Pension Funding Risks &

Possible Method Changes

Alan MilliganChief Actuary

Agenda

• What’s happening?• Discussion of funding risks• Possible changes to funding methods• Impact on contribution rates

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What’s Happening?

Accounting Changes

• GASB Statement No. 67- Applies to plans (CalPERS)- Replaces GASB Statements No. 25

• GASB Statement No. 68- Applies to employers- Replaces GASB Statements No. 27

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Highlights of GASB 68• Accounting ≠ Funding• Have to Report Unfunded Liability on Balance Sheet- Using market (fair) value of assets

• Pension expenses no longer the ARC- Based on shorter amortization periods- Very volatile

• Pooled Employers will have to report their share of the pool’s UAL and pension expense

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Will CalPERS Provide the Information?• Planning on it• Will require extensive changes• Cannot use trust fund money• Will have to charge employers asking for the information• Will be going to CalPERS Board this spring for approval to

proceed and charge employer- GASB valuations will be done on request- Not mandatory

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Potential GASB Implementation Issues• Need actuarial computer system re-write• Ability to hire staff• Need to be ready by spring of 2015- Most employers will need the information for June 30, 2015

CAFR

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Pension Reform

• Its here!• Best source of up to date info is CalPERS website- FAQ, circular letters, member publications

• PEPRA rate letters were sent in December- New PEPRA employer rate for pooled plans- Blended rate for non-pooled plans

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Pension Reform – Clean Up• CalPERS is pursuing regulations• Clean up Legislation (SB 13)- Issues

• Special compensation• Contribution and benefit offsets

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Pension Reform – Employer Inquiries• MOU impairment• Working after retirement• Member rate, EPMC• Compensation cap- Will be stopping contribution above cap- System changes needed- Expected to be in place by end of June at the latest

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Pension Reform – Risk Pool Impact

• CalPERS Board created two new risk pools- Miscellaneous 2% at 62- Safety 2.7% at 57, 2.5% at 57 and 2% at 57

• Existing Pools are closed to new entrants- Need to address amortization of side funds and pool

unfunded liability• Looking at various solutions

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Total Normal CostMiscellaneous Plans

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Benefit Formula Low Median High Current Employee

Contribution2% at Age 60 13.9% 13.9% 15.9% 7%

2% at Age 55 15.6% 16.1% 18.8% 7%

2.5% at Age 55 17.8% 18.3% 20.4% 8%

2.7% at Age 55 19.0% 19.7% 22.5% 8%

3% at Age 60 19.5% 20.2% 22.4% 8%

2% at Age 62 12% ?

Total Normal CostSafety Plans

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Benefit Formula Low Median High Current Employee

Contribution2% at Age 55 20.7% 20.7% 22.6% 7%

2% at Age 50 24.3% 24.3% 28.5% 9%

3% at Age 55 26.4% 27.3% 31.0% 9%

3% at Age 50 28.7% 29.6% 37.3% 9%

2% at Age 57 17% ?

2.7% at Age 57 21% ?

Asset Allocation and Discount Rate

• Board reviews asset allocation every 3 years• Asset liability workshop scheduled for November 2013- Final asset allocation will be adopted in December 2013

• Implications are potential changes to discount rate assumption- Would be adopted in February 2014- Would impact 2013 valuation setting 2015-2016 rates

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Experience Study

• Review of demographic assumptions• Once every 4 years- Will work on new one in 2013.- Expect to present result in early 2014.

• Future mortality improvement (i.e people living longer) will be looked at- Expected to result in higher contribution requirements

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Funding Risk

Risk• Funding Risk report in March• New risk analysis section in reports• Discount Rate Sensitivity Analysis- Employer rate under different discount rate- 6.5% and 8.5% discount rate

• Investment Return Sensitivity analysis- Projection of employer rate up to 2017-2018- 5 scenarios

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Termination Liability• CalPERS Board approved new asset allocation for

terminated plans in December• Liabilities have been immunized using a fixed income

portfolio• What does it mean in today’s low interest rate environment?- Discount rate is much lower- Termination liabilities much higher than funding liabilities

• Hypothetical termination liability was included in most recent actuarial valuation report

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Example

• Plan with an asset to payroll ratio (volatility index) of 6- Assume AVA = 120% of MVA

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• Need some graphics

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Possible Changes

Employer Contributions

• Exploring new ways to set contribution requirements• Ideas- Status quo- Separate contribution rate per benefit formula- Set a rate for normal cost and bill $ for any payment toward

an unfunded liability (and side fund)- Set a $ amount each year

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Review of Smoothing and Amortization Methods

• CalPERS actuarial staff performing a review of existing methods- 15 year asset smoothing- 30 year rolling amortization

• Results of review will be presented in March• Potential for a recommendation to shorten asset smoothing

period and/or amortization period

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Issues with the Current Methods

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The Concept

• No corridor• Shorter (fixed) smoothing period• Fixed amortization periods• Smoothing the rate directly

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Directly Smoothing the Rate?

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Graph of Contribution Rate

• UAL pmt, single asset loss/ current versus new concept

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Impact on Employer Contributions

Accounting Changes

• No impact on employer contributions• Will impact pension expense on your financial statements

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Pension Reform

• No impact at start• Gradual phase in of lower normal cost- As you hire new employees

• Member contribution rate increases - Direct offset if/when implemented- Consult your actuary as to timing

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New Assumptions

• Expect to recommend changes in early 2014• May be effective for 2015-16 or 2016-17• Mortality projection- Impact of a 1% change is shown in your valuation report

• Discount rate- Impact is 2% to 4% of payroll

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New Smoothing Methods

• Timing• Impact

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Timeline of Pension Changes

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Impact on Rates*

Impact on Rates*

2012

2013

2014 2015 2016 2017

GASB

AB340

Assumption

Change

Method Change Impact on Rates*

*For illustrative purposes only

• No impact on rates• Applies to Fiscal years beginning after June 15, 2014 for most Employers• Information needed Fall 2015

• Impacts rates of new Employees when hired (or shorty thereafter)

• Impacts FY 2015-16 rates• Impacts discount rate in Valuations• Impacts mortality projections in the presentation

• Impacts FY 2015-16 rates

Approval

Approval

QUESTIONS?