Analysis of Recent Cash Balance Plans in the Public

Analysis of Recent Cash Balance Plans in the Public Sector and the Importance of Arcane Actuarial Concepts Thomas B. Lowman, FSA, EA Bolton Partners, Inc. NCPERS 2013 Legislative Conference Monday, January 28, 2013 Washington, D.C. 1 Thomas B. Lowman, FSA, EA, MAAA • Thomas B. Lowman is the Chief Actuary at Bolton Partners, Inc. in Baltimore. Tom has over thirty-four years of pension actuarial experience. He is a Fellow of the Society of Actuaries (1982), an Enrolled Actuary (1981), a member of the American Academy of Actuaries (1982), and a Fellow of the Conference of Consulting Actuaries. Tom is also a member of the Conference of Consulting Actuaries Public Plans Steering Committee where he helped draft their response to GASB

and is currently working on the CCA pension funding guidelines. • Tom’s SOA Papers – Cash Balance (2000) – DROP(2003) – Gain Sharing (2012) Visit Tom’s Corner at www.BoltonPartners.com 2 Cash If you have employee Balance contributions in your plan, you probably Plans are have a cash balance notEvil feature. 3 It is not until they are ready “ to retire that they understand how little they are actually getting. ” Quoted by Ellen Schultz in an article in the Wall Street Journal 1999 4 Definition Section 414(j) defines the term “defined benefit plan” to be : Any plan which is not a defined contribution plan. 5 Cash Balance Concept • A DB plan that is more like a DC plan – Pays credits (employer + employee) – Interest crediting rate – Annuity conversion rate Leverage – the difference between Fund Investment Return and Interest Credit - not the same as arbitrage 6 Annuity Conversions / Mortality Improvements Source: SOA 7 Comparison to Traditional Final Average Pay Plan (like DB vs. DC) BENEFITS BENEFITS for younger employees SAME COST (NC) for older employees 8 Cash Balance History • Started in the 1990s in the private sector • In 1999, hit PR and regulatory bumps • Most of the issues dealt with “Conversions”/Use of Surplus/Elimination of Early Retirement Subsidies – Whip-saw litigation – Above market interest credit rates – Wear-away 9 History in the Public Sector • Texas Municipal Plan (late 1940s) – Pay credits: 5% - 7% from employees plus 100% to 200% match – 90+% get 21% – Interest Credit: 5% – UP84 5% Annuity Conversions – COLAs • Kansas –2015 new hires – Pay credits: 6% from employees plus 3% to 6% from employer depending on service – Interest Credit: 5.25% but possibly more depending on actual return and funding • Nebraska (2003), Louisiana (2013) 10 Conversion (DB to DC to CB) • Defined Contribution plans to Cash Balance Plans – Montgomery County MD’s GRIP 11 Kentucky –PEW recommendation • Proposed cash balance plan for all new employees – 9% pay credit (including 5% employee contribution) for general employees – 15.5% pay credit (8% employee contribution) for public safety – Interest Credit: 4% plus 75% of plan return over 4% Pew advocating change to Cash Balance design elsewhere 12 Kentucky Interest Credit 13 Embedded CB Design Features • Interest credits tied to equity indices • Minimum interest guarantees...

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