Public Pensions & Pension Deficits New Ideas New Solutions?

Atlantic Connection 2013, Miami, Florida

Public Pensions & Pension DeficitsNew Ideas New Solutions?

Presented by: Marcia Tam-Marks, FSA

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Introduction and Outline

• Public pensions?- Pensions for Government Employees (Public

Servants)- Social Security

• Financing options• Funded levels of public sector plans in Canada• Benefit design / contribution levels - Caribbean• Liability profile and gain and loss analysis of sample

plan

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Financing Options

• Pay As You Go- Benefit payments are part of annual expenditure- It is usually not pre-funded- Vulnerable to increase in pensioner / active ratio- As plan matures cost increases- Unless the return on investments exceeds the GDP growth

rate pre-funding does not reduce the fiscal burden (applies to public sector plans)

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Financing Options

• Funded plans- Relies on a pension fund, productively invested, to pay for

the benefits of retired members.- Vulnerable to low interest rates, disappointing stock

market performance, increasing inflation, longevity, etc. - Contribution rates must be increased to sustain benefits or

investment earnings must fund the balance of the cost.• Some public sector plans are partially funded by design.• Initial unfunded liability at start of plan which continues

unless there is a plan to eliminate the deficit – lump sum payments, increasing contributions

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Global Financing

Source: Civil-service Pension Schemes around the World, Robert Palacios & Edward Whitehouse, World Bank May 2006.

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Conclusion of a World Bank Discussion Paper

“The civil service pension schemes tend to be more generous and less financially viable than those covering the rest of the formal sector. Taking the scope of coverage into account, they are also more expensive. Costs have spiraled in many countries as the schemes have matured and past promises have come due. Most projections show that the situation will worsen without reform, raising concerns about possible crowding out of important social programmes.”

Civil Service Pension Schemes Around the World, World Bank Discussion Paper, May 2006.

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Funding Level of 85 Public Sector Plans (84 Canadian and one Caribbean)

• Source: Morneau Shepell Limited Pensions Database

14

32

29

10

Funding Level

0 to 75%

75% to 90%

90% to 100%

Above 100%

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Statutory retirement age (Current Law)*

Early retirement

age *

Minimum Vesting Period *

Canada 65 60 rUnited States 67 62 10Antigua and Barbuda 60 - 10

Barbados 65 60 10Bolivia 65 - -Dominica 60 - 10Grenada 60 - 10Guyana 60 - 15Jamaica 60/65 - 28.86

St. Kitts and Nevis 62 - 10St. Lucia 63 60 13

St. Vincent and the Grenadines 60 - 10Suriname .. ..

Trinidad and Tobago 60 - 15

Notes:Not available: .. Not applicable: -

r: Qualifying conditions require a certain number of year of residence p: Qualifying condition are measured in terms of points which are gained through accruing years of contribution.

Qualifying Conditions (Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pagePK:148956~piPK:216618~theSitePK:396253,00.html)

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Contribution Rates and Scheme Design(Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pagePK:148956~piPK:216618~theSitePK:396253,00.html)

Employee Employer Total Programs Employee Employer TotalCanada 4.95 4.95 9.9 o-d-s/ sm/ w/ u/ f 6.7 7.4 14.1United States 6.2 6.2 12.4 o-d-s/ sm/ w/ u/ f 7.7 9.2 16.9Antigua and Barbuda 3 5 8 1 o-d-s/sm 3 5 8

Barbados 6.75 6.75 13.5 3 o-d-s/sm/w/u 7.5 7.5 15

Dominica 4 6.75 10.75 o-d-s/sm/w 4 7.75 11.75

Grenada 4 5 9 o-d-s/sm/w 4 5 9

Guyana 5.2 7.8 13 o-d-s/sm/w 5.2 7.8 13

Jamaica 2.5 2.5 5 o-d-s/sm/w/f 2.5 2.5 5

St. Kitts and Nevis 5 5 10 o-d-s/sm/w 5 6 11

St. Lucia 5 5 10 o-d-s/sm/w 5 5 10

St. Vincent and the Grenadines 3.5 4.5 8 o-d-s/sm/w 3.5 5 8.5

SurinameTrinidad and Tobago 3.2 6.4 9.6 o-d-s/sm/w/f 3.605 7.21 10.815

Notes:Not available: ..

Not applicable: -

o: Old Age; d: Disability; s:Survivorship; sm:Sickness and Maternity; w:Work Injury; u:Unemployment;f:Family Allowancev: Varies according the income levelw: Weekly rate of contributionHigh Income OECD:

Latin America & Caribbean

3. Barbados: Contribution rates for private sector employee, government temporary employees and apprentices. For government

Pillar 1 Social Security (all programs)

1. Canada: Unemployment contribution rate for both employer and insured person are different in Quebec.8. United States: Unemployment employer's contribution rate varies depending on federal taxes and state programs.

1. Antigua & Barbuda: Contribution rate for insured person in public sector corresponds to 2% of covered monthly earnings.

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Dependency Ratios(Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pagePK:148956~piPK:216618~theSitePK:396253,00.html)

20002001200220032004200520062007200820092010Recent Year(% GDP)Canada 18.5 18.5 18.6 18.7 18.8 18.9 19.1 19.3 19.6 19.9 20.3 2009 4.50

United States 18.7 18.7 18.6 18.5 18.5 18.5 18.6 18.7 18.9 19.1 19.5 2010 6.80Antigua and Barbuda 2006 2.5

Dominica 2006 4.00

Barbados 14.6 14.5 14.4 14.4 14.3 14.2 14.1 14.1 14.1 14.2 16.0 Dominican Republic 8.3 8.5 8.6 8.8 8.9 9.1 9.2 9.3 9.5 9.6 10.0 2009 0.69

Grenada 13.3 13.0 12.8 12.5 12.3 12.0 11.7 11.4 11.1 10.8 11.0 2006 2.00

Guyana 7.9 8.1 8.3 8.5 8.8 9.0 9.1 9.2 9.3 9.4 6.9 2010 0.07Haiti 7.1 7.2 7.2 7.2 7.2 7.3 7.3 7.3 7.3 7.3 7.4

Jamaica 12.5 12.6 12.6 12.7 12.7 12.6 12.6 12.5 12.4 12.3 12.4 2009 0.12St. Kitts and Nevis 2006 2.70

St. Lucia 12.6 12.2 11.9 11.5 11.1 10.8 10.6 10.4 10.3 10.2 10.0 2006 1.70St. Vincent /Grenadines11.2 11.2 11.2 11.3 11.2 11.1 11.0 10.7 10.5 10.2 10.2 2006 1.50Suriname 9.0 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.9

Trinidad and Tobago 8.7 8.6 8.6 8.7 8.7 8.8 8.9 9.0 9.1 9.3 9.6 2010 4.35

Population + 65 /(Working Age Population)Public pension spending

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Pension Spending to GDP (World)(Source: World Bank pension database at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTSOCIALPROTECTION/EXTPENSIONS/0,,contentMDK:23231994~menuPK:8874064~pagePK:148956~piPK:216618~theSitePK:396253,00.html)

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Situation of Schemes and Focus

• Many public pension schemes face difficulties due to demographic and economic factors.

• For civil service pension the focus should be on sustainability since most are unfunded.

• Contributory social security schemes are mainly partially funded so the focus should be on contribution stability.

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Some Causes of Unfunded Liabilities

• Low than expected investment returns• Lower than expected post-retirement mortality• Non-compliance• Original unfunded or partially funded design • Government Fiscal Deficits• Administrative Inefficiencies• Disconnect between benefit improvements and contribution

rate increases• Maturing plan profile• Reciprocal agreements

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Range of Caribbean NIS Pension Benefits / Contributions

• Source: International Social Security Association (ISSA) Country Profiles at http://www.issa.int/Observatory/Country-Profiles

Country EE contributions ER Contributions Maximum annual earnings Basic Pension Benefit Average WageAntigua and Barbuda 3% 5% EC$54,000 25% of insured's average earnings in best 5 of last 10 years Best 5 years of last 10 yearsBahamas 3.90% 5.90% BAH$26,000 30% of covered wages in best 3 of last 10 years Best 3 years of last 10 yearsBarbados 5.93% to 13.50% 5.93% to 6.75% B$50,180 40% of average covered earnings Best 5 yearsBermuda Ber$30.40 per week Ber$30.40 per week BER$200,000 Ber $219.53 per weekBVI 3.25% 3.25% $36,199.80 30% of average covered wage in the best 9 years of contributions Best 9 years of contributionsCanada 4.95% 4.95% C$3,500 - C$48,300 25% of average monthly pensionable earningsGrenada 4% 5% EC$42,000 30% of average weekly wage Best 5 years /52Jamaica 2.50% 2.50% J$1,000,000 J$2,400 per weekGuyana 5.20% 7.80% G$1,593,956 40% of average weekly wage best 3 years of last 5St. Lucia 5% 5% None 40% of of average covered earnings, min $300 best 5 yearsSt. Kiits & Nevis 5% 5% EC$78,000 30% of average annual earnings, min EC$400 best 3 years of last 15yearsSt. Vincent & the Grenadines 3.50% 4.50% EC$780 - EC$ 52,000 30% of average annual earnings, min EC$280 best 3 years of last 15yearsTrinidad and Tobago 3.20% 6.40% TT$ 6,240 - TT$99,580 30% to 48% of average weekly wage, min TT$2,000 per month career averageUnited States 6.20% 6.20% US$110,100 maximum $2,326 per month average of 35 highest years

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Liability Profile of a Sample Pension Plan

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

2010 2012

Mill

ions

Retired

DVS

Actives

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Funded Position of the Sample Pension Plan

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2010 2012 2013 2014

Mill

ions

Assets

Liabilities

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Sample Pension Plan Gain and Loss

-20-15-10

-505

10152025

Mill

ions

Gain and Loss Experience

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Sensitivity Analysis for Sample Pension Plan

Assumption Change Impact on Total Liability (%)

Interest rate 1.0% increase (11.7)1.0% decrease 14.6

Salary increase rate 1.0% increase 4.01.0% decrease (3.6)

Inflation 1.0% increase 9.71.0% decrease (8.3)

Life Expectancy 1.0% increase 2.61.0% decrease (2.4)

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New Entrant Cost Example

Salary $70,000 $70,000 $70,000 Accrual Rate 2% 1.50% 1.25%Interest Rate 6.50% 6.50% 6.50%Salary increase 4.25% 4.25% 4.25%Form of benefit Life and 5 yr GuaranteeCOLA 3% every 2 yearsNRA 65Lump Sum 11.5 x 25% Annual PensionMortality GAM 94

Male Age Contribution Rate % Salary30 12% 9% 8%35 14% 10% 8%40 15% 11% 9%45 17% 13% 10%50 19% 14% 12%

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Conclusions

• Plan design – be careful when increasing benefits and contributions – consider relationship and impact on funded position – do actuarial costing instead of doing it in isolation

• Consider new entrant (n/e) profile – typically contribution rate more than cost of benefits for younger n/e

• Longevity risk is real and significant• In addition to interest rates, other plan experience should be

consistently monitored to determine sources of gains and losses – early retirement incidence and benefits, increase in longevity, new entrant profile, salary and merit increases, level of indexation etc.

Thank YouContact [email protected]