NASRA Releases Brief on Public Pension Plan Amortization Policies

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NASRA Releases Brief on Public Pension Plan Amortization Policies

On April 27, 2022, the National Association of State Retirement Administrators (NASRA) released its issue brief, Overview of Public Pension Amortization Policies. The brief cites that a pension plan funding policy describes how pension benefits are financed. Generally, the core elements of a funding policy include: 1) the actuarial cost method; 2) the asset smoothing method; and 3) the amortization policy.

According to the brief, “An amortization policy is defined as the rules and processes that determine the length of time and the structure of payments required to systematically eliminate a funding shortfall, known as the unfunded actuarial accrued liability (UAAL). The UAAL, or unfunded liability, is the difference between a plan’s actuarial value of assets and its liabilities, which are the accumulated value of benefits earned by plan participants.” It adds, “Nearly every public pension plan has an unfunded liability; some plans have an actuarial surplus, which also is referred to as a negative unfunded liability. As financial obligations, public pension unfunded liabilities sometimes are likened to debt. As with other government obligations, unfunded liabilities typically are amortized, or paid, in a systematic manner over a period of time.”

For purposes of comparing amortization policies, the brief includes: 1) the basis of employer contributions: variable or fixed; 2) plan type: variable employer contributions with fixed amortization periods; and 3) plans funded by fixed employer contributions.

NASRA compiled the data based on the amortization policies of 104 statewide and 20 locally administered public pension plans as of the latest Fiscal Year (FY) (generally FY 2020). The selected sample plans represent about $4.0 trillion in assets and $1.5 trillion in unfunded liabilities to be amortized.  

The brief is available here and the dataset is available here.

Society of Actuaries Publishes Report on Expert Interviews Related to Defined Benefit Risk

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Society of Actuaries Publishes Report on Expert Interviews Related to Defined Benefit Risk

In April 2022, the Society of Actuaries (SOA) published its Retirement Section report, Defined Benefit Risk Phase 2: Expert Interviews. In collaboration with the Retirement Section’s Project Oversight Group (POG), the SOA researchers are conducting a three-phase project intended to address the challenges in communicating defined benefit to pension risk to stakeholders. The project includes: Phase 1 – Literature Search Report; Phase 2 – Expert Interviews; and Phase 3 – Review and Discussion.

In December 2020, the Phase 1 literature search report identified articles on pension risk that were published in peer reviewed journals in addition to submissions on pension risk management of the Social Sciences Research Network (SSRN). It covered literature related to: 1) risk management; 2) risk measurement; and 3) risk mitigation.

The recently published Phase 2 report contains interviews with individuals representing various aspects of plan administration including: plan fiduciaries, finance professionals, consultants and providers. The report summarizes the interviews related to risk management processes, risk measurement, and risk mitigation techniques and concludes that:

  • Risk management processes vary by type of plan (i.e., public sector, corporate, …);
  • Risk management processes vary by sophistication level of plan’s trustees/decision makers;
  • Risk management processes vary by levels of importance of the plan on a sponsoring entity’s financials; and
  • Governance is a challenge for all plans.

In the future, Phase 3 is planned to review and integrate the findings from Phases 1 and 2, and recommend other areas for additional study.

Currently, Jim Anderson, Senior Consultant for GRS, serves on the POG and contributes to this effort.

The report is available here.

CRR Analyzes Public Employee Pension Funding

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CRR Analyzes Public Employee Pension Funding

On April 26, 2022, the Center for Retirement Research (CRR) at Boston College released its issue brief, Forensic Analysis of Public Employee Pension Funding: A Tool for Policymakers. According to the brief, state and local policymakers face an increasing pension cost burden, but may lack understanding of the root causes of pension underfunding. The brief discusses one of the major contributors to underfunding known as legacy debt in which historical unfunded liabilities accumulated before plans adopted modern funding practices.

CRR conducted forensic analyses for 13 large state-administered retirement systems in Con­necticut, Illinois, Massachusetts, Ohio, Pennsylvania and Rhode Island. Each analysis began with the earliest financial report available for the retirement system (typically from the 1940s) through subsequent reports for a timeline of key events in the system’s funding history. 

Some of the key findings include:

  • Currently, legacy debt still exists since historical unfunded liabilities were ultimately paid in full using some of the money intended to fund future benefits.
  • In a selected sample of plans with low funded ratios, the average legacy debt was over 40% of the unfunded liabilities.
  • Legacy debt may have provided misleading information about benefit generosity that may be an obstacle for developing effective solutions.

According to CRR, “Continuing to manage legacy debt within the current framework burdens the current generation – who, at this point, is no more responsible for the legacy debt than any other – with the full cost of that transition. And, it may be encouraging misguided approaches to manag­ing more recent unfunded liabilities.” 

The brief is available here.

BLS Summarizes Health Care Plan Provisions for State and Local Government Workers

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BLS Summarizes Health Care Plan Provisions for State and Local Government Workers

On April 14, 2022, the U.S. Bureau of Labor Statistics (BLS) released its survey summary of health care plan provisions for state and local government workers in 2021. The information is based on the National Compensation Survey (NCS) which provides features, costs, and limits of employer-sponsored benefits for private industry as well as state and local government workers.

The summary provides detailed information related to various factors of health care plans for state and local government workers, including: 1) plan characteristics; 2) coinsurance & out-of-pocket maximums; 3) annual deductibles; 4) high deductibles; 5) services provided; and 6) outpatient prescription drugs.

As of March 2021, the findings indicate that a plan network was available to 98% of state and local government union workers and 99% of nonunion workers participating in medical care plans. In addition, it found that there were service requirements for 40% of educational services workers participating in medical care plans. In 2021, a coinsurance was required for 58% of state and local government workers participating in medical care plans. About 98% of union workers and 99% of nonunion workers had an individual out-of-pocket maximum with the median amount of $2,000 for union and $3,000 for nonunion workers.

The summary information is available here.

CRR Studies Comparability Standard for Public Employees Not Covered by Social Security

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CRR Studies Comparability Standard for Public Employees Not Covered by Social Security

On April 12, 2022, the Center for Retirement Research (CRR) at Boston College released its issue brief, How Many Public Workers without Social Security Could Fall Short? CRR examined state and local government employees not covered by Social Security in their current job. About five million of those workers are not covered annually. Federal law requires a comparability standard that their pension plans provide a benefit equal to what they would have received upon retirement if they were covered by Social Security. However, it is important to determine whether state and local plans currently provide comparable benefits.

Other key findings include:

  • Although all plans meet the requirements of the law, a previous study found that 43% were found to not provide lifetime benefits equal to Social Security for some workers.
  • Often workers that terminate employment in mid-career may not have comparable benefits since their pensions are based on wages when they terminate and real value erodes over time.
  • This group accounts for about 17% of current noncovered workers that may be at risk of falling short of Social Security equivalent resources in retirement.

The brief concludes, “Although relatively few workers may fall short of Social Security, the problem is still serious. Social Security is intended to provide a minimum level of retirement income for all Americans. Covered public sector workers – and many private sector workers – augment their Social Security benefits with employer-sponsored retirement plans. Thus, learning that hundreds of thousands of noncovered workers, in any given year, are at risk of not receiving that minimum is concerning.”

The brief is available here.

CMS Releases National Health Care Expenditure Projections for 2021 to 2030

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CMS Releases National Health Care Expenditure Projections for 2021 to 2030

On March 28, 2022, the Office of the Actuary at the Centers for Medicare & Medicaid Services’ (CMS) released the projections for national health expenditures for 2021 through 2030. 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 2021 slowed to 4.2% from 9.7% in 2020. The near-term expected trends reflect significant declines in supplemental funding for public health activity and other federal programs from $417.6 billion in 2020 to $286.8 billion in 2021 due to the COVID-19 pandemic. Under current law, national health spending is projected to grow at an average rate of 5.1% per year from 2021 through 2030, reaching $6.8 trillion by 2030.  As a share of the gross domestic product (GDP), health care spending is projected to remain nearly the same at 19.7% in 2020 and 19.6% in 2030. 

By 2024, federal, state and local governments are projected to finance 46% of total national health spending, down from a record high of 51% in 2020. The decrease is mainly due to the expected decline in COVID-19 federal supplemental funding between 2021 and 2024.

Among the major payers for health care, projected growth in average annual spending for Medicare (7.2%) and Medicaid (5.6%) are significant contributors to the rate of national health expenditure growth from 2021 through 2030.

From 2021 through 2030, private health insurance spending is projected to average 5.7%. During this time period, out-of-pocket expenditures are projected to increase at an average rate of 4.6% and represent 9% of total spending by 2030, down from 9.4% in 2020. In addition, retail prescription drug spending is projected to increase by an average of 5% per year, hospital spending growth is projected to average 5.7%, and physician and clinical services spending is projected to increase an average of 5.6% per year. 

The insured share of the population with health insurance is expected to be 91.1% in 2021 and projected to be 89.8% in 2030. 

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