Actuarial Standards Board Releases Pension Task Force Report

On June 30, 2016, the Actuarial Standards Board (ASB) released the report of its Pension Task Force (PTF).  The PTF was created to review proposals for changes to Actuarial Standards of Practice (ASOPs) which were submitted to the ASB’s 2014 Request for Comments on the ASOPs and Public Pension Plan Funding and Accounting.  Based on their review, the PTF has suggested the following potential changes for consideration by the ASB.  It is important to note that, in general, the PTF suggests that these changes apply to all defined benefit pension plans, both public and private sector, notwithstanding Federal guidelines that supersede actuarial opinion.

  • Solvency Value of Liability – A market-based liability measurement should be calculated and disclosed for all valuations of pension plans for funding purposes. The solvency value should represent an estimate of the cost, as of the valuation date, to defease all liabilities accrued under the plan in the marketplace.
  • Statement of Opinion – Current ASOPs require that the actuary should disclose concerns about any assumption not prescribed by law that in the actuary’s opinion is not reasonable. The suggestion is to require a positive statement by the actuary about the reasonableness and consistency of significant individual assumptions, the assumptions in the aggregate, and the combination of the assumptions and methods, including the interaction of any smoothing techniques, taken together.
  • Reasonable Actuarially Determined Contribution (ADC) – Contribution requirements and funded status associated with a reasonable ADC should be calculated and disclosed whenever a funding valuation is performed. Suggestions for a reasonable ADC include:  meeting the current requirements of the ASOPs (including those for reasonable assumptions); each member’s normal cost be based on the benefit structure applicable to that member; and amortization payments must either be greater than the nominal interest on the unfunded liability or payoff all of the unfunded liability in a reasonable fixed (finite) time period.
  • Assumptions – The current ASOP requirements should be clarified to include disclosures related to why the actuary thinks current assumptions and any assumption changes are reasonable. New requirements for assumptions would include:  considering whether techniques such as experience studies or gain/loss analyses are warranted for demographic assumption selection; disclosing the length of time since an assumption was last analyzed and the availability of credible data; and disclosing the basis of each assumption and the date of any applicable study.
  • General Guidance and Additional Conditional Disclosures – General guidance suggestions include: a requirement that the actuarial valuation should include a partial gain and loss analysis; a requirement that the actuary should consider the three goals of a contribution allocation procedure; a specific reference should be included for direct rate smoothing; and a disclosure should be made regarding the rationale fr actuarial methods.  Additional disclosures address:  the exhaustion of assets; implicit amortization periods; contribution requirements less than the normal cost; and inclusion of a historical scorecard of actual and recommended contributions.

It is anticipated that the next step in this process will be for the ASB to determine what changes to the ASOPs or new ASOPs will result from the PTF’s suggestions.  The ASB’s procedure for changing or adding ASOPs includes and exposure draft period with time for public comment.

The full report is available on the ASB’s website.

 CRR Reports on State and Local Pension Funding 2015-2020

On June 21, 2016, the Center for Retirement Research at Boston College (CRR) released its issue brief, The Funding of State and Local Pensions: 2015-2020.  The brief was authored by Alicia H. Munnell and Jean-Pierre Aubry, and examines the funded status of state and local government pension plans from 2015 through 2020.  The brief is based on a sample of 160 state and local pension plans in the Public Plans Database (PPD) whose assets of $3.4 trillion represents about 90% of public plan assets.

The key findings include:

  • During 2014, public pension plans adopted the new accounting standards under Governmental Accounting Standards Board (GASB) Statement No. 67 for reporting purposes, but continued using the traditional actuarial methods and assumptions they used under GASB Statement No. 25 for funding purposes (i.e., for plans’ actuarial valuations).
  • The traditional funded ratio (with smoothed asset values) rose slightly from 73% in 2014 to 74% in 2015.
  • By comparison, the funded ratio under the new accounting rules declined slightly to 72%.
  • The average actuarially determined employer contribution (ADEC) 1 increased to 18.6% of payroll in 2015 from 17.6% in 2014.  Moreover, average contributions actually paid by the employers increased to 91% of the ADEC in 2015, up from 86% in 2014.
  • Based on the report’s projections, the funded ratio is expected to continue improving, assuming steady asset returns over the next few years.

The report concludes, “Under the new GASB rules, where assets are valued at market, funding declined slightly, reflecting the poor stock market performance in 2015.”  It added, “What happens from here on out depends very much on investment performance.  In 2020, assuming expected returns are realized, plans should be 78 percent funded.  If returns are lower, as predicted by many investment firms, funding will drift lower.”  The funding projections for 2020 were based on baseline scenarios of state and local pension plans reaching their assumed rate of return, which averaged 7.6%.

The report also includes an appendix that provides the individual traditional funded ratios for the state and local pension plans in the PPD for 2001, 2004, 2007, and 2010-2015.

The report is available here.

NIRS Releases Report on Retirement Income Security for Public Sector Employees

On July 13, 2016, the National Institute on Retirement Security (NIRS) released its report, Preserving Retirement Security for Public Sector Employees.  The report findings indicate that nearly all state retirement systems have features that allow for the preservation of retirement income benefits and portability for those individuals that change jobs.  The report is based on a recent NIRS survey of 89 public pension plans which analyzed: 1) plan type; 2) employee contribution rates; 3) vesting requirements; 4) interest rates paid on withdrawn employee contributions; 5) refunds of member accounts; 6) re-deposits of employee contributions; and 7) ability to purchase service credits.

The key findings include:

  • 80% of the public retirement systems surveyed offer new members a defined benefit (DB) pension plan.
  • Nearly all public pension plans require employees to make contributions to help fund their retirement benefits. For new members, the average employee contribution is 6.68% of pay.
  • The majority of the public plans surveyed require five years of service or less for full vesting.
  • 71% of public pension plans provide employees with interest on their contributions averaging 3.86%.
  • Many public pension plans have features that allow individuals that change jobs to retain and, in some cases, increase their benefits. In most plans, separated members have an option to leave their account balances with the pension plan which may continue to earn interest.
  • Most of the retirement systems surveyed allow for members that terminated their employment to rejoin the system and repay the refunded amount with interest at an average rate of 6.46%.
  • Almost all public DB pension plans allow members to purchase additional service credits to increase their retirement benefits. In 70% of the states, members can purchase five or more years of military service credits.  Some plans also allow for the purchase of service credits for prior out-of-state government service or other specified service and leave.
  • Some of the public pension plans surveyed also have features that may increase benefits for short or moderate-term employees. Some of the modifications include: increasing the value of deferred annuity benefits paid to former employees; rewarding employees that keep their member accounts in the plan with interest; and providing higher employer matching amounts.

According to the report’s authors, Diane Oakley, NIRS Executive Director and Erin Brown, NIRS Manager of Research, “This study demonstrates that DB pension plans can address some of the issues that short-term employees may have when they decide to seek other career options outside of the public sector.  Public retirement systems are able to provide such flexibility without harming the benefits of more productive and dedicated career educators and public employees.”

The survey results are available for individual retirement systems in the Appendices.  The report also notes that, for systems that did not reply to the survey, NIRS compiled the data from other sources including the Public Plan Database, National Association of State Retirement System (NASRA) reports, and public pension plan websites.

The report is available here.

 1 The ADEC is similar to the Annual Required Contribution (ARC) under the prior GASB standards.

 NASBO Releases Spring 2016 Fiscal Survey of States

On June 21, 2016, the National Association of State Budget Officers (NASBO) released their semi-annual report, The Fiscal Survey of States: Spring 2016.  The report updates information on the states’ fiscal conditions and presents aggregate and individual data on the states’ general fund receipts, expenditures, and balances.  The survey was conducted by NASBO and completed by the governors’ state budget officers in all 50 states over the period from February 2016 through April 2016.

The NASBO reports that most state budgets are maintaining a course of stable, moderate spending and revenue growth.  Following the Great Recession, most state budgets continue to grow at a moderate pace after several years of slow recovery.  Fiscal 2016 marks the first time since fiscal 2008 that the estimated state general fund spending and revenues exceeded their pre-recession peak levels after adjusting for inflation.  However, the report indicates that progress has been unbalanced among states and long-term spending pressures continue for education, health care, pensions and infrastructure.

According to the report, the states’ general fund revenues are projected to increase by 2.9% in fiscal 2017, as compared with an estimated 2.8% gain in fiscal 2016.  The governors estimate that tax revenues in fiscal 2017 will be $810.1 billion, compared with $787.1 billion in fiscal 2016.  Personal income tax revenues are expected to increase 3.6% in fiscal 2016 and 3.9% in fiscal 2017.  Sales tax revenues are projected to increase by 4.4% in fiscal 2017, up from 3.5% in fiscal 2016.

General fund expenditures are projected to be $818.0 billion in fiscal 2017, up 2.5% from an estimated $797.7 billion in fiscal 2016.  In fiscal 2017, state operating budgets will likely be constrained by limited revenue growth with restricted additional budgeted funds to address competing demands.  Most states are allocating additional funding for K-12 education and Medicaid which comprise the largest state general fund expenditures.  In response to these challenges, governors’ recommended budgets show moderate spending increases in fiscal 2017.

The survey also reported on “total balances” which include year-end balances and any budget stabilization funds that the states have set aside for use during a financial downturn.  In fiscal 2010, total state balances reached a low due to the severe decline in revenues and increase in expenditures due to the recession.  In fiscal 2015, total balances increased to $77.7 billion or 10.3% of general fund expenditures and are estimated to decline in fiscal 2016 to $68.9 billion or 8.9% of expenditures.  For fiscal 2017, the governors have recommended decreasing total balances slightly to $65.7 billion or 8.3% of general fund expenditures.  Although total balances declined in fiscal 2016, balances in states’ rainy day funds (used to respond to an economic downturn or other unforeseen event) increased to an estimated $49.3 billion, up from $45.1 billion in fiscal 2015.

The report also discusses Medicaid costs and expected enrollments.  Medicaid spending increased rapidly to 16.3% of general fund spending in fiscal 2015, which reflects the first full fiscal year of Medicaid’s expansion under the Affordable Care Act (ACA).  Total Medicaid spending is estimated to increase by 9.0% in fiscal 2016 and 2.1% in fiscal 2017.  Medicaid enrollment also increased in fiscal 2015 to 14.6% and is estimated to increase by 4.4% in fiscal 2016 and an additional 2.8% in fiscal 2017.

Looking forward, the report cautions that many states continue to face budgetary challenges including: spending requirements on K-12 education, health care and other core government services; unfunded pension liabilities; the constrained need for infrastructure investment; and the fiscal and economic impacts of declining oil prices.  The report states, “With slow revenue growth expected to continue in fiscal 2017, governors are recommending mostly modest spending increases for the next fiscal year, with many also calling for increasing rainy day fund balances to help prepare for the next economic downturn.”

The report is available here.