p 3 actuaries you can understand 1 introduction to the actuarial valuation: funding and assumptions...
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1P3 Actuaries you can
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Introduction to the Actuarial Valuation:
Funding and Assumptions
January 12, 2006
P
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Outline
• Basic Concepts and Terminology
• Developing Contributions
• Economic Assumptions
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Long Term Perspective
Contributions
Investment Return
Benefit Payments
Expenses
Money In = Money Out
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Actuarial Methods
• Liabilities
• Assets
• Amortization
• Contribution Smoothing
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Present Value (PV)
The money you need now to pay, using that money and earnings on that money, benefits you expect to pay in the future.
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PV of Projected Benefits (PVB)
Present
Value of
Projected
Benefits
Assumptions
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Actuarial Accrued Liability (AAL)
Present Value of
Future Normal
Costs
Actuarial
Accrued
L iability
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Competing GoalsDampen Volatility
Track Asset Value over
the long-term
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Current Approach
• Difference between expected and actual investment return spread over 5 years
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Current Approach
• Expected Return– Calculate semi-annually– Base on market value– Use assumed investment return at that
time
• Set 20% Corridor around Market Value
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Unfunded Actuarial Accrued Liability (UAAL)
Assets
UAALPresent
Value of
Future
Normal
Costs
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This Year’s Contribution
Present Value
of
Future Normal
CostsNC
UAAL Amortization
Assets
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Member Contributions
BASIC
General
COLA
Supplemental
BASIC
Safety
COLA
SupplementalProposed Legislation
Based on Valuation
From 37 Act
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Basic – General MembersTier 1
• 31621.5. … the normal rate of contribution … shall be such as will provide an average annuity at age 60 equal to one 200th of the final compensation of members …
BASIC31621.5
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Basic – General MembersTier 2
• 31621.4. … the normal rate of contribution … shall be such as will provide an average annuity at age 60 equal to one 240th of the final compensation of members …
BASIC31621.4
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Basic – Safety MembersTier 1
• 31639.5. The normal rate of contribution shall be such as will provide an average annuity at age 50 equal to one 200th of the final compensation…
BASIC31639.5
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Basic – Safety MembersTier 2
• 31639.5. The normal rate of contribution shall be such as will provide an average annuity at age 50 equal to one 200th of the final compensation…
BASIC31639.5
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COLA Contributions
• 31873. Any increases in contributions shall be shared equally between the county or district and the contributing members …
COLA
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COL Contributions
• FCERA Board previously decided that “Any increases in contributions” means contributions for both Normal Cost and Unfunded Actuarial Accrued Liability.
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Supplemental Contribution
• …to the extent undistributed earnings are unavailable in the future to make additional contributions on members’ behalf…then the employer and employee contribution rates shall be increased …
Supplemental
31627
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Supplemental Contribution
• Lawyers not yet in agreement
• Look to proposed legislation for guidance
• Members electing Tier 2 would not make Supplemental Contributions
Supplemental
31627
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AB 2063 – General Members
• …the normal rates of contribution… shall be rates that provide an average annuity at age 55 years equal to the fraction of one 160th of the final compensation …
Supplemental
31627
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AB 2063 – Safety Members
• The normal rates of contribution… shall be rates that will provide an average annuity at age 50 years equal to the fraction of one 160th of the final compensation …
Supplemental
31627
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Actuarial Assumptions
• What are they?
• How do we set them?
• What are others doing?
• What are our recommendations?
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Economic Assumptions
• Describe impact on money
• InflationSalary IncreasesReturn on InvestmentsCost-of-Living Adjustments
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Demographic Assumptions
• Describe member movement from one category to another
• TerminationDisabilityRetirementDeath
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Economic Assumption Model
Inflation Inflation Inflation
Merit & Longevity
Real Investment
Return
COLA (limited to 3.0%)
Salary Increase
Investment Return
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Annual Inflation Rate
-4%
0%
4%
8%
12%
16%
20%
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Period Ended June 30
Per
cen
t C
han
ge
in C
PI
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Average Inflation Rate
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
1970
1975
1980
1985
1990
1995
2000
2005
30-Year Period Ended June 30
Ave
rag
e A
nn
ual
Infl
atio
n
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Inflation Spike: 1974-1982
0%
4%
8%
12%
16%
20%
1974
1975
1976
1977
1978
1979
1980
1981
1982
Period Ended June 30
Per
cen
t C
han
ge
in C
PI
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Average Inflation after Removing Spike
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
1970
1975
1980
1985
1990
1995
2000
2005
30-Year Period Ended June 30
Ave
rag
e A
nn
ual
Infl
atio
n
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Inflation Assumptionsin 37 Act Systems
2
10
3 3
1
0
3
6
9
12
3.75
%
4.00
%
4.25
%
4.50
%
4.75
%
Inflation Assumption
Num
ber
of S
yste
ms
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Average Inflation Assumptionin 37 Act Systems
4.12%4.08%
4.28%
4.38%4.38%4.43%
3.50%
4.00%
4.50%
1999 2000 2001 2002 2003 2004
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Inflation Assumption
• Current4.00%
• Reasonable Range 3.00% - 5.00%
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Real Investment Return
• Over 90% of Real Investment Return due to asset allocation
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FCERA Allocation Targets
Stocks – Domestic 38%
Stocks – International 18%
Bonds – Global 3%
Bonds – Core 28%
Cash & Equivalents 2%
Private Markets 11%
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Average Annual Real Returnsby Asset Class
(1/1/1926-6/30/2005)
Large Company Stocks 7.3%
Small Company Stocks 9.6%
Long-term Corporate Bonds 3.0%
Long-term Government Bonds 2.5%
Intermediate-term Government Bonds 2.3%
US Treasury Bills 0.7%Ibbotson Associates, Inc.
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Real Investment Return in 37 Act Systems
1 1
32
3
7
1 1
0
3
6
9
3.25% 3.50% 3.66% 3.75% 3.90% 4.00% 4.16% 4.25%
Real Investment Return Assumption
Num
ber
of S
yste
ms
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Average Real Investment Assumption
3.90%
3.96%
3.80%3.81%3.82%
3.73%
3.50%
3.75%
4.00%
1999 2000 2001 2002 2003 2004
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Real Investment Return
• Current4.16%
• Reasonable Range 3.50% - 4.50%
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Nominal Investment Return in 37 Act Systems
1
3
1
2
5 5
2
0
3
6
7.50% 7.75% 7.80% 7.90% 8.00% 8.16% 8.25%
Investment Return Assumption
Num
ber
of S
yste
ms
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Average Effective Investment Return
8.00%
8.04%8.07%
8.19%8.20%8.15%
7.75%
8.00%
8.25%
1999 2000 2001 2002 2003 2004
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Nominal Investment Return
• Current8.16%
• Reasonable Range 7.00% - 8.25%
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