GRS Publishes Article on Potential Solvency Liability Disclosure
On October 11, 2016, GRS published Potential Solvency Liability Disclosure May Have Significant Implications for Public Employee Retirement Systems in its latest issue of GRS Perspectives. Written by David T. Kausch, GRS’ Chief Actuary and Senior Consultant, this article discusses the potential solvency liability disclosure requirement for pension plans suggested by the Pension Task Force of the Actuarial Standards Board (ASB) in their June 2016 report. The article helps to provide an understanding of the purpose of a solvency measure as well as its uses and limitations, regardless of whether or not solvency liability becomes a new disclosure requirement.
According to Kausch, “A key point in understanding the difference between solvency liability and the more standard actuarial accrued liability is to consider the purpose of the measurement. The purpose of a solvency liability for a pension plan is to estimate the cost, as of the valuation date, to sell all liabilities accrued under the plan in the marketplace – analogous to the plan sponsor ‘selling’ the pension plan in the open market and having no future obligation.”
This issue of GRS Perspectives is available here.
GASB Proposes Implementation Guidance for Statement No. 74
On October 18, 2016, the Governmental Accounting Standards Board (GASB) issued an Exposure Draft (ED) containing proposed implementation guidance for other postemployment benefit (OPEB) plans and governments applying GASB Statement No. 74, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. The proposed guide is presented in a “question and answer” format and is intended to clarify, explain or elaborate on the requirements of GASB Statement No. 74.
In June 2015, GASB approved Statement No. 74, which applies to OPEB plans that administer benefits on behalf of governments through trusts that meet the GASB’s specified criteria. It replaces GASB Statement No. 43 and requires more extensive note disclosures and required supplementary information (RSI) for both defined benefit (DB) and defined contribution (DC) OPEB plans. The provisions of GASB Statement No. 74 became effective for plan fiscal years beginning after June 15, 2016.
Comments on the proposed Implementation Guide are due by December 19, 2016.
The ED is available on the GASB’s website.
Carol Calhoun Updates Checklist of Federal Tax Laws Applicable to Public Retirement Systems
On October 8, 2016, Carol V. Calhoun of Venable LLP (formerly of the Calhoun Law Group) posted an updated “Checklist of Federal Tax Law Rules Applicable to Public Retirement Systems.” The checklist summarizes the Internal Revenue Code (IRC) qualification requirements applicable to governmental plans, other than plans described in IRC § 403(b) and 457(b). It also includes selected IRC requirements not related to retirement plan qualification. Links are provided to each of the applicable IRC sections and other considerations are included related to recent legislative and administrative developments. However, she cautions that the summary is very general and should not be a substitute for research on specific issues.
The checklist is available here.
NASRA Updates Issue Brief on Cost-of-Living Adjustments
In October 2016, the National Association of State Retirement Administrators (NASRA) released its issue brief, Cost-of-Living Adjustments, which updates an earlier version published in July 2015. The brief discusses: 1) the purpose of cost-of-living adjustments (COLAs); 2) types of COLAs; 3) costs of COLAs; and 4) recent state COLA legislative changes.
According to the brief, most state and local government pension plans provide some form of COLAs to offset or reduce the effects of inflation on retirement income. In addition, COLAs are important for state and local government employees who do not participate in Social Security in order to supplement their income during disability or normal retirement. Typically, governments prefund the cost of a COLA over an employee’s working career.
The report also provides a summary of COLA provisions by state-level plans, including any recent legislative changes. According to the report, of the 100 select state-level plans that provide COLAs, 73 provide them on an automatic basis and 27 provide them on an ad hoc basis. In addition, since 2009, 15 states have changed their COLAs for current retirees, 8 states have changed COLAs for current employees’ future benefits, and 7 have changed COLAs for future employees only. Since 2015, only four states have enacted COLA reductions that affect one or more major employee groups. However, in several states, the legality of these changes has been challenged. In addition, some states are including provisions that would allow COLAs to increase if the plan’s funding status or fiscal conditions improve or if inflation rises.
The report also includes an appendix with a listing of COLA provisions for many state retirement plans and identifies the applicable changes from 2009-2016.
The issue brief is available here.
NASRA Updates Issue Brief on Employee Contributions to Public Pension Plans
In October 2016, the National Association of State Retirement Administrators (NASRA) updated its issue brief, Employee Contributions to Public Pension Plans. The brief analyzes employee contribution plan designs, policies and recent trends. As discussed in the brief, nearly all state and local government employees are required to contribute to the cost of their retirement benefits, with employee contributions typically ranging between 4% and 8% of an employee’s salary. In addition, the report indicates that 25%-30% of state and local government employees do not participate in Social Security. In many cases, those who do not participate in Social Security have a higher pension benefit and higher required contributions as compared with those who do participate in Social Security. The median contribution rates have increased to 6% of pay for employees who participate in Social Security and to 8.1% for those employees who do not participate in Social Security.
According to the brief, since 2009, more than 35 state governments increased their employee contribution rates. Moreover, an increasing number of states are exposing employee contributions to risk either by: 1) linking employee contribution rates to the pension plan’s investment return; or 2) establishing a hybrid or 401(k)-type plan, thereby transferring the related investment risk from the employer to the employee.
Other recent trends in employee contributions include:
- Maintaining a variable employee contribution rate based on the pension plan’s actuarial condition; and
- Increasing employee contribution rates when labor agreements are negotiated.
The legality of increasing employee contributions varies by state. In some states, courts have ruled that legislative efforts to increase employee contributions are a violation of the state constitution or contractual rights. However, in other states, higher employee contributions have either withstood or have not been subject to legal challenges. The outcome of current legal challenges will likely affect future reform issues.
The brief includes an appendix of employee contribution rates for 118 individual statewide retirement plans and identifies whether or not plan members have Social Security coverage.
The issue brief is available here.
U.S. Census Bureau Reports 100 Largest Public Pension System’s Assets Remain Over $3.3 Trillion
On October 5, 2016, the U.S. Census Bureau reported that total holdings and investments for the 100 largest state and local government retirement systems increased slightly from approximately $3.26 trillion at the end of the first quarter of 2016 to $3.31 trillion at the end of the second quarter of 2016. In the second quarter of 2016:
- Cash and short-term investments were $113.2 billion, up from $104.4 billion in the first quarter of 2016;
- Employee contributions were $11.7 billion, up from $11.2 billion in the first quarter of 2016; and
- The ratio of government contributions to employee contributions was 2.6 to 1 with government contributions comprising 72.2% of the total contributions.
During the second quarter, holdings and investments in corporate stocks increased 2.0% to $1,231 billion, corporate bonds increased 0.7% to $430 billion, international securities decreased 1.1% to $619 billion, and federal government securities increased 3.1% to $256 billion.
The results are from the U.S. Census Bureau’s Quarterly Survey of Public Pensions which surveys the revenues, expenditures, and composition of assets for the 100 largest U.S. public employee retirement systems. These systems comprise 88% of the total cash and security holdings reported for public plans in the 2012 Census of Governments.
The report also provides a table showing the quarterly percentage changes in investment holdings by major investment category from the first quarter of 2011 to the second quarter of 2016. However, in the first quarter of 2012, the survey was revised to implement changes in asset classification. As a result, comparisons of asset amounts before and after the first quarter of 2012 should be made with caution.
The summary is available here.