tmrs rate stabilization part of the toolkit
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TMRS Rate Stabilization Part of the Toolkit. October 8, 2012 Mark Randall. Where have we come and where are we headed?. Evolution is good. Our retirement plan is that when you get too old to fish, they cut you up and use you for bait. Change in Funding Method. - PowerPoint PPT PresentationTRANSCRIPT
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Copyright © 2012 GRS – All rights reserved.
TMRS Rate Stabilization
Part of the Toolkit
October 8, 2012Mark Randall
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Where have we come and where are we headed?
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Evolution is good
Our retirement plan is that when you get too old to fish, they cut you up and use you for bait.
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Change in Funding Method
In 2007, the TMRS Board of Trustees approved the change to the Projected Unit Credit (PUC) actuarial funding method
►Change was needed to improve funded ratios long term and to pre-fund annually repeating benefit enhancements:• Cost-of-Living Adjustments (COLAs or
Annuity Increases)• Updated Service Credits (USC)
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Ad hoc Benefit Enhancements
These are additional, one time enhancements granted which impact past accruals only►COLAs and Updated Service Credits►These benefits were not accrued while
services were received, therefore, were not advance funded for
In June 2009, Board approved that all future ad hoc benefit enhancements be amortized over a 15 year period with a level dollar payment schedule
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Diversification and Restructuring
HB 360 – 2009 Legislative Session – Diversification
SB 350 – 2011 Legislative Session – Restructuring
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1.4% average increase in active members since 20017.4% average increase in retired members since 2001There are currently 2.3 actives for every retiree, down from 4.1 in 2001
Active Members & Retired Members
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
20,000
40,000
60,000
80,000
100,000
120,000
88,027 90,930 93,780 98,440 102,419 101,151
21,527 25,28729,970 34,510 38,980
44,067
Active Members Retired Members
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Summary of System-wide Results
December 31, 2011
December 31, 2010
December 31, 2009
Actuarial Accrued Liability $21,563 $20,481 $21,525
Actuarial Value of Assets $18,347 $16,986 $16,306Unfunded Actuarial Accrued Liability $3,216 $3,495 $5,219
Funded Ratio 85.1% 82.9% 75.8%
Average Funding Period (Years) 25.6 26.8 27.8
Minimum Contribution Rates:
Straight Average 8.20% 8.04% 9.20%
Payroll Weighted Average 12.94% 12.92% 14.25%
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$ amounts above are in Millions
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Recent Asset Performance
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
7.00% as-sumption
6.95% actual
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Market and Actuarial Values of Assets
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
$0.0
$5.0
$10.0
$15.0
$20.0$ amounts are in Billions
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Projected Contributions versus Benefits and Refunds
$Millions
* Includes member and employer contributions** Includes administrative and investment expenses
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019$0
$400
$800
$1,200
$1,600
Contributions - Phase In * Benefits & Refunds **
Investment Earnings are helping to pay the benefits!
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Funded Ratio Percentages
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201160.0%
70.0%
80.0%
90.0%85.0% 84.2%
82.6% 82.8% 82.7% 82.1%
73.7% 74.4%75.8%
82.9%85.1%
The System-wide Funded Ratio has increasedfour years in a row to its highest level in 10 years
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Projected Funded Ratio
20012002 20032004 20052006 200720082009 20102011 20122013 201420152016 2017201860.0%
70.0%
80.0%
90.0%
84.2%82.8% 82.1%
74.4%
82.9%85.1% 85.7%87.0%
88.4%89.6%
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Historical Payroll WeightedTMRS Contribution Rates
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
10.60% 10.80% 10.80% 11.20%12.00% 11.92% 12.15% 12.52%
13.46%14.16% 14.50%
12.92% 12.94%
Contribution Rate
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An example of the antithesis of Rate Stabilization …
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Example of why adopting an ad hoc COLA year after year is not a good thing
2011 2012 2013 2014 2015 2016 2017 2018 2019 20206%
8%
10%
12%
Projected Full Rate
Valuation as of December 31,
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Example of why adopting an ad hoc COLA year after year is not a good thing
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2011 2012 2013 2014 2015 2016 2017 2018 2019 202070%
80%
90%
100%
110%
Projected Funded Ratios
Valuation as of December 31,
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Sustainability is survival
DB Plan
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In Summary System-wide Funded Ratio continues
to increase►Overall asset and liability gains
Most cities are now paying their Full Rate
Expectation is for an increasing funded ratio over the next few valuations and continued stability in the contribution rates
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Replacement Ratios What percent of working income is
sustained after retirement? What is an adequate income level in
retirement? Key factors:
►Health care costs – HUGE and highly variable
►Inflation►Longevity►Lifestyle
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What replacement ratio in retirement to maintain current standard of living?
“Rule of thumb”: 80% Social Security?
►Roughly 20% to 40% How much have you saved? Your employer’s (all of them) plan?Together, these sources form a
“replacement ratio”, or percentage of working income that employees can rely on in retirement
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Replacement income for Jane Smith
Retirement Age: 65 Gross income: $55,000 Typical calculations show an
adequate income in retirement of $41,600 – roughly 76% replacement ratio
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Replacement income for Jane Smith
Why is it less?► Retirees no longer pay FICA taxes on their income to
Social Security and Medicare► Federal income taxes on Social Security benefits are
lower than those on employment income► Jane no longer has to save for retirement, which
means a larger share of her income can go to current consumption
► Major expenses may also be eliminated or reduced, such as housing (if a mortgage is paid off) and children’s education costs
► Some expenses related to work (such as clothing and transportation) may be lower in retirement
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Replacement income for Jane Smith
But …►By far, the largest factor not
specifically addressed by these models is health care costs, which are typically a major expense in retirement• For a person with “average health care
expenses”, Jane may need around 100% income replacement to maintain her standard of living and pay health care costs
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Remember to consult your Actuary!
Probably knows less than you do about the future. However, his inability to communicate in any understandable terms could be useful in some situations.
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Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent this presentation concerns tax matters, it is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) marketing or recommending to another party any tax-related matter addressed within. Each taxpayer should seek advice based on the individual’s circumstances from an independent tax advisor.
This presentation shall not be construed to provide tax advice, legal advice or investment advice.
Readers are cautioned to examine original source materials and to consult with subject matter experts before making decisions related to the subject matter of this presentation.
This presentation expresses the views of the author and does not necessarily express the views of Gabriel, Roeder, Smith & Company.