Society of Actuaries Publishes Report on Pub-2010 Public Retirement Plans Mortality Tables

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Society of Actuaries Publishes Report on Pub-2010 Public Retirement Plans Mortality Tables

On January 22, 2019, the Society of Actuaries (SOA) published its report, Pub-2010 Public Retirement Plans Mortality Tables.  This report was published in conjunction with the new set of mortality tables for U.S. public pension plans released in late August 2018, the Pub-2010 Mortality Tables. The new tables include the individual mortality experience for teachers, public safety professionals and general employees. This is the first time the SOA has studied public retirement plan mortality separately from the private sector.

The Pub-2010 Public Retirement Plans Mortality Tables include 46 million life-years of exposure data and 580,000 deaths from 78 public pension plans and 35 public pension systems in the U.S. The analysis indicates that teachers have the longest age-65 life expectancy of the job categories studied. In addition, the report suggests that higher income is correlated with lower mortality, since income was the most statistically significant mortality factor across all job categories.

According to the SOA, the financial impact of implementing the new mortality tables will vary based on each individual job category as well as members’ ages and other demographics in each pension plan. The SOA cautions that plan sponsors should work with their plan actuaries to understand the impact of the tables on their pension plan to determine how to incorporate emerging mortality and mortality improvement into their plan’s actuarial valuations.

In August 2018, the Society of Actuaries’ Retirement Plans Experience Committee (RPEC) released an exposure draft report of the Pub-2010 Public Retirement Plans Mortality Tables and comments were due by October 31, 2018.

David Kausch, Chief Actuary for GRS, served as the chair of the Public Plans Subcommittee which developed these tables.

Additional information is available here.

NASRA Updates Issue Brief on State Hybrid Retirement Plans

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NASRA Updates Issue Brief on State Hybrid Retirement Plans

On January 30, 2019, the National Association of State Retirement Administrators (NASRA) released its issue brief, State Hybrid Retirement Plans, which updates an earlier version published in December 2017.  The brief provides new information on statewide cash balance and combination hybrid plans as well as a map that illustrates the percentage of public employees who participate in mandatory or optional hybrid plans in states that administer such plans for groups of general, public safety or K-12 educational employees.

While the majority of public employee retirement systems are traditional defined benefit plans, some public-sector plans are considering hybrid plans that contain elements of both defined benefit (DB) and defined contribution (DC) plans.  The brief examines two types of hybrid plans: 1) cash balance plans that combine elements of a traditional DB plan and individual accounts into a single plan; and 2) “DB+DC” plans that combine a smaller traditional DB pension plan with separate individual DC retirement savings accounts.

The brief also provides overviews of cash balance and DB+DC plans that have been established in various states, with some dating back several decades.  According to the brief, public-sector hybrid plans have diverse combinations of retirement plan designs to address the cost and risk factors of various state or local governments.  However, most continue to include features that meet fundamental retirement plan objectives including:  mandatory participation, shared financing, professionally managed pooled investments, benefit adequacy and lifetime benefit payouts.  Typically, traditional public-sector DB plans that contain hybrid plan elements include benefits or employee contributions that are linked to the plan’s investment performance or actuarial condition.

As of March 2018, the U.S. Department of Labor’s Bureau of Labor Statistics reported that about 50% of the private-sector workforce participates in employer-sponsored retirement plans.  By comparison, nearly all state and local government workers have mandatory retirement plan participation.

The brief is available here.

GAO Releases Report on Health Insurance Exchanges

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GAO Releases Report on Health Insurance Exchanges

On January 28, 2019, the U.S. Government Accountability Office (GAO) released its report, Health Insurance Exchanges: Claims Costs and Federal and State Policies Drove Issuer Participation, Premiums, and Plan Design. GAO examined health insurance exchange activities including: 1) claims costs of issuers participating in exchanges; and 2) factors driving selected issuers’ changes in exchange participation, premiums, and plan design. GAO studied data from nine issuers participating in five states, which represented a varied range in size, tax status, and exchange participation. The five states (California, Florida, Massachusetts, Minnesota, and Mississippi) were selected to provide diversity in geography and whether they had a federally facilitated or state-based exchange.

The report highlights include:

  • From 2014 to 2016, claims costs were higher than expected in earlier years;
  • From 2017 to 2017, claims costs typically increased, but selected insurers experienced volatility in costs mainly due to large variations in the number and health of enrollees from year-to-year; and
  • Average monthly claims costs changed significantly among issuers in the same state.

In addition, selected issuers cited various factors that affect changes related to participation, premiums and plan design, including: claims costs; federal funding changes; and state requirements and funding. In the near future, selected issuers recognized that changes in federal and state policies will continue to affect decisions specifically related to premium changes.

The report is available here.

NIRS Updates Pensionomics Report on the Economic Impact of DB Pension Expenditures

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NIRS Updates Pensionomics Report on the Economic Impact of DB Pension Expenditures

On January 10, 2019, the National Institute on Retirement Security released its updated report, Pensionomics 2018: Measuring the Economic Impact of Defined Benefit Pension Expenditures. The biennial study finds that public and private pension benefits offer significant support for the U.S. economy.

According to the study, each dollar of benefit paid to retirees supported $2.13 of the total U.S. economic output.  In addition, these pension benefits help to support the economy and as well as jobs where retirees reside since those with monthly pension income continue spending on basic needs even during economic downturns.

During the fiscal year ending in 2016, the study reports:

  • Public and private pension plans provided about $578.0 billion in benefits to about 26.9 million retirees and beneficiaries.  Of this amount, $294.7 billion was paid to 10.7 million state and local government retirees and beneficiaries; $83.0 billion was paid to 2.7 million federal government beneficiaries; and $200.3 billion was paid to 13.5 million private sector beneficiaries;
  • These benefits supported more than $1.2 trillion in the total U.S. economic output and provided an estimated $685.0 billion in value added to the national economy; and
  • This, in turn, supported approximately 7.5 million American jobs paying more than $386.7 billion in total compensation, as well as $202.6 billion in annual federal, state, and local tax revenues.  The largest employment impacts were in retail trade, health care, real estate, and food service industries.

The study also finds that over the period from 1993 to 2016, government (i.e., taxpayer) contributions to public pension plans averaged 25.1% of the total annual plan receipts, with the remainder coming from investment earnings (63.3%) and employee contributions (11.6%).  As a result, the study estimates that every dollar contributed by taxpayers to public pension funds supports an estimated $8.48 in total economic output.

According to the report, “reliable pension income can be especially important not only in providing retirees with peace of mind, but in stabilizing local economies during economic downturns. Retirees with DB pensions know they are receiving a steady check despite economic conditions. In contrast, retirees may be reluctant to spend out of their 401(k)-type accounts if their savings are negatively impacted by market downturns.”

The analysis was conducted using data from the U.S. Census Bureau and input-output modeling software (IMPLAN) to assess the economic impact.  In addition to providing national estimates of economic activity, the report also estimates the economic impact of public pensions in all 50 states and provides fact sheets for each state. 

The report is available here.

A map with downloadable fact sheets for each state is available here.

NIRS/Berkeley Labor Center Studies Teacher Pension Plans with 401(k) Plans

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NIRS/Berkeley Labor Center Studies Teacher Pension Plans with 401(k) Plans

On January 7, 2019, the National Institute on Retirement Security (NIRS) and the University of California (UC) Berkeley Labor Center released their joint report, Teacher Pensions vs. 401(k)s in Six States: Connecticut, Colorado, Georgia, Kentucky, Missouri, and Texas. The report is intended to represent a diverse range of defined benefit pension structures and membership demographics across the U.S.

Specifically, the report analyzes teacher retirement system membership and actuarial data in six states. Using retirement system actuarial assumptions, the study examined teacher turnover patterns and projected the final tenure years of service at retirement or separation for current teachers. According to the report, pension plans have important retention impact and provide greater retirement security than 401(k) plans.

Some key findings include:

  • On average in the six states studied, teachers typically serve 25 years in the same state and are well-positioned to benefit from a traditional pension.
  • On average, about 80% of teachers in the states studied, a pension plan will provide more secure retirement income compared to a 401(k) plan.
  • In all six states studied, most teachers would require significantly greater contributions to realize the same retirement income in a 401(k) plan as the lowest-tier pension.

The report suggests some implications for any policymakers considering pension reform, including:

  • As the teacher shortage worsens, pensions positively affect retention, lower turnover and contribute to quality education.
  • The effect of shifting from pensions to 401(k)s and other account-based plans will increase turnover, greatly reduce retirement income and reduce future consumer spending.
  • To help ensure equity between short- and long-term employment teachers should consider restoring or augmenting portability provisions in existing pensions (i.e., service credit purchases, reciprocity, matching employee contribution refunds, or allowing non-vested employees to purchase lifetime income).

The report is available here.

CRR Issues Brief on Late-Life Financial Risks for Retirees

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CRR Issues Brief on Late-Life Financial Risks for Retirees

On January 2, 2019, the Center for Retirement Research at Boston College (CRR) published its brief, What Financial Risks Do Retirees Face in Late Life? According to the brief, the number of individuals in the U.S. over age 75 is increasing and may become more reliant on 401(k) plans rather than Social Security and traditional pensions. As life expectancy increases, more retirees will face late-life financial risks such as: high health costs; difficulty of managing finances due to cognitive decline; and widowhood.

Other key findings include:

  • Currently, researchers indicate that these risks severely affect only a small number of retirees, but the impact may become more extensive in the future.
  • Some reasons for the expected increase would include rising health care costs; increase in 401(k)s that may be more vulnerable to fraud; and the declining role of Social Security’s widow benefits.
  • Since these challenges may be anticipated in advance, individuals, researchers and policymakers may affect the outcome by developing and implementing viable solutions.

The brief is available here.

NASRA Publishes Report on Risk Sharing in Public Retirement Plans

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NASRA Publishes Report on Risk Sharing in Public Retirement Plans

In January 2019, the National Association of State Retirement Administrators (NASRA) released their report, In-Depth: Risk Sharing in Public Retirement Plans. The report is intended to help enhance knowledge and awareness of various current options that are being utilized to design and finance retirement benefits.  Specifically, the report discusses shared risk features that are incorporated into public pension plans and also presents nine case studies of plans that have shared risk structures.

The types of risk sharing discussed in the report include:

  • Variable employee contribution rates;
  • Contingent or limited cost-of-living adjustments;
  • Cash balance hybrid plans; and
  • DB-DC hybrid plans.

In addition, the brief discusses the key risks faced by public retirement plans and the efforts to share the risks between employers and employees through changes in plan designs.  These risks include:

  • Investment Risk – the risk that actual investment returns underperform the expected rate of return;
  • Longevity Risk – the risk that individuals will outlive their retirement assets; and
  • Inflation Risk – the risk that the purchasing power of money will decline over time.

According to the report, “Shared risk plans are intended to increase the predictability of financial outcomes resulting from both positive and negative events affecting plans, sponsors and beneficiaries…. A primary consideration for any retirement plan sponsor is which types of risk, and in what proportion, are most appropriately borne by individuals, and which risks are best borne collectively, by institutions.”

The report is available here.

NASRA Updates Study on Pension Reform for State Retirement Systems

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NASRA Updates Study on Pension Reform for State Retirement Systems

In December 2018, the National Association of State Retirement Administrators (NASRA) updated their report, Spotlight on Significant Reforms to State Retirement Systems, 2018.  NASRA updated their previous report published in 2016 which covered the state pension reforms enacted between 2009 and 2014.

Some of the key findings include:

  • Since 2009, 23 states have introduced or added one or more risk-sharing plan design features for broad employee groups. These include new hybrid plans, variable contribution rates, and benefits, including COLAs, that may change based on external factors, such as the fund’s investment performance or the plan’s funding condition.
  • 29 states increased retirement eligibility, affecting over 40 plans, and typically increased age, years of service or both; and
  • Almost all states retained traditional pension plans and modified employer and employee contributions, restructured benefits or both. 

The report indicates, “Since 2009, nearly every state passed meaningful reform to one, or more, of its pension plans. Although the global market crash and recession affected all plans, differing plan designs, budgets, and legal frameworks across the country defied a single solution; instead, each state met its challenges with tailored changes specific to its unique circumstances.”

The report also includes an appendix with a state-by-state listing of pension reforms for state retirement systems and identifies the applicable changes from 2009-2018. The listing presents detailed descriptions of changes affecting various combinations of contributions, benefits, and eligibility for retirement plans that were affected by pension reform legislation in each state.

The report is available here.

Understanding Actuarial Assumptions

Performing an actuarial valuation for a defined benefit retirement plan is a complex process which involves extensive data requirements and various assumptions. In order to fund pension benefits, several projections about future events are developed based on “actuarial assumptions.” The assumptions should be carefully chosen and continually monitored since they can have a dramatic effect on the results of the valuation and plan funding.

January 2019

IN THIS ISSUE
• IRS Issues Private Letter Ruling on Code Sections 415 and 414(h)(2) Requirements
• Pension Plans Legislative Update
• Employee Plans Compliance Resolution System Update
• Brief Summary of New 403(b) Plan Relief
• Health Litigation Update: Texas v. United States
• Tri-Agency Issues Proposed Guidance That Expands the Use of HRAs