ncpers public safety conference 2009 presented by ed friend & greg stump, efi actuaries october...
TRANSCRIPT
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NCPERS PUBLIC SAFETY
CONFERENCE 2009Presented by Ed Friend & Greg Stump, EFI Actuaries
October 13, 2009
Actuarial Issues Affecting Public
Pensions in the Current Economic Turmoil
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Presentation Agenda2
1. Public Plans Committee2. Asset Smoothing Methods3. “Market Values”4. Actuarial Assumptions,
Experience, and Sustainability
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BackgroundGASB Invitation to CommentSuggestions for Improvements in Accounting
Public Plans Committee
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Spreading gains/losses“Corridors”
Asset Smoothing Methods
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Pay Now or Pay Later5
Ideally costs would be a level % of pay year after year This is unfortunately not possible
How much can contributions be smoothed? Asset smoothing Amortization of gains and losses
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Asset Smoothing: Spreading6
Example: 5 year smoothing Gains/(Losses) based on returns above or
below that assumed Year 1: $10 M gain Year 2: $20 M loss Year 3: $5 M gain Year 4: $80 M loss Year 5 Market Value = $600 Million
Actuarial Value = $667 Million (recognizing 1/5 of each prior year’s gain or loss at a time)
Year 4 loss will be fully recognized by Year 9
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Asset Smoothing: Years7
5 year smoothing was the standard for a long time 3 year smoothing not uncommon
Now, systems are looking at 7, 10, or even 15 year smoothing Same gain/loss recognition process
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Asset Smoothing: Years8
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Year
Investment Return AveragesReturn 3-Year Avg 5-Year Avg 7-Year Avg
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Asset Corridors9
“Corridor” = range of values surrounding market value of assets, within which actuarial value is constrained
Example: 20% corridor means actuarial value cannot be outside of the range 80%-120% of market value Came into play for majority of plans in 2008
or 2009
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Asset Corridors10
80%-120% corridor was most common Many systems are considering or using
a wider corridor to soften the blow of recent losses 25%, 30%, higher Must be very careful about size of corridor
(can be too high) “Hitting the corridor” (at 120% level)
means that 20% of losses are not yet recognized.
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Facts and Myths
What is Market Value?
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“Market Values”12
Assets – Value on books: amount of $ assets expected to be worth in open market.
“Liabilities” – no true definition of market value; not relevant for public plans
PPC has opposed the use of so-called MVL (“Market Value of Liabilities”) primarily due to lack of relevance/ usefulness
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Before the crashAfter the crash
Actuarial Assumptions, Experience, and Sustainability
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Chart 1: Before the Crash14
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 5 10 15 20 25 30 35 40 45YEAR
Employer Contribution Rate (% Payroll)Assum
ed Return
A
Year Actual
Return
------0 A
1 A
2 A
3 A
4 A
5 A
6 A
7+ A
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Chart 2: After the Crash15
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 5 10 15 20 25 30 35 40 45YEAR
Employer Contribution Rate (% Payroll)
After the Crash
Before the Crash
Assumed
ReturnA A
YearActu
al Retu
rn
Actual
Return
------
- - - - -
0 -30% A
1 A A
2 A A
3 A A
4 A A
5 A A
6 A A
7+ A A
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What Next?Testing the Sensitivity of contribution rates to various investment return scenarios
Actuarial Assumptions, Experience, and Sustainability
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Chart 3: Softening the Blow17
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 5 10 15 20 25 30 35 40 45YEAR
Employer Contribution Rate (% Payroll)
Softening the Blow
After the Crash
Assumed
ReturnA A
YearActu
al Retu
rn
Actual
Return
------ - - - - -
0 -30% -30%
1 A A
2 A A
3 A A
4 A A
5 A A
6 A A
7+ A A
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Chart 4: Recovery of Half of the Initial 30% Loss, followed by gains18
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 5 10 15 20 25 30 35 40 45YEAR
Employer Contribution Rate (% Payroll)
Partial Recovery
No Recovery
Assumed
ReturnA A
YearActu
al Retu
rn
Actual
Return
------ - - - - -
0 -30% -30%
1 21.5%*
A
2 A+2%
A
3 A+2%
A
4 A+2%
A
5 A+2%
A
6 A+2%
A
7+ A A
Graph reflects smoothing and extended amortization as in Chart 3
* 21.5% return in year 1represents a recovery of half of the year 0 losses, i.e. [(1-.3)x(1+.215) = .85]
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Chart 5: Half Recovery, then 0% for 2 Years
19
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 5 10 15 20 25 30 35 40 45YEAR
Employer Contribution Rate (% Payroll)
Recovery, then Flat
Partial Recovery
Graph reflects smoothing and extended amortization as in Chart 3
Assumed
ReturnA A
YearActu
al Retu
rn
Actual
Return
------ - - - - -
0 -30% -30%
1 21.5%*
21.5%
2 0% A+2%
3 0% A+2%
4 A A+2%
5 A A+2%
6 A A+2%
7+ A A
* 21.5% return in year 1represents a recovery of half of the year 0 losses, i.e. [(1-.3)x(1+.215) = .85]
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Chart 6: Half Recovery, then 0% for 2 Years, followed by four years of gains20
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 5 10 15 20 25 30 35 40 45YEAR
Employer Contribution Rate (% Payroll)
Recovery Later
Recovery, then Flat
Graph reflects smoothing and extended amortization as in Chart 3
Assumed Return A A
YearActual Retur
n
Actual
Return
------ - - - - -
0 -30% -30%
1 21.5%* 21.5%
2 0% 0%
3 0% 0%
4 A+2.5%
A
5 A+2.5%
A
6-7 A+2.5%
A
8+ A A
* 21.5% return in year 1represents a recovery of half of the year 0 losses, i.e. [(1-.3)x(1+.215) = .85]
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Chart 7: Recovery Reversed by end of year
21
0%
5%
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20%
25%
30%
35%
40%
45%
50%
0 5 10 15 20 25 30 35 40 45YEAR
Employer Contribution Rate (% Payroll)
Recovery Reversed
Partial Recovery
Graph reflects smoothing and extended amortization as in Chart 3
Assumed
ReturnA A
YearActu
al Retu
rn
Actual Return
------ - - - - -
0 -30% -30%
1 0% 21.5%*
2 0% A+2%
3 0% A+2%
4-6 A+2% A+2%
7 A+2% A
8 A+2% A
9+ A A
* 21.5% return in year 1represents a recovery of half of the year 0 losses, i.e. [(1-.3)x(1+.215) = .85]
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Chart 8: Long Term: Actual < Expected
22
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40%
45%
50%
0 5 10 15 20 25 30 35 40 45YEAR
Employer Contribution Rate (% Payroll)
Returns 1% Lower
Returns as Assumed
Graph reflects smoothing and extended amortization as in Chart 3
Assumed
ReturnA A
YearActu
al Retu
rn
Actual
Return
------ - - - - -
0 -30% -30%
1 A - 1%
A
2 A - 1%
A
3 A - 1%
A
4 A - 1%
A
5 A - 1%
A
6 A - 1%
A
7+ A - 1%
A
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Chart 9: Anticipating Lower Returns, Long Term
23
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45%
50%
0 5 10 15 20 25 30 35 40 45YEAR
Employer Contribution Rate (% Payroll)
ASSUME 1% Lower
Returns as Assumed
Graph reflects smoothing and extended amortization as in Chart 3
Assumed
ReturnA-1% A
YearActu
al Retu
rn
Actual
Return
------ - - - - -
0 -30% -30%
1 A – 1%
A
2 A - 1%
A
3 A - 1%
A
4 A - 1%
A
5 A - 1%
A
6 A - 1%
A
7+ A - 1%
A
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Chart 10: Lower Returns Too Conservative?
24
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0 5 10 15 20 25 30 35 40 45YEAR
Employer Contribution Rate (% Payroll)
Returns 1% Higher
Returns as Assumed
Graph reflects smoothing and extended amortization as in Chart 3
Assumed
Return
A-1%
A-1%
YearActu
al Retu
rn
Actual
Return
------
- - - - -
0 -30% -30%
1 A A - 1%
2 A A - 1%
3 A A - 1%
4 A A - 1%
5 A A - 1%
6 A A - 1%
7+ A A - 1%