Managing Retirement Plan Risk While Appropriately ... · Source: 2015/2016 Global Benefits Attitudes Survey, U.S. Sample: Full-time employees who are a member of a retirement plan.

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Managing Retirement Plan Risk While Appropriately Rewarding EmployeesNACT/Philadelphia Treasurer's Club Meeting

October 4, 2017

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Today’s Discussion

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§ Employee-employer relationship and financial stress

§ Changes in employer involvement in retirement

§ Defined benefit plan risks and risk management strategies

§ Retiree medical risk management strategies

§ Defined contribution plan risks and best practices

§ Additional macro retirement issues

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Source: 2015/2016 Global Benefits Attitudes Survey, U.S.Sample: Full-time employees who are a member of a retirement plan. Aged 50 or more.

Employee-employer Relationship and Financial Stress

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Source: 2015/2016 Global Benefits Attitudes Survey, U.S.Sample: Full-time employees who are a member of a retirement plan. Aged 50 or more.

Employee-employer Relationship and Financial Stress


Changes in Employer Involvement in Retirement


Source: Overall Shifts in United States Employer Benefit Costs, July 2017


Changes in Employer Involvement in Retirement


Source: Overall Shifts in United States Employer Benefit Costs, July 2017


Defined Benefit Plan Risks


Investment Risk n Risk associated with market exposure for return seeking assets

Interest Rate Riskn Risk associated with changes in interest rates, including

tracking error from default / downgrade and non-parallel changes in the shape of the yield curve

Longevity Risk n Risk that participants live longer than assumed

Operational Riskn Risks related to ongoing plan administration (e.g.,

compliance, payment of benefits, participant litigation, etc.)

Regulatory Risk n Future changes in regulatory / legislative environment


Defined Benefit Plan Risk Management Strategies


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A Focus on Funding

1. Potentially High ROI: Return on investments plus up to 4%+ for elimination of variable premiums (if below variable premium cap)

2. Low Cost of Borrowing: A number of high profile organizations have borrowed expressly to fund their pensions

3. Potential for Tax Reform: Potential to crystallize tax deduction before tax rates decline

4. Enables Risk Reduction Activities: Whether via lower risk investment strategy or risk transfer

5. Alternative Contributions: Whether stock, property, or more exotic approaches


Highlights of Liability Settlement Marketplace


Bulk Lump Sums Annuity Purchase Market

*Lump sum interest rates are an average of the second and third segment rates

Annuity Purchase Transaction History – 1991 to 2Q 2017

1,500

36,033

3,848

8,700

13,775 13,992

6,457

02,0004,000

6,0008,000

10,00012,00014,000

Avg1991-2011

2012 2013 2014 2015 2016 2017 YTD

1991 – 2011 Source: Estimated LIMRA; 2012 – 2017 Source: Willis Towers Watson Pension Risk Transfer Survey; includes history for 15 insurance companies through June 30, 20171 Data through September 7, 2017

Public 2017 Large / Jumbo Transactions1

§ The Hartford ($1.6B)§ International Paper ($1.3B)§ Accenture ($1.0B)§ Sears ($1.0B over two transactions, 71,000 retirees)

$ M

illio

ns


FAS 106 Adopted Medical Cost Increases

Gov’t Financing for Rx for Retirees and the Rise of the Individual Market

Emerging Financing Strategies

Exit Strategy

Retiree Medical Strategy Risk Management

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Benefit Changes

Focus on cost reduction and accountability

Plan Managementand Account-based Health

Financial Planning

MMA/RDS subsidy changes/

PPACA increases incentive to approach individual market

Reduce liability and/or fund liability

VEBA and 401(h) funding

Annuity buy-in

HRA/RRA subsidyDefined dollar benefitsHRAs/RRAs

HSAs

Defined dollar benefitsLifetime maximums

Plan freezes

Eliminate or reduce benefits offered to

retirees

Full Exit Exchanges

Lump sum cash-outsAnnuity buy-out (taxable option)Medical annuity

buy-out (tax free option)

De-Risk Through Design De-Risk Through Financing

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Defined Contribution Plans Are Not a Risk-Free Panacea


Contributions

Investing

Retirement

↓ Insufficient savings↓ Competition from debt

payments↓ Employer cutbacks↓ Loans & withdrawals

↓ Too much risk↓ Too little risk↓ Market timing↓ High fees

↓ Lack of longevity protection

↓ Continued need to invest

↓ Poor tax favored account utilization

Outcomes Dependent on Employee Actions Participant Lawsuit Risk

n Stock Drop

n “Excessive” Fees – Both Investment and Recordkeeping

n “Inappropriate” Investments

n Revenue Sharing

n Too Many Investment Choices


Seven Defined Contribution Best Practices

1. Automated plan design and investments which produce sufficient income – but allow flexibility

2. Strong governance structure and process to improve decision making and reduce lawsuit risk – right people, right training, right support, right documentation

3. Outsource what you can’t do well – spend your time on strategic issues

4. Outcome based analytics – including focus on retirement income

5. Employee segmentation – meet people where they are

6. Employee decision support that engages – simple and directive as appropriate

7. Consider holistic financial wellness – retirement is only one aspect


Two Additional Macro Retirement Issues

SEP = Single Employer PlanMEP = Multiemployer Plan

Moody’s Estimates of Pension Underfunding, April 2016n Federal Government: $3.5 trillionn State/local Governments: $3.5 trillionn Social Security: $13.4 trillion (ignoring legislated

cutbacks)n Medicare: $3.2 trillion (ignoring legislated cutbacks)

Source: PBGC 2016 Trustees’ Report

Source: SSA 2017 Trustees’ Report

PBGC Funding Government Retirement Program Funding

Managing Retirement Plan Risk While Appropriately ... · Source: 2015/2016 Global Benefits Attitudes Survey, U.S. Sample: Full-time employees who are a member of a retirement plan.

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