calpers presentation - a look into the future

1

David Lamoureux

Supervising Pension

Actuary

CalPERS

A Look into the Future – How will the

Retirement of the Baby Boom Generation

Affect Your Pension Plan?

2

Overview

• Aging Baby Boomers

• Actuarial Mathematics Refresher

• Impact of Baby Boomer Retirements

• Impact of Changes in Life Expectancies

• Where are the Rates Heading

3

Facts about U.S. Baby Boomers

• Those born between 1946 and 1964

• Currently between the ages of 42 and 60

• Starting January 2006, every 7.7 seconds, a baby boomer turns age 60

4

Facts about U.S. Baby Boomers

• This population group is about 78 million

• The first wave will become eligible for Social Security early retirement benefits in 2008

• Most are expected to move out of the labor force and retire within the next 25 years

5

Concerns about Baby Boomer

Retirements

• About 33% of baby-boomer households do not

own assets

• Potential budgetary pressures when baby boomers

collect Social Security and Medicare benefits

Source: GAO analysis of 2004 survey of consumer finances

6

U.S. Population and Age Distribution

Year

Percentage of Population

over age 50

1900 13%

2000 27%

2020* 35%

* Projected

7

Age Distribution of U.S. Workers

Source: Bureau of Labor Statistics

8

Age Distribution of CalPERS Active

Members

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

15-

24

25-

29

30-

34

35-

39

40-

44

45-

49

50-

59

60-

64

65 + 15-

24

25-

29

30-

34

35-

39

40-

44

45-

49

50-

59

60-

64

65 + 15-

24

25-

29

30-

34

35-

39

40-

44

45-

49

50-

59

60-

64

65 +

June 30,1996 June 30,2001 June 30,2005

9


Miscellaneous Members

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

15-

24

25-

29

30-

34

35-

39

40-

44

45-

49

50-

59

60-

64

65 + 15-

24

25-

29

30-

34

35-

39

40-

44

45-

49

50-

59

60-

64

65 + 15-

24

25-

29

30-

34

35-

39

40-

44

45-

49

50-

59

60-

64

65 +

June 30,1996 June 30,2001 June 30,2005

10


Safety Members

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

15-

24

25-

29

30-

34

35-

39

40-

44

45-

49

50-

59

60-

64

65 + 15-

24

25-

29

30-

34

35-

39

40-

44

45-

49

50-

59

60-

64

65 + 15-

24

25-

29

30-

34

35-

39

40-

44

45-

49

50-

59

60-

64

65 +

June 30,1996 June 30,2001 June 30,2005

11

Actuarial Mathematics Refresher

12

Pension Plan Mathematics

• Basic Formula for any Pension Plan

Member Contribution

+ Employer Contribution

+ Investment Income

= Benefits + Administrative Expenses

13

Lots of Unknowns

• Final salaries, years of service, time of retirement & life expectancy are unknown

• Benefits and how long they will be paid are also unknown

• Investment Income is unknown

14

Attacking the Unknown

• Actuary must make assumptions

• To develop these assumptions, the Actuary does

the following:

– Study the past (experience study)

– Judgment call about potential future economic and

demographic changes

15


• Economic Assumptions

• Examples include:

– Salary growth

– Annual inflation

– Investment return

16


• Demographic Assumptions

• Examples include:

– Mortality

– Incidence of retirements

– Termination of employment

– Incidence of disabilities

17


• Assumptions are used in actuarial valuations and

rate setting

• Accomplished by a complex computer program

called an actuarial valuation system

18


• Actuarial assumptions are for the long term

• Assumptions might be correct for the long term

but they will not be realized from year to year

• Adjustments in the employer contribution rate are

needed

19

Impact of Baby Boomers Retiring

• How will my plan be affected?

• Is my rate going to increase?

• Are costs going to be more volatile?

20

Comparison with Social Security

• In 1945, there were 42 workers for each retiree

• That ratio dropped to 3 workers in 2005

• In 2030 there will be 2 workers for each retiree

21


• Social Security is funded on a pay-as-you-go basis

• Payouts depend on the tax revenues generated by the

working population

22


• Plans at CalPERS are pre-funded and contributions are received in the year that members accrue their benefits

• The retirement of baby boomers has already been reflected in the rates using actuarial assumptions

• At retirement, the money needed to pay all future benefits is expected to be there

23

How Will Plans at CalPERS Be

Affected?

• Increase in the number of retirements each year

• Shift in the membership i.e. less active members

per retiree

• More benefits payments will be paid out

24

Number of Retirements

1995-1996 Through 2004-2005

0

2,000

4,000

6,000

8,000

10,000

12,000

FY 1995-1996 FY 2000-2001 FY 2004-2005

Public Agency - Safety Public Agency - Misc All Public Agencies

25

Age of New Retirees

• The number of retirements has increased but the

average retirement age has not changed

significantly

• Average retirement age for Miscellaneous

members has gone from age 60 in 1996 to 59 in

2005. For safety members, the average has

remained at age 55

26

CalPERS Projected Retirements

(2006 through 2020)

20,000

21,000

22,000

23,000

24,000

25,000

26,000

27,000

28,000

29,000

30,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

27

Shift in Membership

• The ratio of the number of active members to the

number of retirees is a good measurement of the

shift in membership and maturity of a pension

plan

• The retirement of the baby boomers is expected to

impact the ratio of active members to retirees

28

Ratio of Active to Inactive workers

• The ratio of active to inactive workers has fallen

to roughly 1-to-1 in the defined benefit pension

system, down from more than 3.5-to-1 in 1980 Pension Benefit Guaranty Corporation (PBGC)

29

Ratio of CalPERS Actives to Retirees

(1970 - 2005)

30


(Projected 2006 – 2020)

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

31


(Projected 2006 - 2056)

1.80

1.38

1.13

1.05 1.05 1.07

2006 2016 2026 2036 2046 2056

32

More Benefit Payments Will be Made

• As expected, the retirement of the baby boomers

will result in more benefit payments being paid

out of the fund.

• CalPERS has already studied the impact as part of

its Asset Liability workshop.

33

Benefit Payments (6/30/1996 - 6/30/2005)

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

06/30/1996 06/30/1997 06/30/1998 06/30/1999 06/30/2000 06/30/2001 06/30/2002 06/30/2003 06/30/2004 06/30/2005

Benefit Payments in

Billions of Dollars

34

Projected Benefit Payments (2006 – 2020)

$5

$7

$9

$11

$13

$15

$17

$19

$21

$23

$25

$27

2006 2008 2010 2012 2014 2016 2018 2020

Benefit Payments in

Billions of Dollars

35

Projected Benefit Payments (2006 – 2056)

$5

$15

$25

$35

$45

$55

$65

$75

$85

$95

2006 2016 2026 2036 2046 2056

Benefit Payments in

Billions of Dollars

36

Will Employer Rates Increase with the

Retirement of Baby Boomers?

• No, unless the baby boomers retire faster than anticipated by actuarial assumptions.

• However, if in the long run baby boomers are not all replaced by new employees and the active payroll is lower, then the rates could be higher as a % of payroll.

37

Are the Costs going to be More

Volatile?

• Yes.

• As mentioned before, the shift in membership will

result in your plan being more mature

• Mature plans have higher levels of assets

compared to the payroll of the active population

38

Volatility Index

• The size of the assets when compared to payroll

affects how the employer rate changes from year

to year

• “Volatility Index” = Assets / Payroll

• Higher “Volatility Index” => more volatile rates

39

Volatility Index

• The retirement of baby boomers will result in

higher volatility index i.e. more volatile rates

• Current rate smoothing policies will mitigate the

impact

40

Impact of Changes in Life

Expectancy

• What if baby boomers live longer that previous

generations?

• Will it impact our rates?

41

Life Expectancy at Birth

42

Life Expectancy of Seniors

43

Current Life Expectancy of

CalPERS Members

• Studies done by CalPERS actuaries have shown

that the life expectancy of miscellaneous and

safety members is the same.

44

Historical Life Expectancy of

CalPERS Members

45

What if Life Expectancy Improves?

• If life expectancy improves then more benefits

would be paid from the pension plan

• Employer would face increases in cost

• Future experience studies will reflect

improvements in life expectancies, if any.

46

Impact of Improvement in Life

Expectancy

• Using a published mortality improvement scale,

we estimated what the life expectancy might be in

5 years, 10 years and 20 years

47


Expectancy - Male

48


Expectancy – Female

49


Expectancy

• The estimated impact on rates for Miscellaneous

Plans would be:

50


Expectancy

• The estimated impact on rates for Safety Plans

would be:

51

Where are the Rates Heading?

52

• The biggest impact on rates is the investment experience

• With the new rate stabilization policies, the rates are

expected to be more stable

• Lets see how we expect the employer rates to change

based on the volatility index

Where are the Rates Heading?

53

2007-2008 Rates

• The calculation of all 2007-2008 rates has just

been completed

• 2007-2008 rates were affected by:

– 13% investment return for 2004-2005

– Other gains/(losses)

54

2007-2008 Rates

• 13% investment return resulted in small asset gains which caused a small reduction in rate

• Most of the asset gains were set aside for the future

55

2007-2008 Rates

• Overall, the change in rate varied by plan

– Affected by demographics, asset/payroll ratio,

amortization period and funded status

• See your June 30, 2005 valuation report for a

reconciliation of how your rate changed

56

Estimated 2008-2009 Rates

• 2008-2009 rates will reflect the impact of the 05-

06 investment return of about 12%

• 12% will result in additional asset gains

• Smoothing policies will result in most of the asset

gains being set aside for the future

57

Estimated 2008-2009 Rates

Volatility Index

4 6 8 10 12

Estimated Change in FY

2008-2009 Rate (0.3%) (0.5%) (0.6%) (0.8%) (0.9%)

CalPERS estimates that the average employer rate for public agencies will decrease as follows for the 2008-2009 fiscal year (when compared to the 2007-2008 rate):

58

Estimated Rates Beyond 2008-2009

• Due to the uncertain nature of the investment markets, it’s impossible to predict where the rates will be in the future

• CalPERS actuarial staff performed “stochastic” projections to calculate probabilities for future employer rates

59

Estimated Change in Rates Beyond

2008-2009

60


2008-2009

61


2008-2009

62


2008-2009

63


2008-2009

calpers presentation - a look into the future

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