1 Interpreting Actuarial Information Fritzie Archuleta, ASA MAAA Senior Pension Actuary, CalPERS February 21, 2013

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Interpreting Actuarial Information

Fritzie Archuleta, ASA MAAASenior Pension Actuary, CalPERS

February 21, 2013

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Overview• The big picture: understanding pension

terminology• Setting the employer contribution rate• What do you mean I’m pooled?• You assumed what? • New report features• Current and Future Events

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The Big Picture

Understanding Pension Terminology

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How are pension plans funded?

• CalPERS public agency plans are pre-funded• Plan assets come from three different sources

(ER contributions, EE contributions, investment returns)

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How are pension plans funded? • Most of the benefits are paid through investment

earnings• CalPERS funding method is designed to collect

contributions as a level percent of payroll over the members working career

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Present value of benefits (PVB)

• Includes all service that has been earned or will be earned

• The number is only as accurate as our assumptions are

• Best estimate for one point in time

“Total dollars needed today to fully fund the pension plan for current members in the plan”


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Normal cost (NC)

• Factors that determine the normal cost– Plan provisions– Demographic assumptions– Economic assumptions

“Annual premium cost associated with one year of service accrual”


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Accrued liability (AL)

• Desired level of assets to have on hand• Plan is fully funded if assets exceed the accrued

liability

“The value of benefits earned to date by members currently in the plan”


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Putting the terminology together

Present Value of Benefits

Accrued Liability

Future NC Contributions


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Market value of assets (MVA)

“Market price that pension assets could be sold for”

Actuarial value of assets (AVA)“Adjusted value of assets used to set your annual contribution rate”


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Market value vs. actuarial value of assetsWhy use an actuarial value of assets?Using MVA would result in volatile employer rates

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

1990 1995 2000 2005 2010

Market Returns Assumed Return


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Investment Volatility – Expected vs Assumed

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-00

00-01

01-02

02-03

03-04

04-05

05-06

06-07

07-08

08-09

09-10

10-11

11-12

-40%

-30%

-20%

-10%

0%

10%

20%

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Market value vs. actuarial value of assets

• Assets along with the annual cash flows are credited with assumed interest of 7.5 percent

• AVA = AVA + (MVA-AVA)/15• Final AVA must be within 20 percent of MVA

How are actuarial value of assets determined?


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Unfunded actuarial liability (UAL)

• This year pooled plans saw their individual numbers as well as their pool numbers

The difference between actuarial value of assets and accrued liabilities


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Putting the terminology together

ActuarialValue of Assets

Unfunded Liability



Accrued Liability



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Setting the Employer Contribution Rate

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Components of every rate

• Pays for a year of benefit accrual

1. The normal cost or annual premium

1. The normal cost or annual premium2. The amortization bases payment

• Pays for deficit or surplus accrued over the years

Every employer rate is made up of two parts:


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Normal cost or annual premium• The normal cost or annual premium pays for

service earned in the upcoming year• Annual cost determined as a percent of payroll• Our funding method is designed to keep this

percent fairly level from year to year


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What events affect the normal cost percent?

• Assumption changes• Contract amendments• Fluctuation of aggregate entry age of actives in

your plan


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Amortization bases payment

• We compare AL of the plan to assets on hand• If liability is greater, plan needs to contribute more • If assets are greater, plan can contribute less• Goal is to get to 100 percent

The amortization bases payment gets your plan back to 100 percent funded

How do we come up with the amortization bases payment?


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A “scale” model of your pension plan

Salary

Retirements

Amendments

Death

Disability

Investment Return

Benefit Payouts

Contributions

Inflation

Liabilities Assets


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The scale never lies…Fully funded

Underfunded

Overfunded

• Scales are level no need to add weight to either side

• Add weight to the asset side via increased contributions• Add weight to the asset side via investment returns• May reduce weight on the liability side through amendments

• May reduce weight on asset side via lowered contributions• Add weight to liability side via through improved benefits


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• All gains and losses• Increase in liability due to plan amendment • Assumption/methodology changes• “Fresh start”

Most plans today are underfunded

Each piece of the UL/Surplus is attributed to a source


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Amortization bases payment (continued)

• They buy a house for fair market value• Each year the property value goes up or down

(gain/loss) • They take out an equity loan to pay for college

(assumption change)• They may take out an equity loan to remodel

(benefit change)• They refinance to consolidate to one bill (fresh start)

Imagine a homeowners journey through life…


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Amounts for Fiscal 2013/2014

Reason for BaseDate

EstablishedAmortization

PeriodBalance6/30/11

ExpectedPayment2011/2012

Balance6/30/12

Expected Payment2012/2013

Balance6/30/13

ScheduledPayment for2013–2014

Payment AsPercentage of Payroll

(GAIN)/LOSS 06/30/08 30 $24,470,884 $1,469,501 $24,841,996 $1,491,786 $25,218,737 $1,514,410 4.494%

PAYMENT (GAIN)/LOSS 06/30/10 30 $(152,243) $(898,465) $768,589 $(120,790) $953,538 $57,261 0.170%

BENEFIT CHANGE 06/30/03 12 $12,214,307 $1,177,534 $11,938,604 $1,215,804 $11,601,808 $1,255,318 3.725%

ASSUMPTION CHANGE 06/30/09 19 $8,596,703 $63,563 $9,196,967 $694,658 $9,188,658 $717,234 2.128%

SPECIAL (GAIN)/LOSS 06/30/09 29 $(8,971,028) $0 $(9,666,283) $(580,470) $(9,812,876) $(599,335) (1.779%)

SPECIAL (GAIN)/LOSS 06/30/10 30 $12,377,573 $0 $13,336,835 $0 $14,370,440 $862,959 2.561%

TOTAL $48,536,196 $1,812,133 $50,416,708 $2,700,988 $51,520,305 $3,807,847 11.299%

These bases can be found on page 13 of your report (non-pooled) and on page 13 of section 2 (pooled)


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Employer contribution rate

Your CalPERS Employer Contribution Rate

Normal Cost Dollars needed

+ Amortization Bases

Payment on Unfunded Liability

Expected Payroll of Active Employees

= ÷

The bottom line: annual payment by employer is the sum of the normal cost plus or minus the amount needed to bring the assets back in line with the accrued liability

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Now the picture is complete


Unfunded Liability



Accrued Liability



Unfunded Liability

Future Contributions

CY Normal Cost

CY Amortization


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How does this look in my non-pooled report?

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This can be found on page 5 of your report. Pre-Payment must be received before the first payroll of the new fiscal year and after June 30.

Plan’s total normal cost

Required Employer Contribution Fiscal Year Fiscal Year

2012/2013 2013/2014

Required Employer Contributions

1. Contribution in Projected Dollars

a) Total Normal Cost $ 686,231 $ 731,940

b) Employee Contribution1 $ 363,197 $ 373,874

c) Employer Normal Cost [(1a) – (1b)] 323,034 358,066

d) Unfunded Contribution $ 13,535 $ 34,297

e) Total Employer Contribution [(1c) + (1d)] 336,569 392,363

f ) Employee Cost Sharing $ $ 0

g) Net Employer Contribution [(1e) – (1f)] 392,363

Annual Lump Sum Prepayment Option2 [(1g) / 1.075^.5] 324,239 378,428

2. Contribution as a Percentage of Payroll

a) Total Normal Cost 12.746% 13.197%

b) Employee Contribution1 6.746% 6.741%

c) Employer Normal Cost [(2a) – (2b)] 6.000% 6.456%

d) Unfunded Rate 0.251% 0.618%

e) Total Employer Rate [(2c) + (2d)] 6.251% 7.074%

f ) Employee Cost Sharing 0.000%

g) Net Employer Contribution Rate [(2e) – (2f)] 7.074%


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What do You Mean I’m Pooled?

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Pooling

• Normal cost– Employers within a pool have the same net normal

cost

– Surcharges account for additional optional benefits

• Amortization base (UL/surplus)– Experience gains and losses, assumption changes

shared by all in the pool since June 2003

“Sharing the risk”


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Pooling (continued)

• Normal cost rate components– Net employer normal cost– Optional benefit surcharges– Normal cost phase-out

• Amortization bases rate components– Risk pool’s amortization bases– Agency’s side fund

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How does this look in my pooled report?

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* Payment must be received before the first payroll of the new fiscal year and after June 30.

Required Employer Contributions

Plan’s total normal cost is the sum of the highlighted amounts and employee contributions

Fiscal Year Fiscal Year 2012/2013 2013/2014Employer Contribution Required (in Projected Dollars)

Risk Pool’s Net Employer Normal Cost $ 3,061 $ 3,057Risk Pool’s Payment on Amortization Bases 556 661Surcharge for Class 1 Benefits None 0 0Phase out of Normal Cost Difference 0 0Amortization of Side Fund 2,909 2,994Total Employer Contribution $ 6,740 $ 6,909Employee Cost Sharing xxx xxxNet Employer Contribution xxx xxxAnnual Lump Sum Prepayment Option* $ 6,493 $ 6,664

Projected Payroll for the Contribution Fiscal Year $ 46,102 $ 45,011

Employer Contribution Required (Percentage of Payroll)

Risk Pool’s Net Employer Normal Cost 6.640% 6.792%Risk Pool’s Payment on Amortization Bases 1.206% 1.469%Surcharge for Class 1 Benefits None 0.000% 0.000%Phase out of Normal Cost Difference 0.000% 0.000%Amortization of Side Fund 6.310% 6.652%Total Employer Contribution 14.621% 15.351%Employee Cost Sharing 0.000% 0.000%Net Employer Contribution 14.621% 15.351%


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Pooling

• Represents the remaining balance of your UL or surplus from entry to the pool

– Behaves like a mortgage account

– Currently charges 7.5 percent

– Payments are on a set amortization schedule

– Agency has control over the balance

– Retroactive benefit enhancements, golden handshakes, and additional payments are events that can increase or decrease the side fund balance

Side fund


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Pooling

• For pooled plans side fund rate is usually most volatile– Payment is predictable, increasing at 3.00

percent each year– Payroll is expected to increase at same rate

as payments– Volatility ensues if payroll does not increase at

3.00 percent

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Pooling

Year # Activities Payroll SF Pmt* SF Rate**

1 4 $200,000 $20,000 10.00%

2 4 206,000 20,600 10.00%

3 3 160,000 21,218 13.26%

4 3 160,000 21,855 13.66%

5 2 120,000 22,511 18.76%

6 8 460,000 23,186 4.61%

* Note side fund payment increases by exactly 3.00 percent each year ** SF rate = SF Pmt divided by payroll

Side fund Volatility - Example

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How does this look in my pooled report?Pooled side fund

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Employer Side Fund Reconciliation

June 30, 2010 June 30, 2011

Side Fund as of valuation date* $ (18,203) $ (16,781)

Adjustments 0 0

Side Fund Payment 2,729 2,818

Side Fund one year later $ (16,781) $ (15,156)

Adjustments 0 0

Side Fund Payment 2,818 2,909

Side Fund two years later $ (15,156) $ (13,277)

Amortization Period 6 5

Side Fund Payment during last year $ 2,909 $ 2,994

Plan’s side fund balance as of 6/30/2013


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You Assumed What?

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Actuarial assumptions

• Actuaries must make predictions about your employees to calculate a cost for their benefits

• Several key assumptions used– Investment return, 7.5 percent– Salary increases– Retirement rates – Life expectancy

“Predictions developed by actuaries on what will happen to your plan in the future


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Actuarial assumptions

• Actual cost = benefits paid + administrative expenses

Assumptions DO determine the expected costs of a plan

Assumptions DO NOT determine the actual cost of a plan

Where do discrepancies come from?

• Investment returns differ from 7.5 percent

• Salary increases, retirement rates are different from what we expect

• Discrepancies result in gains or losses for the plan


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2011 assumption changes

• The actuarial office does an experience study every few years to keep assumptions current

• Early this year, CalPERS board adopted a change to the price inflation assumption

• What assumptions were changed as a consequence?– The assumed investment return was lowered from

7.75 percent to 7.5 percent– The overall payroll growth was lowered from 3.25

percent to 3.00 percent

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2011 assumption changes• How did the change in assumptions impact my

rate?– Expect increases of 1-2 percent for miscellaneous

plans and 2-3 percent increases in safety plans– CalPERS Board will allow employers to “phase in” the

increase to the rate over the next two years– Agencies should watch for GASB compliance


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New Report Features

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Risk analysis• This is appendix D for non-pooled plans and

Appendix E of Section 2 for pooled plans – Volatility ratios – how sensitive is your plan to real life

experience– Rate projections – a range of what you can expect

given various market returns– Discount rate sensitivity – what your rate look like if the

discount rate were changed


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Termination liabilities• What would it cost for my agency to terminate?

– Agencies now have some idea – Agencies still need to request a pre termination

valuation to initiate the process


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Current and Future Events

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Pension Reform (Key Provisions)

• Mandates benefit formulas for new members• Eliminates one-year final average

compensation• Benefit enhancements are only prospective

(for most available benefit enhancements)• Eliminates air-time purchases• New members pay half the “cost” of the plan

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Pension Reform (Timing)

• Expect to see pension reform data starting June 30, 2013 valuation

• Savings will only be realized as your employees turn over

• Average “cost” for the 2.7%@55 is 21% (fire) and 24% (police)

• Average “cost” for the 2%@62 is 12.5% (miscellaneous)

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GASB 68 Requirements

• GASB 68 replaces GASB 27• Employers will need special GASB valuations

done around the same time your 6/30/2013 valuations are done

• Employers will need to pay for valuations to be done

• Alan Milligan is speaking in detail about this topic tomorrow

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In The Future…• Smoothing Method

– Would affect rates as early as 2014-15

• Assumptions– Both demographic and economic– Would affect rates as early as 2015-16

• Alan Milligan is speaking in detail about these topics tomorrow

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Questions?

Documents

1 Interpreting Actuarial Information Fritzie Archuleta, ASA MAAA Senior Pension Actuary, CalPERS February 21, 2013