Michigan Governor Signs Legislation for Local Government Pension and Retiree Health Care Reporting Requirements
On December 20, 2017, Michigan Governor Rick Snyder signed into law Public Act (PA) 202 of 2017 (SB 686), Protecting Local Government Retirement and Benefits Act. The Act establishes reporting requirements that are applicable to all local Michigan governments that offer or provide defined benefit pension and/or defined benefit other postemployment benefits (OPEB) plans. Some of the provisions of the Act include, but are not limited to:
- Requiring uniform reporting to the Michigan Department of Treasury (Treasury), including a summary retiree health care report;
- Requiring the Treasury to determine “underfunded” status of a local unit of government (LUG). (For retirement health systems, if less than 40% funded and the annual required contribution (ARC) for all the retirement health systems is greater than 12% of the LUG’s annual general fund revenues for the most recent fiscal year. For retirement pension systems, if less than 60% funded and the ARC for all retirement pension systems is greater than 10% of the LUG’s annual general fund revenues for the most recent fiscal year.) The Treasury may waive the determination of underfunded status if the system is in the process of addressing the funded level;
- Creating a Municipal Stability Board with the Treasury that underfunded LUGs are to submit a corrective action plan;
- Creating a list of various options for a corrective action plan; and
- Requiring both a LUG and the Treasury to post a summary of the LUG’s reports and data online.
On January 5, 2018, the Treasury released the initial reporting requirements under PA 202 in Numbered Letter 2018-1. The Treasury requires that LUGs must complete Form 5572, referred to as the “Retirement System Annual Report.” Currently, the Treasury is only collecting data to determine if a LUG is in “underfunded status.” Other reporting requirements (i.e., “summary retiree health care report”) will be required at a later date. For each retirement plan, the LUG must report:
- The plan’s funded ratio (by specifying assets and liabilities);
- For a retiree health care plan, the ARC;
- For a retirement pension plan, the actuarial determined contribution (ADC); and
- The annual governmental fund revenues.
In accordance with the Act, pension and retiree health care reports for retirement systems shall be electronically filed with the Treasury no later than six months after the end of the LUG’s fiscal year. For those that have already filed 2017 audited financial statements with the Treasury (or a biennial filer) with fiscal years ending on or before June 30, 2017, Form 5572 is due by January 31, 2018.
All LUGs that have a retirement pension system or retirement health system must file their reports for their individual plan(s). All local units must submit their most recent audited financial statement to the Treasury, prior to (or concurrently with) the submission of the retirement system annual report. Failure to report by the due date may result in an underfunded determination in accordance with PA 202. LUGs are advised to review reporting requirements with legal counsel or the Treasury to ensure compliance with State requirements.
PA 202 became effective on December 20, 2017 and is available here.
Further information is available on the Michigan Department of Treasury website here.
EBRI Reports on Savings Needed by Medicare Beneficiaries for Health Expenses
On December 20, 2017, the Employee Benefit Research Institute (EBRI) released its report, Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $370,000, Up from $350,000 in 2016. EBRI examined the projected amount of savings needed by Medicare beneficiaries to cover premiums, deductibles and other health expenses in retirement.
The key findings included:
- In 2017, a male age 65 needs $73,000 in savings and a female age 65 needs $95,000 to have a 50% chance of having enough savings to cover premiums and median prescription drug expenses in retirement. For a 90% chance of having enough savings, a male needs $131,000 and a female needs $147,000.
- A couple with median prescription drug expenses needs $169,000 to have a 50% chance of having enough savings to cover health care expenses in retirement. For a 90% chance of having enough savings, they need $273,000.
- For a couple with drug expenses at the 90th percentile throughout retirement who want a 90% chance of having enough money saved for health care expenses in retirement by age 65, targeted savings is $368,000 in 2017.
- From 2016 to 2017, projected savings targets increased between 1% and 6%. By comparison, savings targets decreased between 2011 and 2014, but then increased from 2014 to 2016. Although the savings targets increased since 2014, the 2017 savings targets continue to be lower than they were in 2012 overall.
The report is available here.
National Center for Health Statistics Finds U.S. Life Expectancy Declines for the Second Consecutive Year
On December 21, 2017, the National Center for Health Statistics (NCHS) at the U.S. Department of Health and Human Services’ (HHS) Center for Disease Control and Prevention (CDC) released its Data Brief, Mortality in the United States, 2016. The NCHS Data Briefs are statistical publications that provide information on current public health topics.
According to the brief, in 2016, life expectancy for the U.S. population was 78.6 years, a decrease of 0.1 year from 78.7 in 2015. This marked the second consecutive year that life expectancy has declined. For males, life expectancy was 76.1 years in 2016, a decrease of 0.2 year from 76.3 in 2015. For females, life expectancy remained the same at 81.1 years in both 2015 and 2016.
In 2016, the age-adjusted death rate decreased by 0.6% to 728.8 deaths per 100,000 standard population, down from 733.1 deaths in 2015. Between 2015 and 2016, the age-specific death rates increased for younger age groups and decreased for older age groups.
NCHS’s findings also indicate that, in 2016, the 10 leading causes of death remained the same as in 2015, although two causes exchanged ranks. The third leading cause was unintentional injuries and the fourth was chronic lower respiratory diseases. In 2016, the infant mortality rate was similar to the 2015 rate at 587.0 infant deaths per 100,000 live births. The 10 leading causes of death remained the same as in 2015. The first leading was congenital malformations and the second was low birth weight.
The report is available here.
CRR Issues Brief on Local Pension Plan Funding
On January 2, 2018, the Center for Retirement Research (CRR) at Boston College released its brief, The Funded Status of Local Pensions Inches Closer to States. According to the brief, as of 2015, local pension plans have an aggregate funded ratio of 69.9%, compared with 73.9% for state plans. In addition, in 2015, local plans contributed 83% of their required contributions, compared with 76% for state plans. CRR findings indicate that the variances between state and local plans are possibly linked to differences in aggregate investment approaches and funding methods, respectively.
Key findings include:
- Since 2001, the aggregate funded status of local pension plans has fallen behind that of state pension plans.
- However, in recent years, the funding gap has been closing due to: 1) local plans continuing to receive more of their required contributions than state plans and likely using more stringent funding methods; and 2) local plans earning stronger investment returns than state plans, likely as a result of lower allocations to alternative investments.
- Although many local and state plans have made progress, both continue to face significant funding challenges.
The brief concludes, “in recent years, local plans have experienced stronger returns than state plans, shrinking the funding gap between the two.” Adding, “it is important that state and local plans evaluate their funding policies and consider incorporating more aggressive funding methods that pay down unfunded liabilities faster. This shift would expedite funding progress when returns are strong and could serve as a safeguard in the event of poor returns.”
The brief is available here.
CRR Finds Modest Improvement in Retirement Security
On January 9, 2018, the Center for Retirement Research (CRR) at Boston College released its issue brief, National Retirement Risk Index Shows Modest Improvement in 2016. The brief discusses the National Retirement Risk Index (NRRI), which measures the percent of U.S. working households who are at risk of being unable to maintain their pre-retirement standard of living throughout retirement. The NRRI compares projected household replacement rates (i.e., retirement income as a share of pre-retirement income) with the target replacement rates needed to maintain their standard of living, and then calculates the percentage of households at risk of falling short. The results indicate that more than half of U.S. households will face major retirement income challenges and need more retirement savings to ensure retirement security.
The report’s key findings include:
- Between 2013 and 2016, the NRRI improved modestly, decreasing from 52% to 50% of working-age households.
- The modest improvement was mainly due to increasing home prices and stock market gains.
- However, declining interest rates and Social Security’s rising “Full Retirement Age” have hindered greater progress.
The brief concludes, “half of today’s households will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65 and annuitize all their financial assets, including the receipts from a reverse mortgage on their homes. This analysis clearly confirms that many of today’s workers need to save more and/or work longer to achieve a secure retirement.”
The brief is available here.
NCPERS Releases 2017 Public Retirement Systems Study
On January 10, 2018, the National Conference of Public Employee Retirement Systems (NCPERS) announced the results of its 2017 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 2017, the average funding levels (the value of the assets in the pension plan divided by an actuarial measure of the pension obligation) decreased slightly for the first time in four years. Aggregate funding levels were 71.3% in 2017. Pension plans that responded in both 2016 and 2017 have an average funding level of 72.9%, down from 74.7% in 2016.
- In 2017, the average investment return assumption remained unchanged at 7.5% and the average inflation assumption slightly declined to 2.9% from 3.0%. Nearly 64% of responding funds reported that they have reduced their actuarial assumed rate of return and about 21% more are considering doing so in the future. In addition, the smoothing period for investment returns continues to be shortened, dropping to 5.0 years from 5.7 years.
- Due to more conservative assumptions, employer contribution rates rose to 22% in 2017, up from 18% in 2016. In addition, pension funds receiving full contributions from plan sponsors increased to 74%, up from 70% in 2016.
- The funds experienced solid 1-year, 5-year and 20-year returns, close to or exceeding the assumed rate of return. Aggregated 20-year returns were 7.4%, 5-year returns were 8.4%, and 1-year returns averaged 7.8%.
- Pension funds reduced the cost of administering funds and paying investment managers to 55 basis points (or 55 cents per $100 invested) versus 54 basis points in 2016. This is lower than the average fee of 63 basis points for stock mutual funds and 74 basis points average for hybrid mutual funds (which include stocks and bonds).
The survey included 164 state and local government pension funds with more than 15.5 million active and retired members and total assets exceeding $1.77 trillion in actuarial assets and $1.80 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.
SOA Releases Survey Report on Retirement for Americans
On January 17, 2018, the Society of Actuaries (SOA) released its biennial report, 2017 Risks and Process of Retirement Survey. The report examines: 1) the extent to which pre-retired and retired American’s ages 45-80 are aware of their financial risks in retirement; 2) how that awareness affects how they manage their finances; and 3) how they manage the process of retirement. The survey was conducted by Mathew Greenwald & Associates, and is the ninth in the SOA’s series.
Some of the key findings include:
- Pre-retirees and retirees tend to underestimate average life expectancy. In general, both groups expect to live to age 85.
- About 60% of pre-retirees expect to work longer; however, only 11% of retirees reported working longer.
- About 52% of pre-retirees expect to postpone taking Social Security; however, only 14% of retirees reported having done so.
- Most retirees have experienced at least one major financial shock in retirement (e.g., major repairs, medical or dental expenses, etc.). About 33% of retirees feel unprepared to handle significant out-of-pocket medical expenses, 35% feel unprepared to manage a 25% decline in their home value, and 47% feel unprepared to handle depleted assets in retirement.
- Pre-retirees expect to retire at a median age of 65, while retirees report having retired at a median age of 60.
- For pre-retirees and retirees who plan to work longer, the major reasons include: not having enough money; wanting to build their assets; and keeping employer-provided health benefits.
Households with lower incomes tend to be more concerned about most of the retirement risks. Lower income retirees who have experienced shocks are more likely to have reduced assets and spending as a result.
The report is available here.