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Contribution Volatility and Asset Smoothing. FCERA Board of Retirement and Fresno County Board of Supervisors Joint Meeting - April 30, 2009 Paul Angelo, FSA & Andy Yeung, ASA The Segal Company San Francisco. 5032871. Current Contribution. Amortization of UAAL. - PowerPoint PPT Presentation
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FCERA Board of Retirement and Fresno County Board of Supervisors
Joint Meeting – April 30, 2009
Contribution Volatility and Asset Smoothing
FCERA Board of Retirement andFresno County Board of Supervisors
Joint Meeting - April 30, 2009
Paul Angelo, FSA & Andy Yeung, ASAThe Segal Company
San Francisco5032871
Slide 2
FCERA Asset Smoothing – April 30, 2009
Actuarial Value of Assets (AVA)
Unfunded Actuarial
Accrued Liability (UAAL)
Amortization of UAAL
Normal Cost
Present Value of Future Normal Costs
Current Contribution
Slide 3
FCERA Asset Smoothing – April 30, 2009
Managing Contribution VolatilityAsset allocation – volatility at the sourceAsset smoothing
Specific to investment return volatilityUAAL amortization – assets and liabilities
More than just asset volatility control Direct contribution rate smoothing
Contribution collar – limits increases Contribution rate phase-in – delays full impact
Slide 4
FCERA Asset Smoothing – April 30, 2009
Actuarial Value of AssetsTo reduce the impact of short term asset volatility, plans use
an Actuarial Value of Assets (AVA) which “smoothes” returns Each year, take the difference between:
Actual return on Market Value of Assets (MVA)Assumed return on MVA (currently 8.00%)
Difference is spread over (typically) five yearsReduces volatility without reducing long term expected return
Slide 5
FCERA Asset Smoothing – April 30, 2009
Example: one good year
Year 1 2 3 4 5 6
MVA return 13% 8% 8% 8% 8% 8%
Deferred (5%)
Recognized 1% 1% 1% 1% 1%
AVA return 9% 9% 9% 9% 9% 8%
Slide 6
FCERA Asset Smoothing – April 30, 2009
Example: one good, then one bad year
Year 1 2 3 4 5 6 7
MVA return 13% 3% 8% 8% 8% 8% 8%
Deferred (5%) 5%
1% 1% 1% 1% 1% Recognized (1%) (1%) (1%) (1%) (1%)
AVA return 9% 8% 8% 8% 8% 7% 8%
Slide 7
FCERA Asset Smoothing – April 30, 2009
The one thing to remember:
Actuarial valuation determines the current or “measured” cost, not the ultimate cost
Assumptions and funding methods affect only the timing of costs
C + I = B + EContributions + Investment Income
equalsBenefit Payments + Expenses
Slide 8
FCERA Asset Smoothing – April 30, 2009
Asset Smoothing MechanicsWhen MVA return is greater than assumed
Smoothing “defers gains” Smoothed value (AVA) is less than MVA UAAL and contributions are larger
When MVA return is less than assumed Smoothing “defers losses” Smoothed value (AVA) is greater than MVA UAAL and contributions are smaller
Slide 9
FCERA Asset Smoothing – April 30, 2009
Plan Amount notyr end recognized
thru Dec. thru JuneJun-07 $156,975 $70,522 80% 90% $189,050Jun-06 $61,745 ($26,692) 60% 70% $18,363Jun-05 $111,658 ($56,435) 40% 50% $16,446Jun-04 $141,500 ($42,934) 20% 30% $15,420Jun-03 ($162,072) $67,831 0% 10% $6,783Net GAINS not yet recognized $246,061
Market Value of Assets (MVA) $2,938,652MINUS GAINS not yet recognized ($246,061)Actuarial Value of Assets (AVA) $2,692,591AVA/MVA ratio 92%
Percent notrecognized
Market ValueGain/(loss)
FCERA Actuarial Value of Assets as of June 30, 2007(Market G/L measured in six month increments)
Slide 10
FCERA Asset Smoothing – April 30, 2009
Plan Amount notyr end recognized
thru Dec. thru JuneJun-08 ($103,817) ($321,390) 80% 90% ($372,305)Jun-07 $156,975 $70,522 60% 70% $143,550Jun-06 $61,745 ($26,692) 40% 50% $11,352Jun-05 $111,658 ($56,435) 20% 30% $5,401Jun-04 $141,500 ($42,934) 0% 10% ($4,293)Net LOSSES not yet recognized ($216,295)
Market Value of Assets (MVA) $2,726,605PLUS LOSSES not yet recognized $216,295Actuarial Value of Assets (AVA) $2,942,900AVA/MVA ratio 108%
Percent notrecognized
Market ValueGain/(loss)
FCERA Actuarial Value of Assets as of June 30, 2008(Market G/L measured in six month increments)
Slide 11
FCERA Asset Smoothing – April 30, 2009
Plan Amount notyr end recognized
thru Dec. thru JuneJun-09 ($981,300) $0 80% 90% ($785,040)Jun-08 ($103,817) ($321,390) 60% 70% ($287,263)Jun-07 $156,975 $70,522 40% 50% $98,051Jun-06 $61,745 ($26,692) 20% 30% $4,341Jun-05 $111,658 ($56,435) 0% 10% ($5,644)Net LOSSES not yet recognized ($975,554)Market Value of Assets (MVA) $1,961,700PLUS LOSSES not yet recognized $975,554Actuarial Value of Assets before corridor $2,937,254Actuarial Value of Assets AFTER corridor $2,354,040AVA/MVA ratio (before corridor) 150%
Percent notrecognized
Market ValueGain/(loss)
FCERA Actuarial Value of Assets as of June 30, 2009ESTIMATED 2008/2009 Market Value return = -28%
Slide 12
FCERA Asset Smoothing – April 30, 2009
Asset Smoothing and “MVA Corridor” Many plans (incl. FCERA) limit how far the AVA can get from the MVA by
limiting the AVA ratio Typical 20% “MVA corridor” means the AVA must be between 120% and
80% of MVA Maximum deferred gain or loss is 20% of MVA Hitting the MVA corridor effectively stops smoothing
MVA corridor will have major impact starting in 2009 For FCERA, 6/30/2009 AVA is 150% of MVA Immediate cost increase with MVA corridor: 15.0% Immediate cost increase w/o MVA corridor: 3.3%
Slide 13
FCERA Asset Smoothing – April 30, 2009
$1.0
$2.0
$3.0
$4.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Valuation Date (6/30)
Asse
ts ($
in B
illio
ns)
MVAAVA with corridorAVA w/o corridor
FCERA Historical MVA and AVA
Ratio of AVA to MVA (before 20% MVA Corridor)
86% 86% 95% 95% 116% 116% 106% 100% 97% 92% 108% 150%
Slide 14
FCERA Asset Smoothing – April 30, 2009
Actuarial Standards of Practice #44ASOP 44 focuses on two key features
How close does AVA stay to MVARatio of AVA to MVA (“AVA Ratio”)
How long before AVA returns to MVASmoothing period
ASOP 44 also provides some structure If “likely” to be “reasonable”, both are required If “sufficiently close” or “sufficiently short” then only one or the other is
required
Slide 15
FCERA Asset Smoothing – April 30, 2009
Longer Asset Smoothing Period?Possible Systemic Reasons
Longer business/economic cycles Greater actual market volatility (assets) Greater sensitivity to contribution rate volatility Greater asset volatility relative to payroll
Higher funded percentages More mature plan, larger benefit levels
Practical Reasons Reduce immediate impact of market losses Delay full impact of market losses
Slide 16
FCERA Asset Smoothing – April 30, 2009
5 year Smoothing and MVA Corridor Under ASOP 44, is 5 years “sufficiently short”?
Widespread use, industry opinions Also consider cash flow, employer ability to pay
If any action taken, consider wider MVA corridor Considerations beyond just complying with ASOP Maintains policy of some control on AVA vs MVA
Important if also considering longer smoothing Use actual 5 yr smoothing AVA ratio as a guide
For FCERA, consider 130% or 140%Fully aware of current and future implications
Slide 17
FCERA Asset Smoothing – April 30, 2009
Longer Smoothing and MVA Corridor Longer smoothing means larger AVA ratios Longer period increases need for MVA corridor Possible framework for policy alternatives
5 year smoothing: corridor based on actual AVA ratio Longer periods: use this corridor or narrower
Allows more time to get to ultimate contribution rateDoes not lower immediate rate impact
For longest periods (10 - 15 years) use 120%-130%
Slide 18
FCERA Asset Smoothing – April 30, 2009
Q U E S T I O N S
Slide 19
FCERA Asset Smoothing – April 30, 2009
20%
30%
40%
50%
60%
70%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Valuation Date (6/30)
Perc
ent o
f Pay
roll
Scenario 1-A: 80%-120% CorridorScenario 1-B: 70%-130% CorridorScenario 1-C: 60%-140% CorridorScenario 1-D: No Corridor
5 Year Smoothing Period (Exhibit 3-1)
108% 150% 144% 128% 113% 101% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Ratio of AVA to MVA(No Corridor) Shown Above
-28% return for 2008/2009, 0% for 2009/2010 and then 8% per year
Employer Contribution Rates
Slide 20
FCERA Asset Smoothing – April 30, 2009
20%
30%
40%
50%
60%
70%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Valuation Date (6/30)
Perc
ent o
f Pay
roll
Scenario 2-A: 80%-120% CorridorScenario 2-B: 70%-130% CorridorScenario 2-C: 60%-140% CorridorScenario 2-D: No Corridor
7 Year Smoothing Period (Exhibit 3-2)
108% 153% 150% 137% 124% 114% 107% 101% 100% 100% 100% 100% 100% 100% 100%
Ratio of AVA to MVA(No Corridor) Shown Above
-28% return for 2008/2009, 0% for 2009/2010 and then 8% per year
Employer Contribution Rates
Slide 21
FCERA Asset Smoothing – April 30, 2009
20%
30%
40%
50%
60%
70%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Valuation Date (6/30)
Perc
ent o
f Pay
roll
Scenario 3-A: 80%-120% CorridorScenario 3-B: 70%-130% CorridorScenario 3-C: 60%-140% CorridorScenario 3-D: No Corridor
10 Year Smoothing Period (Exhibit 3-3)
108% 155% 155% 144% 132% 123% 117% 112% 107% 104% 100% 100% 100% 100% 100%
Ratio of AVA to MVA(No Corridor) Shown Above
-28% return for 2008/2009, 0% for 2009/2010 and then 8% per year
Employer Contribution Rates
Slide 22
FCERA Asset Smoothing – April 30, 2009
20%
30%
40%
50%
60%
70%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Valuation Date (6/30)
Perc
ent o
f Pay
roll
Scenario 4-A: 80%-120% CorridorScenario 4-B: 70%-130% CorridorScenario 4-C: 60%-140% CorridorScenario 4-D: No Corridor
12 Year Smoothing Period (Exhibit 3-4)
108% 156% 157% 146% 135% 127% 121% 116% 112% 108% 105% 102% 100% 100% 100%
Ratio of AVA to MVA(No Corridor) Shown Above
-28% return for 2008/2009, 0% for 2009/2010 and then 8% per year
Employer Contribution Rates
Slide 23
FCERA Asset Smoothing – April 30, 2009
20%
30%
40%
50%
60%
70%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Valuation Date (6/30)
Perc
ent o
f Pay
roll
Scenario 1-D: No CorridorScenario 2-D: No CorridorScenario 3-D: No CorridorScenario 4-D: No Corridor
Various Smoothing Periods – No Corridor (Exhibit 6)
-28% return for 2008/2009, 0% for 2009/2010 and then 8% per year
Employer Contribution Rates
Slide 24
FCERA Asset Smoothing – April 30, 2009
20%
30%
40%
50%
60%
70%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Valuation Date (6/30)
Perc
ent o
f Pay
roll
Scenario 1-A: 80%-120% CorridorScenario 2-A: 80%-120% CorridorScenario 3-A: 80%-120% CorridorScenario 4-A: 80%-120% Corridor
Various Smoothing Periods – 120% Corridor (Exhibit 7)
Employer Contribution Rates
-28% return for 2008/2009, 0% for 2009/2010 and then 8% per year
Slide 25
FCERA Asset Smoothing – April 30, 2009
20%
30%
40%
50%
60%
70%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Valuation Date (6/30)
Perc
ent o
f Pay
roll
Scenario 1-B: 70%-130% CorridorScenario 2-B: 70%-130% CorridorScenario 3-B: 70%-130% CorridorScenario 4-B: 70%-130% Corridor
Various Smoothing Periods – 130% Corridor (Exhibit 8)
Employer Contribution Rates
-28% return for 2008/2009, 0% for 2009/2010 and then 8% per year
Slide 26
FCERA Asset Smoothing – April 30, 2009
20%
30%
40%
50%
60%
70%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Valuation Date (6/30)
Perc
ent o
f Pay
roll
Scenario 1-C: 60%-140% CorridorScenario 2-C: 60%-140% CorridorScenario 3-C: 60%-140% CorridorScenario 4-C: 60%-140% Corridor
Various Smoothing Periods – 140% Corridor (Exhibit 9)
Employer Contribution Rates
-28% return for 2008/2009, 0% for 2009/2010 and then 8% per year
Slide 27
FCERA Asset Smoothing – April 30, 2009
20%
30%
40%
50%
60%
70%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022Valuation Date (6/30)
Perc
ent o
f Pay
roll
Scenario 1-D: No CorridorScenario 2-D: No CorridorScenario 3-D: No CorridorScenario 4-D: No Corridor
Various Smoothing Periods – No Corridor (Exhibit 6)
-28% return for 2008/2009, 0% for 2009/2010 and then 8% per year
Employer Contribution Rates
Slide 28
FCERA Asset Smoothing – April 30, 2009
Q U E S T I O N S