PERA Solvency Task Force Sensitivity Analysis and Plan Design - - PowerPoint PPT Presentation

May 16, 2019

John Garrett, ASA, FCA, MAAA Principal and Consulting Actuary Jonathan Craven, ASA, FCA, MAAA, EA Consulting Actuary

PERA Solvency Task Force

Sensitivity Analysis and Plan Design Modelling

2

Refresher: Goals of Task Force

• Prepare and present to the Office of the Governor a set of

Recommendations to preserve the defined benefit system

• ffered by PERA by August 30, 2019
• Task Force Recommendation must:

1. Result in the July 1, 2019 Unfunded Actuarial Accrued Liability (UAAL) being fully amortized in 25 years or less using an expected investment return assumption of 7.25% 2. Include employer and employee contribution levels and benefit structure that are actuarially sound, preserve the defined benefit retirement and ensure intergenerational equity for all members 3. Consider the funded levels of the Divisions within PERA

Deterministic Projections

3

• Open-group projections take into account the

future membership

• Deterministic projections assumed all current

assumptions are exactly met

– Investment gains and losses are primary source of volatility – Deterministic projections use investment returns of 7.25% every future year - no investment gains and losses

• Indicates the mid-point of future expected outcomes

4

June 30, 2018 PERA Open Group Projection

2018 and 2043 Labeled

71.6% 74.4%

65.00% 70.00% 75.00% 80.00% 85.00% 90.00% 2018 Baseline

Vacancy Rate Improvements

5

Reducing Cap on Total Pension Accrual

6

$200m Lump Sum Contribution

7

Employee/Employer Contribution Increases

8

Multiplier Reduction for Tier 1

9

Projected Impact on Net Cash Flow

Tier 1 Multiplier Reduction of 0.25%

10

COLAs

• COLA adjustments can make many different

forms.

• Straight reduction (i.e. from 3% fixed to 2% fixed)
• Awarded every 3rd year (i.e. Judges & Magistrates)
• Risk share, awarded contingent on investment

performance and/or funding status

• Other forms.

11

Stochastic Projections

• Asset Liability Model – ALM
• Generates 500 random return outcomes for the next 30

years to model the impact of investment volatility on PERA’s future valuation results

• Investments are by far the largest source of volatility in

future results

• Provides a range of future outcomes

– Median of outcomes or the 50th percentile – mid-point of expectation

– 75th percentile – best likely outcome – 25th percentile – worst likely outcome

12

Baseline ALM Output

13

Baseline ALM Output

14

Baseline ALM Output

15

Contribution Increase ALM Output

16

Contribution Increase ALM Output

17

Risk Shared COLA

18

• Six (6) states have a risk shared feature to their COLA:

Louisiana SERS, Maryland SRPS, Massachusetts SERS and TRB, Nebraska RS, South Dakota RS, Wisconsin RS

• Instead of automatic fixed COLAs, in a Risk Share COLAs are

awarded contingent on investment performance and/or actuarial soundness of the plan.

Source: National Association of State Retirement Administrators (NASRA)

Considerations for PERA Risk Shared COLA

19

• PERA is not fully funded
• Not all gains are shareable for increased post-

retirement benefits so apply funded ratio in determining sharable COLA rates

• Current retired liability with COLA and 7.25% discount

rate is approximately equal to retiree liability without a COLA and a 5.5% discount rate

– Spread equals inherent annual annuity adjustment of 1.75%

• Limit adjustments
• Avoids potential excessive increases and decreases
• Model limits COLA adjustments between 0% and

2.5%

Risk Shared COLA ALM Output

20

Risk Shared COLA ALM Output

21

Takeaways

• There is no silver bullet. No one prescription

solves funding + negative cash flow challenges alone

• Improving bad outcome (bottom 25th percentile

investment outcome) cash flow projections should be considered.

• A balanced combination of prescriptions ought to

be considered.

22