September 12, 2011 - d10k7k7mywg42z.cloudfront.net€¦budget analysis -Preliminary ... Status of Pension and OPEB Plans Administered by RI Municipalities, March 2010 (Office of the

Pension Advisory Group – Meeting 4 Refining parameters

September 12, 2011

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Agenda

Monday, September 12

Welcome 9:30 – 9:35 Bill Foulkes

Actuarial scenarios and applying changes 9:35 – 11:15 Joe Newton, GRS

Solutions for independent municipalities 11:15 – 11:40 Ernie Almonte Mayor Fung

Discussion of other pension plan features 11:40 – 12:10 Bill Foulkes

Closing discussion 12:10 – 12:30 Bill Foulkes

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Recap: recent progress

• Detailed scenarios

• Financing options

• Defined contribution/ hybrid plans

• Non-MERS municipal plans

• Self-correcting mechanisms

• Further actuarial scenarios

• Meetings with advisory group members

• Further work on hybrid plans, solutions for independent municipal plans, and self-correcting mechanisms

• Presentation of refined scenarios by actuary

• Discussion of key variables and trade-offs of reform

• Recommendations for independent municipalities, DC administration and self-correcting mechanisms

• Address outstanding items including SS, MERS, public safety

Last meeting

August 17- today

Today

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-Financing options

-Defined contribution/ hybrid plans

-Cities & towns

-Self-correcting mechanisms

A look at where we’ve been and what we’ve accomplished

June July August September October

• Legislation

-Governor/ Treasurer to submit legislation to General Assembly

• Baseline/ preliminary scenarios

-Defining retirement security

-State and local budget analysis

-Preliminary scenarios

• Trade-offs

-Additional detailed scenarios

-Other important features, including SS, MERS police and fire, non-MERS municipal plans, judges and state police

-Weighing options

• Diagnosis & objectives

-Magnitude and drivers of the problem

-Key principles

-Defining success

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Agenda







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Agenda







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The locally administered plans’ unfunded liability is slightly larger than that of MERS

Source: Status of Pension and OPEB Plans Administered by RI Municipalities, March 2010 (Office of the Auditor General), GRS Valuation Report, June 2010

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Reforms to MERS and Teachers plans will provide substantial relief to Rhode Island’s municipalities

Locally administered (addl. cost to reach 100% funding status)

State-related

There are two parts to a municipality’s pension obligation

In Cranston, ~70% of increases to pension costs are State-related

• Municipalities make pension payments to their own independent plans and/or the State’s plan (teachers and/or MERS)

-40% of Teacher’s pension plan is funded by the state, and 60% is funded by the municipality

• The State does not have direct control over the independently determined municipal plans

• Municipalities may have employees in both their independent plans as well as the State MERS plan

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But, independent plans are underfunded and additional reforms would help stabilize them

Mandate benefit changes until funded % improves

Establish permanent benefit limits

• Revise benefits until municipal plans reach 80% funded

-A self-correcting mechanism for municipalities that automatically changes benefits

• Require plans that do not meet funding obligations to join the state system

• Mandate that municipalities’ independent plans do not provide pension benefits that exceed the reformed state design

• Adopt same accrual rate, COLA, retirement age, etc. as the reformed State plan

Reform other features of local plans

• Eliminate purchase of service credits and benefit enhancers

• Eliminate other features of plans that require municipalities to provide benefits that exceed 70-80% replacement income

• Disability

Require full audit of non-MERS municipal plans

• Verify and fully understand the actual magnitude of problem

• Reveal and correct any abuses

Offer buyout option for most poorly funded plans

• Explore the possibility and feasibility of a buyout option

Move municipal plans into the reformed state

system

• Enable, incent, or require municipalities to join the state system on a go-forward basis

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Agenda







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Other issues for discussion

•Defined contribution plans

•Self-correcting plans

•Disability, part-time work, other features

•Means-tested solutions

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Defined contribution vs. defined benefit plans

•The framework represents a commitment to DB, while addressing DB’s fundamental weaknesses and risks

-No portability

-No flexibility

-The State assumes all risk

•A DC introduces risk-sharing, but has its own pitfalls

-No participation

-Employees don’t make the maximum contribution

-Employees don’t diversify investments

-Accounts don’t rollover

•So, how can we set up a DC plan so that we avoid the common pitfalls?

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DC is attractive for many employees

A DC plan would provide greater income in retirement for many…

…while providing many unique benefits and retirement security

•Assumes DC plan can earn 7.5% until commencement and annuitize the balance at 5.00% actuarial equivalence at retirement Source: GRS

• Investments

-High quality investments

-Access to expert advice and retirement planning from trusted financial planners

• Loans and hardship withdrawals:

-Permitted in accordance with IRS rules

• Portability

-Full portability to enable vested employees to move their DC assets to new employers

• Prudent guidelines

-Mandatory participation and contributions

-Structured to help manage risk and provide retirement security

-Investments in funds that guarantee some level of return

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There are several options for setting up a defined contribution plan in Rhode Island

Methods of administering a defined contribution plan

100% in-house 100% outsourced

Administration outsourced, State determined menu

of investment options

Administration outsourced,

investment in-house

• Description: State manages both administration and investment of individual plans

• The state lacks the resources/ experience/ personnel to be effective

• Description:3rd party provides admin services, but funds are co-mingled with state assets

• Employees have no control over their investments or risk profile; the State takes added responsibility for individuals’ balances

• Description: 3rd party provides admin services, financial advice, and works with state to identify investment packages/options

• Employees have some choice over plan but must work within the State’s guidelines (e.g. must invest x% in lifecycle funds, etc.)

• Description: 3rd party provides administration, investment management, financial advice etc.

• Employees have full ownership with limited guidance from the state

FOR DISCUSSION

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A self-correcting mechanism will eliminate the need for another round of pension reform in the legislature

TRIGGER: Funded

ratio OR

% of payroll?

Triggered when

plan has not made progress by established guidelines for 3

consecutive years; actuary must certify plan status

Green zone ≥80% funded

OR ≤25% of payroll

Endangered zone <80% funded

OR >25% of payroll

Default schedule

Other schedules

• What should our default schedule look like?

• Are there guidelines we want to consider for alternative schedules (submitted by RI Retirement Board?)

• E.g. linking employer and employee contribution increases 1-1?

FOR DISCUSSION

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A self-correcting system can also share benefits during upturns

What upside sharing ideas have we considered to-date?

Self-correcting COLA

Higher employer contributions to

DC

Lower employee contributions when funded

status improves

• Restore COLA when funded status improves

• Tie COLA to investment returns to ensure retirees benefit from strong investment performance

• When the liability is brought down, increase employer contributions to DC

• When the liability is brought down, decrease the employee contribution to the DB portion of the plan, enabling employees to put more away in their DC plan

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• For DB plan: reduce vesting period to 5 years to promote fairness to short-term employees

• For DC plan: institute 3-year vesting for employer contributions to the DC, to remain competitive with private sector jobs

• Prohibit part-time work from counting toward years of service

• For those unable to engage in any gainful employment:

- Disability provided at 66% of salary

• For those who are unable to engage in specific job responsibilities:

- Disability provided at an amount equal to the replacement income that the state plan will provide

• No service purchases allowed except for military service

• In no event can pensions (including Social Security) exceed 100% of indexed final average compensation earned as active employee

• Mandatory financial training for Retirement Board members

Other provisions for discussion

Part-time work

Disability

Service credit purchase

Other

Vesting

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Should we have additional provisions to further protect and provide for lower income earners?

Means-tested features

• The State can possibly replace a greater % of low-earners’ income

- Overall income replacement for those earning <$40K is significantly higher than the level recommended by experts

• The new plan could also institute a benefit floor to ensure that no employee has too little in retirement

- For those with final average salaries <$40K, the pension benefit could be the greater of the normal calculation OR a flat dollar amount multiplied by years of service

Pre-retirement income

% replaced by SS % provided by proposed state pension plan

Total approx. replacement

Aon GRS

$30,000 59% 49% 40% 89-99%

$40,000 54% 45% 40% 85%-94%

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Agenda







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-Financing options

-Defined contribution/ hybrid plans

-Cities & towns

-Self-correcting mechanisms

A look at where we’ve been and what we’ve accomplished

June July August September October

• Legislation

-Governor/ Treasurer to submit legislation to General Assembly

• Baseline/ preliminary scenarios

-Defining retirement security

-State and local budget analysis

-Preliminary scenarios

• Trade-offs

-Additional detailed scenarios

-Other important features, including SS, MERS police and fire, non-MERS municipal plans, judges and state police

-Weighing options

• Diagnosis & objectives

-Magnitude and drivers of the problem

-Key principles

-Defining success

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Our process has been exhaustive

• We have:

-Established a definition of retirement security

-Analyzed the budgetary impact on the state and local level

-Assessed the pros and cons of defined contribution plans

-Benchmarked other states and the federal plan’s risk-sharing and self-correcting mechanisms

-Carefully considered the municipal problem and potential solutions

-Run numerous scenarios and worked closely with our actuary

-Have investigated numerous financing options

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Variables we considered

•Benefits to existing retirees

•Benefits to current workers

•Benefits to new hires

•Benefit levers:

•Retirement age/years of service

•Annual accrual rate

•COLA

•Salary calculation

•Actuarial assumptions

•Return on investment

•Employer contributions

•Employee contributions

•Additional taxpayer contribution to legacy costs, for example, through re-am

•One-time financing (e.g. re-amortization, asset transfer)

Liabilities Assets

September 12, 2011 - d10k7k7mywg42z.cloudfront.net€¦budget analysis -Preliminary ... Status of Pension and OPEB Plans Administered by RI Municipalities, March 2010 (Office of the

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