ncpers public safety conference 2009 presented by ed friend & greg stump, efi actuaries october...

NCPERS PUBLIC SAFETY

CONFERENCE 2009Presented by Ed Friend & Greg Stump, EFI Actuaries

October 13, 2009

Actuarial Issues Affecting Public

Pensions in the Current Economic Turmoil

Presentation Agenda2

1. Public Plans Committee2. Asset Smoothing Methods3. “Market Values”4. Actuarial Assumptions,

Experience, and Sustainability

BackgroundGASB Invitation to CommentSuggestions for Improvements in Accounting

Public Plans Committee

3

Spreading gains/losses“Corridors”

Asset Smoothing Methods

4

Pay Now or Pay Later5

Ideally costs would be a level % of pay year after year This is unfortunately not possible

How much can contributions be smoothed? Asset smoothing Amortization of gains and losses

Asset Smoothing: Spreading6

Example: 5 year smoothing Gains/(Losses) based on returns above or

below that assumed Year 1: $10 M gain Year 2: $20 M loss Year 3: $5 M gain Year 4: $80 M loss Year 5 Market Value = $600 Million

Actuarial Value = $667 Million (recognizing 1/5 of each prior year’s gain or loss at a time)

Year 4 loss will be fully recognized by Year 9

Asset Smoothing: Years7

5 year smoothing was the standard for a long time 3 year smoothing not uncommon

Now, systems are looking at 7, 10, or even 15 year smoothing Same gain/loss recognition process

Asset Smoothing: Years8

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Year

Investment Return AveragesReturn 3-Year Avg 5-Year Avg 7-Year Avg

Asset Corridors9

“Corridor” = range of values surrounding market value of assets, within which actuarial value is constrained

Example: 20% corridor means actuarial value cannot be outside of the range 80%-120% of market value Came into play for majority of plans in 2008

or 2009

Asset Corridors10

80%-120% corridor was most common Many systems are considering or using

a wider corridor to soften the blow of recent losses 25%, 30%, higher Must be very careful about size of corridor

(can be too high) “Hitting the corridor” (at 120% level)

means that 20% of losses are not yet recognized.

Facts and Myths

What is Market Value?

11

“Market Values”12

Assets – Value on books: amount of $ assets expected to be worth in open market.

“Liabilities” – no true definition of market value; not relevant for public plans

PPC has opposed the use of so-called MVL (“Market Value of Liabilities”) primarily due to lack of relevance/ usefulness

Before the crashAfter the crash

Actuarial Assumptions, Experience, and Sustainability

13

Chart 1: Before the Crash14

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0 5 10 15 20 25 30 35 40 45YEAR

Employer Contribution Rate (% Payroll)Assum

ed Return

A

Year Actual

Return

------0 A

1 A

2 A

3 A

4 A

5 A

6 A

7+ A

Chart 2: After the Crash15

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0 5 10 15 20 25 30 35 40 45YEAR

Employer Contribution Rate (% Payroll)

After the Crash

Before the Crash

Assumed

ReturnA A

YearActu

al Retu

rn

Actual

Return

------

- - - - -

0 -30% A

1 A A

2 A A

3 A A

4 A A

5 A A

6 A A

7+ A A

What Next?Testing the Sensitivity of contribution rates to various investment return scenarios

Actuarial Assumptions, Experience, and Sustainability

16

Chart 3: Softening the Blow17

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0 5 10 15 20 25 30 35 40 45YEAR


Softening the Blow

After the Crash

Assumed

ReturnA A

YearActu

al Retu

rn

Actual

Return

------ - - - - -

0 -30% -30%

1 A A

2 A A

3 A A

4 A A

5 A A

6 A A

7+ A A

Chart 4: Recovery of Half of the Initial 30% Loss, followed by gains18

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0 5 10 15 20 25 30 35 40 45YEAR


Partial Recovery

No Recovery

Assumed

ReturnA A

YearActu

al Retu

rn

Actual

Return

------ - - - - -

0 -30% -30%

1 21.5%*

A

2 A+2%

A

3 A+2%

A

4 A+2%

A

5 A+2%

A

6 A+2%

A

7+ A A

Graph reflects smoothing and extended amortization as in Chart 3

* 21.5% return in year 1represents a recovery of half of the year 0 losses, i.e. [(1-.3)x(1+.215) = .85]

Chart 5: Half Recovery, then 0% for 2 Years

19

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0 5 10 15 20 25 30 35 40 45YEAR


Recovery, then Flat

Partial Recovery


Assumed

ReturnA A

YearActu

al Retu

rn

Actual

Return

------ - - - - -

0 -30% -30%

1 21.5%*

21.5%

2 0% A+2%

3 0% A+2%

4 A A+2%

5 A A+2%

6 A A+2%

7+ A A


Chart 6: Half Recovery, then 0% for 2 Years, followed by four years of gains20

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0 5 10 15 20 25 30 35 40 45YEAR


Recovery Later

Recovery, then Flat


Assumed Return A A

YearActual Retur

n

Actual

Return

------ - - - - -

0 -30% -30%

1 21.5%* 21.5%

2 0% 0%

3 0% 0%

4 A+2.5%

A

5 A+2.5%

A

6-7 A+2.5%

A

8+ A A


Chart 7: Recovery Reversed by end of year

21

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0 5 10 15 20 25 30 35 40 45YEAR


Recovery Reversed

Partial Recovery


Assumed

ReturnA A

YearActu

al Retu

rn

Actual Return

------ - - - - -

0 -30% -30%

1 0% 21.5%*

2 0% A+2%

3 0% A+2%

4-6 A+2% A+2%

7 A+2% A

8 A+2% A

9+ A A


Chart 8: Long Term: Actual < Expected

22

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0 5 10 15 20 25 30 35 40 45YEAR


Returns 1% Lower

Returns as Assumed


Assumed

ReturnA A

YearActu

al Retu

rn

Actual

Return

------ - - - - -

0 -30% -30%

1 A - 1%

A

2 A - 1%

A

3 A - 1%

A

4 A - 1%

A

5 A - 1%

A

6 A - 1%

A

7+ A - 1%

A

Chart 9: Anticipating Lower Returns, Long Term

23

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0 5 10 15 20 25 30 35 40 45YEAR


ASSUME 1% Lower

Returns as Assumed


Assumed

ReturnA-1% A

YearActu

al Retu

rn

Actual

Return

------ - - - - -

0 -30% -30%

1 A – 1%

A

2 A - 1%

A

3 A - 1%

A

4 A - 1%

A

5 A - 1%

A

6 A - 1%

A

7+ A - 1%

A

Chart 10: Lower Returns Too Conservative?

24

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0 5 10 15 20 25 30 35 40 45YEAR


Returns 1% Higher

Returns as Assumed


Assumed

Return

A-1%

A-1%

YearActu

al Retu

rn

Actual

Return

------

- - - - -

0 -30% -30%

1 A A - 1%

2 A A - 1%

3 A A - 1%

4 A A - 1%

5 A A - 1%

6 A A - 1%

7+ A A - 1%

Ed Friend: [email protected] Stump: [email protected]

Thank You25

ncpers public safety conference 2009 presented by ed friend & greg stump, efi actuaries october...

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