The State of Retirement Plans

May, 2011

David S. Boomershine

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• 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

Agenda

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• Competitive

• Attract employees

• Tax break

• Reward employees/employee appreciation

• So employees can retire

• Contribute to society

Background

Employers sponsor retirement plans – why?:

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Ideal employer sponsored retirement program:– Defined Benefit Plan (DB) – Base

– Defined Contribution Plan (DC)– Supplemental

Combined program provides blend of security, flexibility for employees

Background

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Driving forces:

• Federal legislation

• Accounting rules

• Asset performance

• Cost/liability volatility

• Economics

• Stupidity

Background

Employers plans are changing – why?:

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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!

Employer Plans

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• Pension Protection Act (PPA) – Impacts Private Sector– Defined Benefit Plans

– Defined Contribution Plans

– Hybrid Plans

• Other – minor changes

Recent Federal Legislative Changes

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• 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!

Recent Federal Legislative Changes-PPA

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• 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

Recent Federal Legislative Changes-PPA

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• Hybrid Plans– “New Age” Discrimination Testing

– Some past design issues resolved prospectively

– Vesting

– More viable plan design option now?

Recent Federal Legislative Changes-PPA

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• 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

Recent Accounting Standards Changes

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• 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

Significant Plan Asset Losses

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• 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

Significant Plan Asset Losses

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Private Sector vs. Public Sector

Impacts:

DB Plans DC Plans

Issue Private Sector Public Sector Private Sector

PensionRetiree Medical Pension

Retiree Medical

Federal Legislation

Accounting

Asset Losses

Result: Increased volatility for Private Sector Pension Plans

Let’s Review:

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• Plan Asset gains/losses – issue exacerbated by PPA

• Valuation interest rate basis – issue exacerbated by PPA

• Accounting Discount Rate basis – set by FAS

Sources of Cost/Liability Volatility - DB Plans

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• 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?

Recent Pension Funding Relief Passed

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• 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

Funding Relief Alternatives

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Recent International Foundation of Employee Benefits Survey -Pension Plans: Impact of the Financial Crisis, September 2009

Top Concerns:1. Market losses/underfunded Plans2. Decreased job security3. Changes to health care system4. Delayed Retirement5. .6. .7. .8. Eliminated employer-sponsored retirement benefits

Survey Says

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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

Survey Says

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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

Survey Says

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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%

Survey Says

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• 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

Resulting Trends/Future Plan Prospects

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• 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

Hybrid Plans

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DC Plans

Private Sector Public Sector Other Trends• Matching Contributions –

reinstated

• Automatic Enrollment – 40% adopted- Increases participation- Improves

nondiscrimination testing

• Annuity option in DC plans?

– Public relations campaign

– Federal government involvement

– Default option?

• Some increased interest in DC, Hybrid plans under “Soft Freeze” approach

• Delayed Retirement

• Phased Retirement

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Current Public Sector Plan Debate

June, 2010

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Three Phases for Pension and OPEB Plans• Baseline Actuarial Cost• Funding Alternatives• Plan Design Alternatives

Concerns/Interested Parties:• Budgets• Taxpayers• Unions• Bond Rating Agencies

Current Issue: Government Budgets cannot afford current Plans/volatility

Actuarial Cost Viewpoint -

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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

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• 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

Pension Plan Design Changes – significant cost/liabilityimpact:

Plan Design Changes

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• Private Sector – Changes have calmed down

• Public Sector – Changes are raging!

• Some recovery going on

• Overall – not good

• Getting attention

Conclusions – The State of Retirement Plans?

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?Questions