Presented by: Terri Cicchelli Rose Fairbanks Harmony Ledbetter Yahaira Martinez Karina Rodriguez.
Presented by David Rodriguez, Regional Manager
description
Transcript of Presented by David Rodriguez, Regional Manager
Presented byDavid Rodriguez, Regional Manager
Leslee Hardy, ASA,EA,MAAA, Actuarial Services Director
The Real Value of a TMRS Benefit
TMRS’ Value Why TMRS Makes “Dollars & Sense…”
To Cities… To the Public… To Members…
Cost Benefit Comparisons TMRS DB Plan vs. 401(k)-Type DC Plan What do city’s and employee’s dollars
buy?
2
3
Why TMRS Makes “Dollars and Sense”
4
TMRS Makes Dollars & Sense to Cities Plan of choice for Texas cities; voluntary
statewide retirement plan Defined benefit (cash balance) plan Benefits are funded by mandatory
employee deposits, city contributions, and investment income
Operates by local control: Each participating city controls employer costs by choosing its own options
5
System Soundness + City Choices
Contribution rates* vary depending on benefits (e.g., 2.34% for cities with 5% / 1:1 match with no COLA, vs. 16.08% for cities with a 7% / 2:1 match and repeating COLAs)
Average contribution rate for all cities for 2013 is 13.22%
All TMRS benefits are fully advance-funded over each employee’s active working career
TMRS’ System funded ratio is 85.1% and System-wide UAAL is $1.7 billion
SYSTEM CITY
*Average rates weighted by payroll
6
Makes Sense to Cities, cont. Each city is funded as separate entity;
assets are pooled for investment purposes
Each city has its own assets and liabilities and Funded Ratio
TMRS increases a city’s competitive edge in hiring: 849 cities have chosen to participate in TMRS, and the number increases each year
TMRS benefits are effectively portable across participating cities to help attract experienced employees
7
Flexible, Local ControlMenu of benefits provides cities with over 1,400 possible combinations. Cities control these four major cost drivers of their plans:1.Employee deposit rate: 5%, 6%, or 7% (by
law, em-ployees must agree, by 2/3 vote, to lower deposit rate)
2.Employer match of contributions at retirement: 1:1; 1.5:1; or 2:1
3.Retiree COLAs: Adopt, change, or rescind a repeating or ad hoc COLA at either 30%, 50%, or 70% of CPI
4.Updated Service Credit: May be adopted at either 50%, 75%, or 100% of the calculated credit, and can be modified or rescinded by employer
8
The majority of a retiree’s benefit is funded by investment earnings on member and city contributions over the member’s career
TMRS’ administrative costs are low — approximately 0.15% of assets in 2011 (compared to a median “all-in” fee of 0.78% for 401(k)s)*
TMRS’ actuarial investment return assumption (net of expenses) is 7% — one of the lowest in the country for large public sector plans
* Source: Deloitte/InvestmentCompany Institute, 2011
TMRS Makes Dollars & Sense to the Public
9
TMRS is a “cash balance” or “savings-based” plan that receives no state funding
Decisions that affect costs are made locally TMRS invests $18.5 billion (as of
12/31/11) in the markets― providing capital for the national economy
In 2011, TMRS paid more than $810 million in retirement benefits, which circulate through local economies For example, a 2007 study by the Perryman Group
showed that TMRS benefits resulted in $1.32 billion in annual spending, most of it in the communities from which members retired
Makes Sense to the Public, cont.
10
TMRS determines each city’s Annual Required Contribution (ARC) based on benefit plan chosen by city
Cities must pay the ARC every year, or reduce benefits if ARC is not sustainable ARC = the cost of the current year’s
accruals (Normal Cost Rate) + amortization of the UAAL (Prior Service Rate)
No pension contribution “holidays”
Makes Sense to the Public, cont.
11
System assets are secure, and the System-wide funded ratio has increased over the past 4 years
TMRS members’ contributions provide a “savings plan” for the benefit of the employee
The member’s account gains a 5% interest credit each year, guaranteed by law Fluctuations in the plan’s value do not
directly affect the benefit amounts promised to members
TMRS Makes Dollars & Sense to Members
12
After retirement, members draw a guaranteed annuity for life
After retirement, retirees may receive a COLA based on their city’s plan choices
Makes Sense to Members, cont.
13
As members, city employees are rewarded by the prudent, diversified investment policies of the System (as opposed to relying on outside investment advisors or making investment decisions alone)
A pension plan provides greater stability and less vulnerability to market fluctuations Retirement savings of TMRS members were
not affected by the stock market crash of 2008; whereas 401(k) asset values declined more than 25% on average
Makes Sense to Members, cont.
14
Retirement Components Retirement is traditionally described as a
“three-legged” stool, comprising: Retirement Program Social Security (86% of TMRS cities have
Social Security) Personal Savings
401(k)s and similar DC plans were never intended to be the primary retirement vehicle
15
DB vs. DC vs. TMRS Defined Benefit Defined Contribution TMRS
Benefit based on formula; not based solely on actual contributions
Benefit based on employee contributions
Benefit based on member’s contributions and city’s matching funds. PLUS has defined benefit features – USC & COLA
Lifetime annuity Not a lifetime annuity Lifetime annuity
Money pooled and professionally invested
Self-directed investments Money pooled and
professionally invested
16
Cost Benefit Comparisons
Basic Formula for All Pension Plans C + I = B + E
C= Employee and Employer ContributionsI = Investment IncomeB= Benefit PaymentsE= Expenses
soB = C + I – E
Total benefit payments must be paid from the total employee and employer contributions plus total net investment income
17
Built-in Cost Savers of TMRS’ DB Plan Versus 401(k)-Type DC Plan Longevity Risk Pooling: 15% savings
TMRS: Benefits are paid over the average life expectancy of all retirees
401(k)s: Individual must “over-save” so as to not outlive their retirement income
Maintenance of diversified portfolio over time: 5% savings TMRS: investment returns reflect the advantage
of the maintaining balanced portfolios over generations of workers — asset portfolio is “forever young”
401(k)s: Individuals shift toward lower risk/return assets as they age and approach retirement — individual asset portfolio has a finite life
18
Built-in Cost Savers of TMRS’ DB Plan Versus 401(k)-Type DC Plan, cont. Superior Investment Returns: 26%
savings TMRS: Assets are pooled for investment
purposes and professionally managed, resulting in higher returns and lower fees/administrative expenses
401(k)s: Individual participant account fees and administrative expenses are significantly higher due to assets lacking economies of scale
Total combined cost savings of DB Plan relative to 401(k)-type DC Plan is estimated to be 46%, according to a 2008 study by National Institute on Retirement Security
19
Example Plan 1 – TMRS...compared to
20
Example Plan 1 – 401(k)-type plan
21
22
Cost Breakdown Comparison — Example Plan 1
12%
7%
81%
TMRS Plan
Employer ER Contrib.Employee EE Contrib.Investment Earnings
26%
7%67%
401(k)- type PlanProportion of Total Benefit paid by:
Remember the formula: C + I = B + E
Example Plan 2 – TMRS...compared to
23
Example Plan 2 – 401(k)-type plan
24
25
Cost Breakdown Comparison — Example Plan 2
12%
9%
79%
TMRS Plan
Employer ER Contrib.Employee EE Contrib.Investment Earnings
26%
9%65%
401(k)-type PlanProportion of Total Benefit paid by:
Remember the formula: C + I = B + E
Ex. Plan 3 – TMRS... compared to
26
Ex. Plan 3 – 401(k)-type plan
27
28
Cost Breakdown Comparison — Example Plan 3
11%
10%
79%
TMRS Plan
Employer ER Contrib.Employee EE Contrib.Investment Earnings
25%
10%65%
401(k)-type PlanProportion of Total Benefit paid by:
Remember the formula: C + I = B + E
TMRS Versus 401(k)-Type Plan — Employer Cost Summary
TMRS 401(k)
Cost Ratio
Plan 1: 7%; 2:1100% USC; 70% CPI COLA
12.50% 26.50% 47%
Plan 2: 7%; 2:1100% USC; NO COLA
9.25% 20.30% 46%
Plan 3: 7%; 2:1 NO USC; NO COLA
7.75% 17.50% 44%
29
30
Questions?
30