC 2002-2014 Databooks Table M-13
0.00.51.01.52.02.53.03.54.04.55.05.5
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
($0)
($50)
($100)
($150)
($200)
($250)
($300)
($350)
($400)
Num
ber o
f Par
ticip
ants
Millions
Und
erfu
ndin
g ($
bill
ions
)
15 Plans(2001)
54 Plans(2004-2005)
228 Plans(2010)
468 Plans(2013)
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Insured Private Sector Plans -- Insurance Program Impact
19
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PBGC’s Single-employer Program Likely, But not Certain, to Reach Surplus
20
Source: PBGC 2015 Projections Report
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PBGC’s Multiemployer Program Faces Ongoing Deficits…
21
Source: PBGC 2015 Projections Report
Actual(historic dollars)
Projected “High/Low” Range
Projected Mean
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…and a High Likelihood of Running out of Funds
22
Source: PBGC 2015 MPRA Report
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Most likely to Exhaust Funding in 2024 - 2025
23
Source: PBGC 2015 MPRA Report
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If Guarantee Solvency Addressed by Raising Premiums, Considerable Increases are Needed
24
Source: PBGC 2015 MPRA Report
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And Assessing Premiums Carefully Is Important to Protect Benefits
25
Source: PBGC 2015 MPRA Report
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Lisa Schilling, FSA, EA, FCA, MAAA111PD Financial Stress in the DB Retirement SystemOct. 25, 2016
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Single Employer System
27
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SE: Counts2009 2010 2011 2012 2013 2014
(partial)
Plans(thousands) 29.1 28.4 28.0 27.3 27.1 25.2
Total Participants
(millions)27.7 27.6 26.1 25.6 23.1 20.0
Active Participants
(millions)12.0 11.5 10.9 10.2 9.1 7.7
28
Source: Forms 5500 Schedule SB as of Jan 5., 2016
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SE: Counts Compared to 2009
0%
20%
40%
60%
80%
100%
2009 2010 2011 2012 2013
Plans
TotalParticipants
ActiveParticipants
29
Source: Forms 5500 Schedule SB as of Jan 5., 2016
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SE: Aggregate Unit Credit Liabilities and Funded Status
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
$0.00
$0.25
$0.50
$0.75
$1.00
$1.25
$1.50
$1.75
$2.00
$2.25
$2.50
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013
Disc
ount
Rat
e
Liab
ilitie
sTr
illio
ns
UnfundedLiability
FundedLiability
Liab-wtdDiscountRate
Funding Target Liabilities and AVA
Est. Liabilities at Unsmoothed Rates and MVA
30
Source: Forms 5500 Schedule SB as of Jan 5., 2016
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SE: Aggregate Contributions and Benchmarks
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
2009 2010 2011 2012 2013 2014*
Billi
ons
MRC AfterOffsets
NC + Intereston UFT
NC + 7-yrAmortization ofUFT
ActualContribution
31
Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting
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SE: Aggregate Contributions and Benchmarks
$0
$20
$40
$60
$80
$100
$120
$140
2009 2010 2011 2012 2013 2014*
Billi
ons
MRC AfterOffsets
NC + Interest onUFT
NC + 7-yrAmortization ofUFTEst. MV: maintainUL
Est. MV: 7-yramortization
ActualContribution
32
Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting
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SE: Aggregate Contributions and Benchmarks
$0
$20
$40
$60
$80
$100
$120
$140
2009 2010 2011 2012 2013 2014*
Billi
ons
MRC
NC + Intereston UFT
UFT: InterestOnly
Est. MV:maintain UL
Est. MV:Interest Only
ActualContribution
33
Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting
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SE System General Observations Over 2009−2013• The system is shrinking
• Plans are exiting the system, or• Positioning to exit
• Under current funding rules:• Aggregate funding levels were 92%−99%• Contributions significantly exceed both MRC and
simplified funding benchmarks• Estimated market value funded status:
• Aggregate funding levels would have been 82%−93%• Starting with 2012, actual contributions would not have
been enough to maintain unfunded liabilities
34
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Multiemployer System
35
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ME: Counts2009 2010 2011 2012 2013 2014
(partial)
Plans 1,344 1,325 1,308 1,311 1,301 757
Total Participants
(millions)9.31 9.32 9.61 9.49 9.62 7.15
Active Participants
(millions)3.88 3.68 3.65 3.52 3.58 2.60
36
Source: Forms 5500 Schedule MB as of Jan 5., 2016
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ME: Counts Compared to 2009
0%
20%
40%
60%
80%
100%
2009 2010 2011 2012 2013
Plans
TotalParticipants
ActiveParticipants
37
Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting
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ME: Aggregate Unit Credit Liabilities and Funded Status
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2009 2010 2011 2012 2013 2009 2010 2011 2012 2013
Disc
ount
Rat
e
Aggr
egat
e Li
abili
ties
Billi
ons
UnfundedLiability
FundedLiability
Liab-wtdDiscountRate
PPA Zone Determination(Actuary’s Discount and AVA)
Current Liability and MVA
38
Source: Forms 5500 Schedule SB as of Jan 5., 2016
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ME: Number of Inactive Participants per Active Participant
1.40
1.75
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2009 2010 2011 2012 2013 2014*
39
Source: Forms 5500 Schedule SB as of Jan 5., 2016 * Partial Year of Reporting
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ME: Previous Benefit Cost (PBC)
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
2009 2010 2011 2012 2013 2014* 2009 2010 2011 2012 2013 2014*
Thou
sand
s
85th-95th75th-85th50th-75th25th-50th15th-25th5th-15th0-5thMedian
Plan Actuary Discount Rates Current Liability Discount Rates
40
Source: Forms 5500 Schedule SB as of Jan 5., 2016
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ME: Observations on Unfunded Liabilities Relative to Active Participants• Aggregate unfunded liabilities (unit credit and MVA):
• Significant but stable around $115 billion for PPA Zone• Much greater and increasing as measured by Current Liability
($385 billion for 2009 to $500 billion for 2013)
• While aggregate ratio of inactive to active participants increased
• 1.40 in 2009• 1.75 in 2014 (partial year of reporting for 2014)
• Unfunded liability per active participant (PBC) varies across plans:
• While stress is high, most plans are improving, but• The most highly stressed plans are getting worse
41
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ME: Aggregate Contributions and Benchmarks
$0
$5
$10
$15
$20
$25
$30
2009 2010 2011 2012 2013 2014*
Billi
ons
MRC
NC + Interest onUALNC + 30-yr pmton UALActual
2009 Actual + CPI
42
Source: Forms 5500 Schedule MB as of Jan 5., 2016 * Partial Year of Reporting
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ME: Aggregate Contributions and Benchmarks
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
2009 2010 2011 2012 2013 2014*
Billi
ons
MRC
NC + Intereston UAL
NC + 30-yr pmton UAL
NC + Intereston UCL
NC + 30-yr Pmton UCL
Actual
43
Source: Forms 5500 Schedule MB as of Jan 5., 2016 * Partial Year of Reporting
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ME: Aggregate Contributions and Benchmarks
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
2009 2010 2011 2012 2013 2014*
Billi
ons
MRC
NC + Intereston UAL
Interest on UAL
NC + Intereston UCL
Interest on UCL
Actual
44
Source: Forms 5500 Schedule MB as of Jan 5., 2016 * Partial Year of Reporting
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ME: Aggregate Contribution Observations 2009−2013• Contributions increased faster than inflation
• Greatly exceeded Minimum Required Contribution, yet• Were insufficient to maintain existing unfunded liabilities,
let alone pay down unfunded liabilities• Credit balances enable phenomenon
• PPA Zone aggregate funding stability stemmed from market returns and benefit reductions, not contributions
45
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Ted Goldman, FSA, EA, MAAA111PD Financial Stress in the DB RetirementSystemOct. 25, 2016
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Stress Reduction Considerations
• Actuaries have an important role to play with plan sponsors
• Risk management is our forte• Adopt funding and investment approaches early• Early detection is critical – but nuances exist• Disclose and explain the significance of appropriate
metrics• Use projections to check for sustainability• Scenario test the projections of targeted metrics
47
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Stress Reduction Considerations (cont’d)
• Fully fund and immunize liabilities for inactives, e.g.• Automatically adjust the level of risk as a plan ages and the retiree
population grows• Immunize liability for next X years of payments• Or immunize Y% of retiree payments, based on funded status
• Link amortization periods to size and remaining working lifetime of the active workforce
• Long amortization periods can cause problems especially if the funding source does not grow or diminishes
• Shorter amortization periods may help• Stay abreast of current market signals
• Set realistic/conservative perspective on asset return forecasts• Plan for interaction when needed
48
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The Data Indicates Significant Financial DB Stress Exists Across Single Employer, Multiemployer, and Public Plans
DB financial stress, if not addressed, can lead to
the need to reduce benefits…
…First for future participants, then future
accruals for current participants…
…Even for current benefits for active
participants and retirees.
We have learned a lot from weathering
economic ups and downs, aging workforces,
and maturing plans.
We need to strengthen the role we play with
plan sponsors.
These are exciting and important changes for
the actuarial profession to embrace.
49
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Questions and Discussion
50