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NCPERS PUBLIC SAFETY CONFERENCE 2009 Presented by Ed Friend & Greg Stump, EFI Actuaries October 13, 2009 Actuarial Issues Affecting Public Pensions in.

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Presentation on theme: "NCPERS PUBLIC SAFETY CONFERENCE 2009 Presented by Ed Friend & Greg Stump, EFI Actuaries October 13, 2009 Actuarial Issues Affecting Public Pensions in."— Presentation transcript:

1 NCPERS PUBLIC SAFETY CONFERENCE 2009 Presented by Ed Friend & Greg Stump, EFI Actuaries October 13, 2009 Actuarial Issues Affecting Public Pensions in the Current Economic Turmoil

2 Presentation Agenda 2 1. Public Plans Committee 2. Asset Smoothing Methods 3. “Market Values” 4. Actuarial Assumptions, Experience, and Sustainability

3 Background GASB Invitation to Comment Suggestions for Improvements in Accounting Public Plans Committee 3

4 Spreading gains/losses “Corridors” Asset Smoothing Methods 4

5 Pay Now or Pay Later 5  Ideally costs would be a level % of pay year after year  This is unfortunately not possible  How much can contributions be smoothed?  Asset smoothing  Amortization of gains and losses

6 Asset Smoothing: Spreading 6  Example: 5 year smoothing  Gains/(Losses) based on returns above or below that assumed  Year 1: $10 M gain  Year 2: $20 M loss  Year 3: $5 M gain  Year 4: $80 M loss  Year 5 Market Value = $600 Million Actuarial Value = $667 Million (recognizing 1/5 of each prior year’s gain or loss at a time) Year 4 loss will be fully recognized by Year 9

7 Asset Smoothing: Years 7  5 year smoothing was the standard for a long time  3 year smoothing not uncommon  Now, systems are looking at 7, 10, or even 15 year smoothing  Same gain/loss recognition process

8 Asset Smoothing: Years 8

9 Asset Corridors 9  “Corridor” = range of values surrounding market value of assets, within which actuarial value is constrained  Example: 20% corridor means actuarial value cannot be outside of the range 80%-120% of market value  Came into play for majority of plans in 2008 or 2009

10 Asset Corridors 10  80%-120% corridor was most common  Many systems are considering or using a wider corridor to soften the blow of recent losses  25%, 30%, higher  Must be very careful about size of corridor (can be too high)  “Hitting the corridor” (at 120% level) means that 20% of losses are not yet recognized.

11 Facts and Myths What is Market Value? 11

12 “Market Values” 12  Assets – Value on books: amount of $ assets expected to be worth in open market.  “Liabilities” – no true definition of market value; not relevant for public plans  PPC has opposed the use of so-called MVL (“Market Value of Liabilities”) primarily due to lack of relevance/ usefulness

13 Before the crash After the crash Actuarial Assumptions, Experience, and Sustainability 13

14 Chart 1: Before the Crash 14 Assumed Return A YearActual Return ------ 0A 1A 2A 3A 4A 5A 6A 7+A

15 Chart 2: After the Crash 15 Assumed Return AA Year Actual Return ------ - - - - - 0-30%A 1AA 2AA 3AA 4AA 5AA 6AA 7+AA

16 What Next? Testing the Sensitivity of contribution rates to various investment return scenarios Actuarial Assumptions, Experience, and Sustainability 16

17 Chart 3: Softening the Blow 17 Assumed Return AA Year Actual Return ------ - - - - - 0-30% 1AA 2AA 3AA 4AA 5AA 6AA 7+AA

18 Chart 4: Recovery of Half of the Initial 30% Loss, followed by gains 18 Assumed Return AA Year Actual Return ------ - - - - - 0-30% 121.5%*A 2A+2%A 3 A 4 A 5 A 6 A 7+AA Graph reflects smoothing and extended amortization as in Chart 3 * 21.5% return in year 1 represents a recovery of half of the year 0 losses, i.e. [(1-.3)x(1+.215) =.85]

19 Chart 5: Half Recovery, then 0% for 2 Years 19 Graph reflects smoothing and extended amortization as in Chart 3 Assumed Return AA Year Actual Return ------ - - - - - 0-30% 121.5%*21.5% 20%A+2% 30%A+2% 4A 5A 6A 7+AA * 21.5% return in year 1 represents a recovery of half of the year 0 losses, i.e. [(1-.3)x(1+.215) =.85]

20 Chart 6: Half Recovery, then 0% for 2 Years, followed by four years of gains 20 Graph reflects smoothing and extended amortization as in Chart 3 Assumed Return AA Year Actual Return ------ - - - - - 0-30% 121.5%*21.5% 20% 3 4A+2.5%A 5 A 6-7A+2.5%A 8+AA * 21.5% return in year 1 represents a recovery of half of the year 0 losses, i.e. [(1-.3)x(1+.215) =.85]

21 Chart 7: Recovery Reversed by end of year 21 Graph reflects smoothing and extended amortization as in Chart 3 Assumed Return AA Year Actual Return ------ - - - - - 0-30% 10%21.5%* 20%A+2% 30%A+2% 4-6A+2% 7 A 8 A 9+AA * 21.5% return in year 1 represents a recovery of half of the year 0 losses, i.e. [(1-.3)x(1+.215) =.85]

22 Chart 8: Long Term: Actual < Expected 22 Graph reflects smoothing and extended amortization as in Chart 3 Assumed Return AA Year Actual Return ------ - - - - - 0-30% 1A - 1%A 2 A 3 A 4 A 5 A 6 A 7+A - 1%A

23 Chart 9: Anticipating Lower Returns, Long Term 23 Graph reflects smoothing and extended amortization as in Chart 3 Assumed Return A-1%A Year Actual Return ------ - - - - - 0-30% 1A – 1%A 2A - 1%A 3 A 4 A 5 A 6 A 7+A - 1%A

24 Chart 10: Lower Returns Too Conservative? 24 Graph reflects smoothing and extended amortization as in Chart 3 Assumed Return A-1% Year Actual Return ------ - - - - - 0-30% 1AA - 1% 2A 3A 4A 5A 6A 7+A A - 1%

25 Ed Friend: edfriend@efi-actuaries.comedfriend@efi-actuaries.com Greg Stump: gstump@efi-actuaries.comgstump@efi-actuaries.com Thank You 25


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