Brian Donohue芝加哥咨询公司的〈养老基金目标和战略〉jkd.pptx

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1、Pension Funding Targets and StrategiesPension Funding Targets and StrategiesBrian Donohue,Chicago Consulting ActuariesBrian Donohue,Chicago Consulting ActuariesJerry Mingione,Towers PerrinJerry Mingione,Towers PerrinMay 12,2004May 12,2004History of Funding RulesHistory of Funding RulesIn the beginni

2、ng of time(post-ERISA).In the beginning of time(post-ERISA).actuaries had considerable control over the assumptions actuaries had considerable control over the assumptions and methods used for determining funding requirements.and methods used for determining funding requirements.Financial assumption

3、s were set to be reasonable on a long-Financial assumptions were set to be reasonable on a long-term basis.term basis.Actuarial methods were selected,essentially right from the Actuarial methods were selected,essentially right from the text book,with considerable freedom.text book,with considerable

4、freedom.Unfunded liabilities were funded over 10-30 year periods,Unfunded liabilities were funded over 10-30 year periods,based on level payments.based on level payments.History of Funding RulesHistory of Funding RulesThen things changed legislatively.Then things changed legislatively.In 1987,OBRA i

5、nstituted the concept of current liability,in order to In 1987,OBRA instituted the concept of current liability,in order to bring a solvency/termination basis perspective to funding bring a solvency/termination basis perspective to funding requirements(and tax deduction allowances).requirements(and

6、tax deduction allowances).Basically,plans were required to maintain a funding level of 90%of current Basically,plans were required to maintain a funding level of 90%of current liability.liability.If they fell below this level,they would be required to contribute additional If they fell below this le

7、vel,they would be required to contribute additional amounts to recover their funded position over(essentially)3-5 years.amounts to recover their funded position over(essentially)3-5 years.Current liability-based funding requirements were made more Current liability-based funding requirements were ma

8、de more stringent in 1994:stringent in 1994:maximum CL interest rate reduced from 110%to 105%maximum CL interest rate reduced from 110%to 105%updated mortality tableupdated mortality table increased required funding%s for deficit reduction contributions.increased required funding%s for deficit reduc

9、tion contributions.History of Funding RulesHistory of Funding RulesAnd capital market changes upset the dynamics.And capital market changes upset the dynamics.Initially interest rates were high enough that the termination basis calculations Initially interest rates were high enough that the terminat

10、ion basis calculations did not override the long-term funding basis that plans had traditionally used did not override the long-term funding basis that plans had traditionally used for funding.for funding.Then interest rates declined in the 90s,as did equity markets in the early Then interest rates

11、declined in the 90s,as did equity markets in the early years of this decade creating the doomsday scenario for pension plans.years of this decade creating the doomsday scenario for pension plans.Actuary-set long term-based financial assumptions did not react much.Actuary-set long term-based financia

12、l assumptions did not react much.Thus,the dynamics of pension funding requirements changed Thus,the dynamics of pension funding requirements changed dramatically.dramatically.Treasury cut back the issuance of 30-year bonds in 1998,and then eliminated Treasury cut back the issuance of 30-year bonds i

13、n 1998,and then eliminated them entirely in 2001.them entirely in 2001.Yields on 30-year T-bonds declined and the credit spread widened.Yields on 30-year T-bonds declined and the credit spread widened.It became apparent that a legislative remedy was required.It became apparent that a legislative rem

14、edy was required.Temporary relief was granted for 2002-2003 by raising the interest rate Temporary relief was granted for 2002-2003 by raising the interest rate cap to 120%.cap to 120%.Current SituationCurrent SituationLets compare assumptions in the late 1980s vs.today:Lets compare assumptions in t

15、he late 1980s vs.today:*Potentially increases to about 6.4%with interest rate relief.19882004average contribution interest rate8.4%8.3%30-year Treasury yield9.0%5.1%maximum current liability rate10.1%5.5%*Current SituationCurrent SituationHeres what those changes imply in terms of valuation results

16、and Heres what those changes imply in terms of valuation results and contribution requirements:contribution requirements:198820042004without reliefwith reliefvaluation interest rate8.4%8.3%8.3%current liability rate10.1%5.5%6.4%AAL funded ratio84%83%83%CL funded ratio115%73%81%regular minimum$47.3$4

17、9.2$49.2addtl.funding charge0.075.634.7minimum with DRC124.983.9Current SituationCurrent SituationThe typical pension plan today has a current liability fundedThe typical pension plan today has a current liability fundedstatus in the range of 80-90%.Many,of course,are well status in the range of 80-

18、90%.Many,of course,are well below this level.below this level.Contribution requirements tend to spike dramatically as funded Contribution requirements tend to spike dramatically as funded levels fall below 90%.levels fall below 90%.However,contribution requirements in most cases lag emerging However

19、,contribution requirements in most cases lag emerging financial experience by roughly 2-3 years,due to the effects of:financial experience by roughly 2-3 years,due to the effects of:volatility reliefvolatility relief four-year averaging of interest ratesfour-year averaging of interest rates asset sm

20、oothingasset smoothing allowable contribution timing delays.allowable contribution timing delays.Current SituationCurrent SituationPlan sponsors have typically not been proactive in addressing theirPlan sponsors have typically not been proactive in addressing theirdeclining funded positions with a f

21、ew notable exceptions.declining funded positions with a few notable exceptions.Why?Why?They counted on smoothing to avoid the worst effects of the capital They counted on smoothing to avoid the worst effects of the capital market situation,and that the capital market situation would improve market s

22、ituation,and that the capital market situation would improve over time.over time.They counted on legislated solutions to mitigate contribution They counted on legislated solutions to mitigate contribution requirements.requirements.The implications in terms of future contribution requirements were no

23、t The implications in terms of future contribution requirements were not always made clear.always made clear.The number of alternative funding measures made it hard to monitor The number of alternative funding measures made it hard to monitor results and determine/prioritize funding targets.results

24、and determine/prioritize funding targets.Lessons LearnedLessons LearnedPoorly funded plans entail a number of adverse Poorly funded plans entail a number of adverse consequences,in addition to spikes in futureconsequences,in addition to spikes in futurecontribution requirements:contribution requirem

25、ents:quarterly contribution requirementsquarterly contribution requirementsPBGC variable premiumsPBGC variable premiumsparticipant notices re underfundingparticipant notices re underfundingPBGC underfunding noticePBGC underfunding noticeadditional minimum liability/charges to shareholder equity.addi

26、tional minimum liability/charges to shareholder equity.Lessons LearnedLessons LearnedRecent experience has exposed a need to better monitor Recent experience has exposed a need to better monitor CL funding,and potentially adjust funding over time so as CL funding,and potentially adjust funding over

27、time so as to maintain a target funding level:to maintain a target funding level:60%to avoid restrictions on benefit improvements60%to avoid restrictions on benefit improvements80%/90%to avoid additional funding charge+participant 80%/90%to avoid additional funding charge+participant noticenotice100

28、%to avoid quarterly contributions.100%to avoid quarterly contributions.110%to avoid lump sum restrictions to top 25.110%to avoid lump sum restrictions to top 25.125%to allow section 420 transfers to fund retiree medical 125%to allow section 420 transfers to fund retiree medical benefits(based on OBR

29、A CL).benefits(based on OBRA CL).Lessons LearnedLessons LearnedOther possible funding targets:Other possible funding targets:FFL to avoid variable premiumFFL to avoid variable premiumABO to avoid additional balance sheet liability.ABO to avoid additional balance sheet liability.Lessons LearnedLesson

30、s LearnedWhile 2003 results were strong,they werent a panacea.While 2003 results were strong,they werent a panacea.Plan sponsors still have the after-effects of smoothing Plan sponsors still have the after-effects of smoothing methodologies to deal with.methodologies to deal with.Most plans now real

31、ize that a minimum funding strategy Most plans now realize that a minimum funding strategy is not optimal.is not optimal.There is also considerable legislative uncertainty There is also considerable legislative uncertainty remaining:remaining:short-term interest rate and DRC-related reliefshort-term

32、 interest rate and DRC-related relief long-term funding reform.long-term funding reform.Proactive StrategiesProactive StrategiesPush back quarterly contributionsPush back quarterly contributions requires requires minorminor acceleration of contribution timing acceleration of contribution timing impr

33、oves CL funded%improves CL funded%reduces PBGC premiums.reduces PBGC premiums.Avoid DRCAvoid DRC 90%/90%/80%/80%pattern90%/90%/80%/80%pattern avoids large increase in funding requirements.avoids large increase in funding requirements.Avoid PBGC variable premiumAvoid PBGC variable premium funding tar

34、get based on FFLfunding target based on FFL variable premiums,unlike contributions,are a dead-weight loss variable premiums,unlike contributions,are a dead-weight loss to employers.to employers.Proactive StrategiesProactive Strategies200420042005200520062006200720072008200820092009Current liabilityC

35、urrent liability$828$828$975$975$1,106$1,106$1,220$1,220$1,314$1,314$1,398$1,398Market value of assetsMarket value of assets8498498868869029029799791,0261,0261,0751,075Funded%(w/accrued contributions)Funded%(w/accrued contributions)104%104%91%91%85%85%82%82%80%80%85%85%PBGC premiumsPBGC premiums1.11

36、.10.30.32.22.22.42.42.72.72.22.2ContributionsContributions January 15January 150.00.00.00.00.00.08.68.69.99.911.911.9 April 15April 150.00.00.00.08.68.69.99.911.911.928.928.9 July 15July 150.00.00.00.08.68.69.99.911.911.928.928.9 September 15September 1522.322.36.56.537.337.36.16.17.07.0103.1103.1 O

37、ctober 15October 150.00.00.00.08.68.69.99.911.911.928.928.9Total contributionTotal contribution22.322.36.56.563.263.244.344.352.552.5201.6201.6Example 1:Minimum FundingExample 1:Minimum FundingAggregate contributions:Aggregate contributions:$390.4$390.4Aggregate PBGC premiums:Aggregate PBGC premiums

38、:$10.9$10.9Proactive StrategiesProactive Strategies200420042005200520062006200720072008200820092009Current liabilityCurrent liability$828$828$975$975$1,106$1,106$1,220$1,220$1,314$1,314$1,398$1,398Market value of assetsMarket value of assets8498498868869029029739731,0141,0141,0561,056Funded%(w/accru

39、ed contributions)Funded%(w/accrued contributions)104%104%91%91%88%88%84%84%82%82%91%91%PBGC premiumsPBGC premiums1.11.10.30.30.30.32.22.22.42.40.30.3ContributionsContributions January 15January 150.00.00.00.00.00.07.77.78.68.610.410.4 April 15April 150.00.00.00.046.046.015.915.918.718.7129.2129.2 Ju

40、ly 15July 150.00.00.00.08.48.49.59.511.511.528.328.3 September 15September 1522.322.36.56.58.68.69.89.811.811.829.029.0 October 15October 150.00.00.00.00.00.00.00.00.00.00.00.0Total contributionTotal contribution22.322.36.56.563.063.042.842.850.550.5196.8196.8Example 2:Push back quarterly contributi

41、onsExample 2:Push back quarterly contributionsAggregate contributions:Aggregate contributions:$381.9$381.9Aggregate PBGC premiums:Aggregate PBGC premiums:$6.5$6.5Proactive StrategiesProactive Strategies200420042005200520062006200720072008200820092009Current liabilityCurrent liability$828$828$975$975

42、$1,106$1,106$1,220$1,220$1,314$1,314$1,398$1,398Market value of assetsMarket value of assets8498498868869029029739731,0141,0141,1591,159Funded%(w/accrued contributions)Funded%(w/accrued contributions)104%104%91%91%88%88%84%84%90%90%90%90%PBGC PremiumsPBGC Premiums1.11.10.30.30.30.32.22.22.42.40.30.3

43、ContributionsContributions January 15January 150.00.00.00.00.00.07.77.78.68.60.00.0 April 15April 150.00.00.00.046.046.015.915.918.718.70.00.0 July 15July 150.00.00.00.08.48.49.59.511.511.50.00.0 September 15September 1522.322.36.56.58.68.69.89.8110.6110.671.671.6 October 15October 150.00.00.00.00.0

44、0.00.00.00.00.00.00.0Total ContributionTotal Contribution22.322.36.56.563.063.042.842.8149.4149.471.671.6Example 3:Avoid DRCExample 3:Avoid DRCAggregate contributions:Aggregate contributions:$355.6$355.6Aggregate PBGC premiums:Aggregate PBGC premiums:$4.5$4.5Proactive StrategiesProactive Strategies2

45、00420042005200520062006200720072008200820092009Current liabilityCurrent liability$828$828$975$975$1,106$1,106$1,220$1,220$1,314$1,314$1,398$1,398Market value of assetsMarket value of assets8498499359359489489719711,0291,0291,1581,158Funded%(w/accrued contributions)Funded%(w/accrued contributions)109

46、%109%96%96%88%88%85%85%90%90%90%90%PBGC PremiumsPBGC Premiums0.30.30.30.30.30.30.30.30.30.30.30.3ContributionsContributions January 15January 150.00.00.00.00.00.07.87.80.00.00.00.0 April 15April 150.00.00.00.00.00.015.915.911.411.40.00.0 July 15July 150.00.00.00.06.16.19.69.611.511.50.00.0 September

47、 15September 1569.269.20.00.08.78.724.524.5109.7109.772.072.0 October 15October 150.00.00.00.00.00.00.00.00.00.00.00.0Total ContributionTotal Contribution69.269.20.00.014.714.757.857.8132.7132.772.072.0Example 4:Avoid PBGC variable premiumExample 4:Avoid PBGC variable premiumAggregate contributions:

48、Aggregate contributions:$346.4$346.4Aggregate PBGC premiums:Aggregate PBGC premiums:$1.8$1.8Proactive StrategiesProactive StrategiesConsultants need to clarify pension funding decisions for clients.Consultants need to clarify pension funding decisions for clients.The actuarial report has become a co

49、mpliance document,not The actuarial report has become a compliance document,not a consulting document.a consulting document.The old model(minimum and maximum)has been replaced The old model(minimum and maximum)has been replaced by a new model(targets and consequences)for pension by a new model(targe

50、ts and consequences)for pension funding.funding.Forecasts are essential to client understanding and decision-Forecasts are essential to client understanding and decision-making.making.Ultimately,pension funding decisions should be less Ultimately,pension funding decisions should be less complicated

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