the state of our governmental pension plans aga - fall professional development seminar november 6,...
TRANSCRIPT
The State of Our Governmental Pension Plans
AGA - Fall Professional Development SeminarNovember 6, 2013
Presentation Outline:
Why is there so much talk about pension plans?
What is being done to address pension plans?
GASB – Changes in Pension Reporting Requirement
Why should federal employee care about pension issues?
You pay taxesIs your federal pension next?
The largest 100 U.S. public-employee pension funds as 6-30-13$2.9 trillion in assetsHighest level in more than 40 years Surpassed the peak reached in 2007
before the Great RecessionBenefits and withdrawals reached
records highs at $62.2 billion – 16.8% increase
Government contributions $22.8 billion – 2.3% increase
Employee contributions - $11.4 billion – 11.2% increase
Why are pension plans receiving so much attention?
Government employee’s benefits versus private sector:
SalariesHealth care - % paid by Govt.Retirement plans – DB vs. DC
Affected:Employers in any tyAffected:Employers in any type of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution planspe of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution plans
Avg. Private Sector Employee Avg. Federal Government Employee $-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$59,804 $74,436
$28,000
$40,000
Avg. Total Compensation of Private Sector and Federal Government
Employees - 2011
Cash Income Benefits
Growing mistrust of the Government
Headlines in the media:
Affected:Employers in any tyAffected:Employers in any type of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution planspe of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution plans
Affected:Employers in any tyAffected:Employers in any type of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution planspe of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution plans
Affected:Employers in any tyAffected:Employers in any type of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution planspe of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution plans
Affected:Employers in any tyAffected:Employers in any type of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution planspe of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution plans
Affected:Employers in any tyAffected:Employers in any type of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution planspe of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution plans
Governments that have filed bankruptcy since 2010:
Detroit, MISan Bernardino, CA.Stockton, CA.Jefferson County, Ala.Central Falls, R.I.
Underfunding of Defined Benefit plans
Bottom 5 state funded pension plansTop 5 state funded pension plansHow does Kansas and Missouri compare?
5 Worst State Funded Pension Plans
New Hampshire 57.5%Louisiana 56.0%Connecticut 53.4%Kentucky 50.5%Illinois 43.4%
5 Best State Funded Pension Plans
Tennessee 92.1%North Carolina 95.3%South Dakota 96.3%Washington 98.1%Wisconsin 99.8%
Affected:Employers in any tyAffected:Employers in any type of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution planspe of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution plans
2004 2005 2006 2007 2008 2009 2010 2011 2012 20130.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
75.0%70.0% 69.0% 69.0% 71.0%
59.0%64.0% 62.0%
59.0%56.4%
KPERS Pension Plan % Funded
Affected:Employers in any tyAffected:Employers in any type of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution planspe of defined benefit plan
Single-employer plansAgent multiple-employer plans
Assets pooled for investment purposesSeparate accounts for each employer
Cost-sharing multiple employer plans - KPERSAssets and obligations pooled
Nonemployer contributorsOther entities legally required to contribute
Unaffected:Employers in defined contribution plans
2004 2005 2006 2007 2008 2009 2010 2011 20120.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
84.6% 84.9% 85.3% 86.8% 85.9%83.0%
80.4% 79.2%73.2%
MOSERS Pension Plan % Funded
What is being done to address the underfunding of pension plans?
Contributing more to the DB plansRequiring employees to contribute moreRedesigning government pension plans
◦Creating hybrid pension plans◦Switching to DC plans
Lowering benefits
What is KPERS doing?
Increase employer contributionsIncrease current member contributions or
decreases benefitsCreates a new tier 3 cash balance
retirement plan beginning January 2015
What is MOSERS doing?
Created a new tier – MSEP 2011Longer vesting periodHigher normal retirement age
How are other countries addressing their pension plans?
Australia & Netherlands – mandatory 9% contribution from employers
Canada – two-part social security system replaces 70% of low-income and 50% for median-income
Prohibit borrowing against retirement assets or lump-sum withdrawals
Three-Legged Investment Stool
Social SecurityEmployee pensionPersonal savings
Quote from President Franklin Roosevelt on Social Security:
“The Social Security Act does not offer anyone, either individually or collectively, an easy life- nor was it ever intended so to do. None of the sums of money paid out to individuals in assistance or in insurance will spell anything approaching abundance. But they will furnish that minimum necessity to keep a foothold’ and that is the kind of protection Americans want.”
GASB Changes in Pension Reporting Requirements
Objectives of New GASB StandardsImprove transparencyIncrease value of assessing
accountabilityEnhance decision – usefulness of
financial reports
Affected or unaffected?
Affected:Employers in any type of defined benefit plan
◦ Single-employer plans◦ Agent multiple-employer plans
Assets pooled for investment purposes Separate accounts for each employer
◦ Cost-sharing multiple employer plans - KPERS Assets and obligations pooled
Non-employer contributors◦ Other entities legally required to contribute
Unaffected:Employers in defined contribution plans
Key Changes
1. Employer liability2. Employer expense3. Discount rate4. Actuarial method5. Amortization6. Timing
Employer Liability
Current:Annual required contribution (ARC)Less: Actual contributions
Net pension obligations (NPO) New:
Total pension liability (TPL)Less: Fiduciary net position (FNP)
Net pension liability (NPL)
Employer expense
Current:Calculation tied to fundingARC adjusted for the cumulative effect of
prior differences between required contributions and actual contributions
New:Calculation tied to costChanges in the net pension liability
Components of expense
Annual service costInterest on the net pension liabilityProjected earnings on plan investmentsThe full effect of any changes in benefit
terms
Discount rate
Current:Estimate long-term investment yield for the plan, with consideration given to the nature and mix of current and expected plan investments
New:Modification necessary if it is expected the FNP will not be sufficient to pay benefits to active employees and retirees.◦Single blended rate
New discount rate – single blended rate
Single rate equivalent to the combined effects of using the following rates:
For projected cash flows up to the point the FNP will be sufficient◦Long-term expected rate of return on
plan investments – 7.5% to 8.0%For projected cash flows beyond that point
◦A yield or index rate on tax exempt 20 year, Aa or higher rated municipal bonds – 3.0%
Actuarial method
Current:Whatever actuarial method is used for fundingSix acceptable methodsMust be applied within parameters defined
by GASB
New:Not tied to actuarial method used for fundingAll employers will use the entry age method
for accounting and financial reporting purposes
Amortization
Background:Circumstances that could affect the net pension liability
(NPL) Changes in benefit terms Changes in economic and demographic assumptions Differences between economic and demographic
assumptions and actual Differences between expected and actual investment
returns
Current: Effect amortized over a period not to exceed 30 years
New: Effect to be amortized over a much shorter period based
on circumstances
Effect on amortization
Changes in benefit termsImmediate recognition
Changes in economic and demographic assumptions
Differences in assumptions and actual experience – Immediate recognition
Differences between expected and actual investment returns – Amortized over 5 years.
Timing
Current:Timing of actuarial valuation
◦Within 24 months of start of valuation periodNew:Measurement date for assets and TPL
◦No earlier than 1 year + 1 day prior to reporting date
Actuarial valuation date◦Up to 30 months before employer reporting
date◦Update to “roll forward” to measurement date
Comparison of Overland Park’s Police & Fire Pension Plans
Current: Net pension obligation $1,330,903
New: Net pension liability $22,247,173
Employers in cost-sharing plans - KPERS
Key changesEmployer liabilityEmployer expense
Employer liability (cost-sharing)
Current :Liability only if employer contribution is
less than the contractually required amount
New: Liability equal to the employer’s
proportionate share of the total NPL of all participating employers
Employer expense (cost-sharing)
Current:Expense = contractually required
contribution New:Expense = employer’s proportionate
share of total pension expense of all participating employers
Estimated Impact on New GASB Pension Standards on KPERS
2012
Current: 59.0%
New: 46.1%
Impact of new GASB Standards on local governmentsLarger financial and organizational burdenCoordination with various people
◦Actuaries◦Plan administrators
More time spent gathering additional information for financial reporting
Rating Agency PerspectiveSupportive of this standardProvides more information and
transparencyLimited immediate impact on ratingsWant to see a long-term plan
Effective Date of new GASB Standards
GASB 67 – Financial Reporting for Pension Plans – 6-30-14
GASB 68 – Accounting and Financial Reporting for Pensions for employers – 6-30-15
