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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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• Detailed scenarios
-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
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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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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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
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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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
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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• Detailed scenarios
-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