Board Retreat – Oct 20, 2011

FCERA 2011 Retirement Board Retreat

October 20, 2011

Paul Angelo, FSA

Andy Yeung, ASA

The Segal Company, San Francisco

5155948v2

FCERA 2011 Board Retreat – Actuarial Topics

Slide 2

Outline of DiscussionPart One Financial Impact of Salary Reductions

Different types of salary reductions Impact on Retirement Benefits Impact on Actuarial Valuation – Costs and Liabilities

Current Actuarial TopicsModel funding policiesUpdate on GASB Exposure Drafts

Part Two Employer Contribution Equity Policy

FCERA 2011 Board Retreat – Actuarial Topics

Slide 3

Different kinds of salary reductions Individual salary reductions

Base salary reductions or furloughs (forced part-time), Other reductions (e.g., lower shift premiums)Permanent or temporary

Explicitly temporary or temporary in practice Workforce reductions

Through layoffs, attrition (hiring freeze) or bothPermanent or temporary

Explicitly temporary or temporary in practice

FCERA 2011 Board Retreat – Actuarial Topics

Slide 4

Remember:

Basic question #1: will individual salary reductions actually reduce future benefit payments

Basic question #2: will total payroll reductions affect the timing of future contributions

C + I = B + EContributions + Investment Income

equals

Benefit Payments + Expenses

FCERA 2011 Board Retreat – Actuarial Topics

Slide 5

Salary Reduction: Impact on Benefits Individual salary reductions (not layoffs) Policy option for temporary reductions: no impact

Continue to pay employer and member contributions on unreduced (full time) salary

Continue to calculate benefit on unreduced salary Permanent reductions mean lower projected benefits

Short term impact more certain than longer termUse current final average salary to calculate benefit until salary increases

resume in the future May accelerate retirements due to smaller future benefit increases

FCERA 2011 Board Retreat – Actuarial Topics

Slide 6

Salary Reduction: Impact on Costs Employer contribution = Normal Cost + amortization of Unfunded

Actuarial Accrued Liability (UAAL) For both Normal Cost and UAAL payments:

First calculate as a dollar amountThen divide by payroll to get NC rate and UAAL rate

These two cost components behave differently when payroll is reducedMust consider impact on each component separatelyGenerally similar impact whether individual salary or workforce reductions

(assuming they are permanent)

FCERA 2011 Board Retreat – Actuarial Topics

Slide 7

Actuarial Value of Assets

Unfunded Actuarial Accrued

Liability

Amortization of Unfunded Actuarial Accrued Liability

Normal Cost

Present Value of Future Normal Costs

Annual Cost

FCERA 2011 Board Retreat – Actuarial Topics

Slide 8

Salary Reduction: Impact on Costs Only considering permanent salary reductions

Individual salary or workforce reductions Normal cost impact

Normal Cost rate generally unchangedNormal Cost dollars reduced

Unchanged rate applied to smaller payroll UAAL cost rate impact

UAAL dollars relatively unchanged (see next slide)UAAL cost rate increased

Unchanged dollars spread over smaller payroll

FCERA 2011 Board Retreat – Actuarial Topics

Slide 9

Salary Reduction: Impact on Costs

Impact of (permanent) salary reduction on UAAL amount – depends on type of salary reductionActuarial gain from individual salary reductions OR layoffs will

reduce the UAAL somewhatNo gain if workforce reduced by attrition

Final UAAL rate impact depends on whether UAAL reduction or UAAL rate increase (prior slide) is greater

Rate impact determined in the following valuation after pay reduction is reflected in the data

FCERA 2011 Board Retreat – Actuarial Topics

Slide 10

Q U E S T I O N S

FCERA 2011 Board Retreat – Actuarial Topics

Slide 11

Current Actuarial Topics Model funding policy for California Public Pension

Plans GASB Exposure Draft update

FCERA 2011 Board Retreat – Actuarial Topics

Slide 12

Employer Contribution Equity Policy FCERA is a cost-sharing multiple employer plan

Different Normal Cost Rate by General/Safety and by tier to recognize different benefit level

Different UAAL Rate by General/Safety onlyContribution rates developed using actuarial assumptions based on

experience from all General/Safety employersActuarial gains/losses from deviation between actual and assumed

experience will decrease/increase UAALChange in UAAL Rate from deviation in experience shared by all

employers within General/Safety

FCERA 2011 Board Retreat – Actuarial Topics

Slide 13

Employer Contribution Equity Policy

Policy adopted by FCERA in 2010 Process to review deviation between actual and assumed experience by

employer. Examples include:

Reduction of an employer’s aggregate payroll overtimeDeviance of compensation practices at an employerHigher incidences of service connected disability experience at an employer

Exclusions: demographic changes (e.g., mortality experience) outside of an employer’s control

FCERA 2011 Board Retreat – Actuarial Topics

Slide 14

Employer Contribution Equity Policy

Policy requirements:FCERA staff to review experience at each employer at

the same time as the triennial experience analysisBoard to consider magnitude of deviation

Conduct further reviewDirect actuary to adjust contribution rate requirements

for specific employers to reflect deviations

FCERA 2011 Board Retreat – Actuarial Topics

Slide 15

Employer Contribution Equity Policy

Possible event for upcoming review:Salary reductions only for County employees and not by

the other employers

FCERA 2011 Board Retreat – Actuarial Topics

Slide 16

Q U E S T I O N S