Michigan Department of Treasury Updates Form 5572 for Local Government Retirement Systems

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Michigan Department of Treasury Updates Form 5572 for Local Government Retirement Systems

In February 2019, the Michigan Department of Treasury (Treasury) released its updated Form 5572 for Fiscal Year 2019 referred to as the “Local Government Retirement System Annual Report.” Beginning in FY 2019, the Treasury streamlined the retirement system reporting by merging Form 5572 with the summary pension report that was previously required under Public Act 530 of 2016 (PA 530).  In addition, Form 5572 includes fundamental data for summary retiree health care reporting as required by Public Act 202 of 2017 (PA 202).

Form 5572 must be filed for any local unit of government that offers a retirement pension benefit plan and/or a retirement health benefit plan (or “other postemployment benefits (OPEB) plan). The report must be submitted electronically to the Treasury no later than six months after the end of the local unit of government’s fiscal year.  If applicable, both the “Pension Report” tab and the “Health Care (OPEB) Report” tab should be completed before submission.  Failure to report by the due date may result in an underfunded determination in accordance with PA 202. 

FY 2019 reporting forms and instructions are available here.

CMS Releases National Health Care Expenditure Projections for 2018 to 2027

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CMS Releases National Health Care Expenditure Projections for 2018 to 2027

On February 20, 2019, the Centers for Medicare & Medicaid Services’ (CMS) Office of the Actuary released the projections for national health expenditures for 2018 through 2027. The National Health Expenditure Accounts (NHEA) measures annual U.S. expenditures for health care goods and services, public health activities, government administration, net cost of health insurance, and investments related to health care.

According to CMS, national health care spending in 2018 grew by 4.4%, reflecting slower-than-expected Medicaid enrollment and spending increases. Under current law, national health spending is projected to grow at an average rate of 5.5% per year from 2018 through 2027, reaching $6.0 trillion by 2027.  As a share of the gross domestic product (GDP), health care spending is projected to increase from 17.9% in 2017 to 19.4% in 2027.  The major drivers of this growth are economic and demographic factors fundamental to the health sector.

By 2027, federal, state and local governments are projected to finance 47% of total national health spending, up from 45% in 2017.  The increase of 2% over the projection period is mainly due to the impact of Medicare enrollment.

Among the major payers for health care, projected growth in average annual spending for Medicare (7.4%) and Medicaid (5.5%) are significant contributors to the rate of national health expenditure growth.  For Medicare, the most rapid annual growth at 7.4% is mainly driven by the comparatively higher projected enrollment growth as baby-boomers continue to age into the program and growth in the use and intensity of covered services.

From 2018 through 2027, private health insurance spending is projected to average 4.8%, which is the slowest of the major payers.  This is the result of low enrollment growth related to baby-boomers transitioning from private health coverage into Medicare.  During this time period, out-of-pocket expenditures are projected to increase at an average rate of 4.8% and represent 9.8% of total spending by 2027, down from 10.5% in 2017.

Prescription drug spending is projected to increase by an average of 5.6% per year over the next decade, driven mostly by increased utilization growth as well as the expected increase of new and expensive innovative drugs into the prescription drug market. Hospital spending growth is projected to average 5.6% mainly due to faster expected growth in both Medicare and Medicaid, but slower projected growth in private health insurance as enrollment declines slightly as a result of the repeal of the individual mandate.

From 2018 through 2027, health care goods and services costs are projected to grow faster at 2.5% compared to 1.1% for 2014-17.  In addition, physician and clinical services spending is projected to increase an average of 5.4% due to the expected rising wage growth related to increased demand from the aging population.

The insured share of the population with health insurance is projected to remain stable at about 90% throughout 2018-27.

The summary report is available here and further information is available here.

Wisconsin Legislative Council Publishes 2017-18 Public Retirement Systems Comparative Study

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Wisconsin Legislative Council Publishes 2017-18 Public Retirement Systems Comparative Study

In February 2019, the Wisconsin Legislative Council released its report, 2017-18 Comparative Study of Major Public Employee Retirement Systems. The survey covers retirement benefits for general employees and teachers in 87 large public retirement systems.  The study provides information regarding retirement benefits, employer and employee contributions, actuarial methods and assumptions, plan funding, and other relevant topics.

The systems in the survey cover 11.4 million active employees and 8.3 million retirees, for a total of 19.7 million participants.  From 2015 to 2017-18, the number of active participants increased 3.2%, while the number of retirees and beneficiaries increased 10.5%, resulting in the ratio of active to retiree members falling from 1.74 in 2015 to 1.48 in 2017-18.

In 2017-18, the funded ratios for the group were distributed as follows:

  • 2% had funded ratios of over 100%;
  • 15% had funded ratios of 90-100%;
  • 16% had funded ratios of 80-89%;
  • 24% had funded ratios of 70-79%;
  • 23% had funded ratios of 60-69%;
  • 13% had funded ratios of 50-59%; and
  • 7% had funded ratios of less than 50%.

From 2008 to 2017-18, the percent of plans with high funded ratios (i.e., ratios over 100%) declined from 12% in 2008 to 2% in 2017-18, while the percent of plans with relatively low funded ratios (i.e., ratios between 60%-79%) rose from 35% in 2008 to 47% in 2017-18.  Additionally, the percent of plans with funded ratios of 90% or more declined from 33% in 2008 to 17% in 2017-18.

Of the plans studied, 76% had interest rate assumptions of 7%-8% in 2017-18. Additionally, 22% of plans had interest rate assumptions of 5%-7% and 2% had interest rate assumptions over 8%.

The study is available here.

Society of Actuaries Analyzes U.S. Public Pension Plan Contributions

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Society of Actuaries Analyzes U.S. Public Pension Plan Contributions

On February 12, 2019, the Society of Actuaries (SOA) released its report, U.S. Public Pension Plan Contribution Analysis. The study compared public pension plan employer contributions to certain benchmarks for contribution levels required to reduce unfunded liabilities.   The report updates the June 2017 SOA study of employer contributions of 180 U.S. large-city and state-based defined benefit pension plans. 

According to the report, for the plans studied, most received insufficient contributions to reduce their unfunded liabilities. Of the plans whose contributions were insufficient to reduce unfunded liabilities as a dollar amount, but were sufficient to reduce unfunded liabilities as a percent-of-payroll, their employer contributions increased from 36% in 2003 to 77% in 2017. Of those whose contributions did not reduce unfunded liabilities as a dollar amount, more than 50% were lower than the plans’ actuarially determined contributions (ADC) or other target contributions.

The report concludes, “Contribution amounts are only one of the many factors that influence pension plans’ funded status, including approaches to plan, cost and risk management; asset allocation; investment experience; changing plan demographics; actuarial methods and assumptions for computing plan liabilities; relatively long budget planning cycles; and contribution decisions that may be subject to legislative processes.”

It adds, “Regardless of the complexities, the goal is to provide the plan with enough assets to pay participants’ benefits when they come due.”

The report is available here.

CRR Releases Report on Early Retirement

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CRR Releases Report on Early Retirement

On February 12, 2019, the Center for Retirement Research at Boston College (CRR) released its report, Retiring Earlier Than Planned: What Matters Most? According to CRR, over 33% of older workers retire earlier than planned. The report examines: 1) the impact of unexpected changes in health, employment, family and finances on early retirement; and 2) the frequency of these occurrences, or “shocks.”

The findings suggest:

  • Health shocks are the main reason for early retirement since they are most common.
  • Although not as prevalent, employment shocks such as a job loss without finding a new job is also a key reason for early retirement.
  • Familial shocks or family transitions have a slight impact on retiring early.
  • Financial shocks seem to have little effect on early retirement.

Importantly, all the shocks combined explain only about 25% of earlier-than-planned retirements. Therefore, the analysis suggests that further research is required to help determine the factors driving early retirement.

The report is available here.

Commonwealth Fund Finds More Americans Are Underinsured in Employer Health Plans-February 2019 Survey Brief

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Commonwealth Fund Finds More Americans Are Underinsured in Employer Health Plans-February 2019 Survey Brief

On February 7, 2019, the Commonwealth Fund released its survey brief, Health Insurance Coverage Eight Years After the ACA: Fewer Uninsured Americans and Shorter Coverage Gaps, But More Underinsured. The report is based on findings from the Commonwealth Fund Biennial Health Insurance Survey, 2018.  According to the survey, the Affordable Care Act (ACA) has expanded and helped to improve coverage options for individuals without access to job-based health plans. However, 45% of U.S. working-age adults between the ages of 19 to 64 are underinsured.

Key findings include:

  • In 2018, about 158 million Americans under age 65 get their health insurance through an employer;
  • About 25% of those under age 65 are enrolled in the ACA’s marketplace health plans or Medicaid;
  • Fewer adults are insured as compared with 2010 and the duration of coverage gaps has significantly shortened; and
  • About 12.4% of adults are uninsured, statistically unchanged from 2016.

The brief indicates that federal and state governments have the ability to extend the ACA’s coverage gains and help to improve the cost protection of both individual-market and employer plans through various policy options.

The report is available here.

CRS Updates Report on Social Security Benefits for Spouses and Survivors

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CRS Updates Report on Social Security Benefits for Spouses and Survivors

On February 6, 2019, the Congressional Research Service (CRS) released its updated report, Social Security: Revisiting Benefits for Spouses and Survivors. The report provides an overview of: 1) the current-law structure of the adequacy and equity of the auxiliary benefits for spouses, surviving spouses, and divorced spouses; and 2) the issues concerning the current-law structure of auxiliary benefits.

The report also discusses some recent proposals to modify Social Security’s current structure of spousal and survivors benefits. These proposals have different potential consequences regarding: 1) benefit levels of current, surviving, and divorced spouses; 2) redistribution of benefits among couples from different socioeconomic levels; 3) eligibility of means-tested programs such as Supplemental Security Income; and 4) work incentives.

The report is available here.

SLGE Releases Report on Financial Literacy Programs for Local Government Employees

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SLGE Releases Report on Financial Literacy Programs for Local Government Employees

On February 4, 2019, the Center for State & Local Government Excellence (SLGE) released its report, Financial Literacy Programs for Local Government Employees. SLGE conducted an in-depth analysis of local government financial literacy programs. The findings indicated that about 25% of local government employers in the U.S. offer such programs to their workforce and 13% reported that their jurisdiction is currently planning a program. Of those offering financial literacy programs, more than 75% include planning for retirement and budgeting and planning, and more than 50% cover debt and investments.

The report provides: 1) background information on the local government workforce; 2) review of literature on financial literacy; 3) data from a survey of U.S. local governments’ elected officials and human resources directors; 4) insights from discussions with city managers and budget officers; and 5) recommendations for practitioners, focusing on program topic and mode, to develop programs for diverse groups and being able to assess the results.

Some of the benefits of offering a financial literacy program include: increased contributions to supplemental savings plans (51%); increased employee engagement related to compensation issues (43%); and increased employee satisfaction (41%).

The report is available here.

NASRA Updates Issue Brief on Public Pension Plan Investment Return Assumptions

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NASRA Updates Issue Brief on Public Pension Plan Investment Return Assumptions

n February 2019, the National Association of State Retirement Administrators (NASRA) updated its standing issue brief, Public Pension Plan Investment Return Assumptions.  NASRA examined public pension investment return data and found that, on average over the past 25 years, public pension funds have exceeded their assumed rates of investment return.  The brief finds that for the 25-year period ending December 31, 2018, the median actual annual public pension fund investment return was 7.4% and for the 30-year period was 8.3%.

In addition, the brief finds that recent changes in economic and financial conditions have caused many public plans to reexamine their investment return assumptions.  Since FY 2010, more than 90% of the 129 plans included in the Public Fund Survey have lowered their return assumptions.  While the dominate investment return assumption ranges from 7.0% to 7.5% for the 129 plans, the average (median) assumption is 7.27%.  The brief also provides a table showing the investment return assumptions that are in use, or announced for use, by the 129 plans included in the Public Fund Survey as of February 2019.

In addition to presenting data related to public pension plans’ investment experience, the brief discusses how the investment return assumption is established and evaluated.  It then compares these assumptions with public funds’ actual investment experience and the challenging investment environment for public retirement systems.

The brief emphasizes that a governmental plan’s investment return assumption is focused on the long-term, typically an investment horizon of 30 to 50 years.  Investment returns are important because investment earnings account for a majority of the revenues received by most public pension plans.  According to the brief, since 1988, public pension funds have accrued an estimated $7.5 trillion in revenue.  Of that amount, investment earnings account for $4.7 trillion (62%), employer contributions account for $2.0 trillion (26%), and employee contributions account for $900 billion (12%).

Typically, a 25 basis point reduction in the investment return assumption will increase the cost of a plan that has a cost-of-living adjustment (COLA) by 3% of pay (i.e., a reduction from 8% to 7.75% will increase the cost from 10% to 13% of pay).  For a plan without a COLA, the return assumption will increase the cost by 2% of pay.

The brief is available here.

NCPERS Releases 2018 Public Retirement Systems Study

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NCPERS Releases 2018 Public Retirement Systems Study

On January 30, 2019, the National Conference of Public Employee Retirement Systems (NCPERS) announced the results of its 2018 NCPERS Public Retirement Systems Study.  The comprehensive survey provides information on investment experience, actuarial assumptions, plan administration and operations, trends, innovations and best practices.

The key findings include:

  • During 2018, the average funding levels (the value of the assets in the pension plan divided by an actuarial measure of the pension obligation) increased slightly.  Average funding levels rose to 72.6% in 2018 from 71.4 in 2017.  Pension plans that responded in both 2017 and 2018 have an average funding level of 72.2%.
  • In 2018, the average investment return assumption was 7.34% compared to 7.49% in 2017.  About 83% of responding funds reported that they have reduced their actuarial assumed rate of return or are considering doing so in the future.
  • Amortization periods have shortened from 23.8 years to 22.4 years, and those with closed/fixed amortization have increased from 62% to 73%.
  • Employer contribution rates remained stable at 22% of payroll in 2018.
  • The funds experienced solid returns, close to or exceeding the assumed rate of return.  On average, 20-year returns were 7.2%, 5-year returns were 9.0%, and 1-year returns were 13.4%, significantly higher than 7.8% reported in 2017.
  • Pension funds reduced the cost of administering funds and paying investment managers to 60 basis points (or 60 cents per $100 invested) versus 55 basis points in 2017.  This is near the average fee of 59 basis points for equity funds and 70 basis points average for hybrid funds. As a result, public funds with lower expenses provide a higher benefit level to members for each dollar invested and produce a higher economic impact for the communities where those members reside.
  • In 2018, about 46% of plan sponsors offer a health plan or subsidy as compared with about 40% who offered a plan in 2017. Of those offering a plan, about 63% of active members are eligible, 98% of retirees are eligible, and 78% of beneficiaries are eligible.

The survey included 167 state and local government pension funds with more than 18.7 million active and retired members and total assets exceeding $2.5 trillion in actuarial assets and $2.6 trillion in market assets.  Of the pension funds surveyed, 62% were local government funds and 38% were state pension funds.

The report is available here.