The State of Retirement Plans May, 2011 David S. Boomershine

2 Background Recent Federal Legislative Changes Recent Accounting Standards Changes Significant Plan Asset Losses Recent Funding Relief Funding Relief Alternatives Survey Says Resulting Trends/Future Plan Prospects Current Public Sector Plan Debate Conclusions Agenda

3 Competitive Attract employees Tax break Reward employees/employee appreciation So employees can retire Contribute to society Background Employers sponsor retirement plans – why?:

4 Ideal employer sponsored retirement program: –Defined Benefit Plan (DB) – Base –Defined Contribution Plan (DC)– Supplemental Combined program provides blend of security, flexibility for employees Background

5 Driving forces: Federal legislation Accounting rules Asset performance Cost/liability volatility Economics Stupidity Background Employers plans are changing – why?:

6 Recent Events: –Increased, restrictive federal legislation –More onerous accounting regulation –And then, asset losses too! This means……Retirement Crisis! – Right? –Yes! Freeze the Plans! –Well, change them somewhat ….. –Well, maybe ….? Let’s Review! Employer Plans

7 Pension Protection Act (PPA) – Impacts Private Sector –Defined Benefit Plans –Defined Contribution Plans –Hybrid Plans Other – minor changes Recent Federal Legislative Changes

8 Defined Benefit Plans (DB) –Funding Rules: Long term to short term funding – Key! –Amortize Unfunded Liability over seven years –Sets valuation interest rate basis: currently around 6% –Only allows 2 year smoothing for investment gains/losses (vs. 5 years) –Pension Benefit Guaranty Corporation (PBGC) premiums –Many other provisions –Net major result: increased cost/liability volatility! Recent Federal Legislative Changes-PPA

9 Defined Contribution Plans (DC) –Vesting –Automatic Contribution Arrangements (ACA) – optional –Default investment options – optional –Investment advice –Combined DB/DC plan in 2010 – for 500 employees or less Recent Federal Legislative Changes-PPA

10 Hybrid Plans –“New Age” Discrimination Testing –Some past design issues resolved prospectively –Vesting –More viable plan design option now? Recent Federal Legislative Changes-PPA

11 Private Sector: FAS 158 –Covers Pension and Retiree Medical plans –Increases Balance Sheet Liability –Compares quasi-future actuarial liability vs. current plan asset value – Key! Public Sector: GAS 45 –Covers Retiree Medical plans –Account for annual cost, current liability –Funding is not required, but strongly encouraged Unfunded liability growth Discount rate Bond rating agencies Recent Accounting Standards Changes

12 DB Plans –Asset Losses: 20% - 35% of Market Value in 2008 –Increase in Unfunded Actuarial Liability –Significant funding requirement increases DC Plans: –Account balance losses –Employees delaying retirement Significant Plan Asset Losses

13 Investment consultants say: –There will be an asset recovery –When? ……..? 3 to 7 years? –Returns: 8% + long term, including recovery Crisis is short term, temporary - ? –Depends on the economy Significant Plan Asset Losses

14 Private Sector vs. Public Sector Impacts: DB PlansDC Plans IssuePrivate SectorPublic SectorPrivate Sector Pension Retiree MedicalPension Retiree Medical Federal Legislation Accounting Asset Losses Result: Increased volatility for Private Sector Pension Plans Let’s Review:

15 Plan Asset gains/losses – issue exacerbated by PPA Valuation interest rate basis – issue exacerbated by PPA Accounting Discount Rate basis – set by FAS Sources of Cost/Liability Volatility - DB Plans

16 Impact Private Sector Pension Plans only IRS final PPA funding regulations – relaxed funding rules for 2009: 1 year only Relaxed funding rules passed in 2010: –Amortization of unfunded liability: up to 15 years –Short term basis - use for two years Limited Relief – Lose relief if: –“Excessive” compensation to employees –“Excessive” payments to shareholders –Needed relief for prior year actuarial losses > KEY Net Result: Where’s the relief? Recent Pension Funding Relief Passed

17 Impact Public Sector: –Pension Plans: due to asset/losses –Retiree Medical: due to new accounting requirements Alternatives (check State restrictions) –Amortization basis – Level % of pay –Amortization period – to 30 years –Asset smoothing corridor – to 130% of Market Value –Asset smoothing – to 10 years –Phase-in funding increase: 5 years? Utilize on short term basis Ability to recover on a long term basis Funding Relief Alternatives

18 Recent International Foundation of Employee Benefits Survey - Pension Plans: Impact of the Financial Crisis, September 2009 Top Concerns: 1.Market losses/underfunded Plans 2.Decreased job security 3.Changes to health care system 4.Delayed Retirement Eliminated employer-sponsored retirement benefits Survey Says

19 Other Results Worst of financial crisis over? – Split decision Slower recovery? – Yes Long Term Impact of Crisis –DB Plans: Moderate –DC Plans: Moderate DB Plan investment policy changes Survey Says

20 DB Plan Changes: Reviewed assumptions/plan design-70% Discontinued benefits -9% Closed plan to new hires -9% Update: Public Sector: ½ of States have “Soft Frozen”/ closed their DB plans – new plans for new hires Public Sector – increased employee contributions Survey Says

21 DC Plan Changes: Reduce/suspend match-8% Restore match within 12 months-44% Plan Participants’ Actions: Decrease/stop contributions -80% Reduce equity exposure -42% Hardship withdrawals - 45% Loans -39% Postponing retirement - 51% Survey Says

22 Increased communications: Financial Education campaign More plan design analysis – short term Funding relief – short term Increased plan costs Some more frozen DB plans – due to volatility Increased funding – Public Sector Retiree Medical plans Employer matching restoration Employee savings increase/decrease – depends on economic recovery Investment re-balancing DB to DC plan trend continues – DC plans with DB/annuity features? More DB/DC emphasis re-balancing? More hybrid plans? Finally-postponed retirement -phased retirement Resulting Trends/Future Plan Prospects

23 Private Sector: some past design issues resolved prospectively under PPA Primarily Cash Balance Plan – DB plan that looks like a DC plan More viable option now? Other Approach: Provide a basic DB plan with a supplemental DC plan Hybrid Plans

24 DC Plans Private SectorPublic SectorOther Trends Matching Contributions – reinstated Automatic Enrollment – 40% adopted - Increases participation - Improves nondiscrimination testing Annuity option in DC plans? –Public relations campaign –Federal government involvement –Default option? Some increased interest in DC, Hybrid plans under “Soft Freeze” approach Delayed Retirement Phased Retirement

25 Current Public Sector Plan Debate June, 2010

26 Three Phases for Pension and OPEB Plans Baseline Actuarial Cost Funding Alternatives Plan Design Alternatives Concerns/Interested Parties: Budgets Taxpayers Unions Bond Rating Agencies Current Issue: Government Budgets cannot afford current Plans/volatility Actuarial Cost Viewpoint -

27 Actuarial Valuation Process Other Post Employment Plans (OPEB) – Retiree Medical: Major Cost Drivers Actuarial Assumptions - Discount rate assumption (for DB plans also) - Healthcare trend rate assumption - Retirement Plan Design - Retiree cost sharing - Eligibility (Retirement) - Spousal coverage

28 Increase employee contribution levels Retirement eligibility COLA’s Revise benefit structure Final average pay DROP’s Other Soft Freeze – State Protections DC Plans Hybrid Plans Pension Plan Design Changes – significant cost/liability impact: Plan Design Changes

29 Private Sector – Changes have calmed down Public Sector – Changes are raging! Some recovery going on Overall – not good Getting attention Conclusions – The State of Retirement Plans?

30 ? Questions