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HomeMy WebLinkAboutActuarial 12-17-09 FR/SRconco P t S Management Advisors Bents Specialists September 1, 2009 Mr. Pedro G. Hernandez City Manager City of Miami 3500 Pan American Drive Miami, Florida 33133-5595 GESE - CHANGES TO OPTIONAL FORMS OF BENEFIT Dear Mr. Hernandez: You have requested an opinion regarding the cost implications of the proposed ordinance related to the City of Miami General Employees and Sanitation Employees Retirement Trust as it pertains to revisions in the optional form of annuity contained in Section 40-255(i), "Optional Allowances." In my opinion, the changes as proposed do involve increased actuarial cost. Changing factors for actuarial conversions of optional forms of benefit amounts to a benefit increase for members who elect spouse benefits; since it involves a benefit increase, it appears this should be a benefit that is negotiated with the union. A more detailed analysis follows below. The "normal form" of pension payment is a life annuity (see Section 40-255(a)(3)); Option 6A under Section 40-255(1) contains the key to understanding the "special" nature of optional forms of benefits under the plan. Members may elect, without reduction, a 40% spouse annuity in lieu of the wife -only annuity normal form. That 40% spouse annuity form, by itself, usually costs between 4% and 6.5% depending upon the age of the member at retirement and assuming a spouse close in age to the member. So the plan picks up the full additional cost of the 40% joint and survivor annuity with a spouse over the life annuity normal form. The options under Option 2 and Option 3 assume the first 40% of spousal annuity is "free" (not a charge to the member), so the reduction shown under Options 2 and 3 are only for the difference between the 40% and 50% or 40% and 100% joint and survivor annuity spousal forms. The current factors were developed using older mortality tables and more importantly lower interest rates. If the current assumed interest rate of 8.1% is used, then factor reductions are less as well as closer together. However, whether or not there is an interest in "modernizing" the option factors, lessening reductions applicable to normal 3020 leftiq i2d., &uitc 250, jackacmvium n 32m Mot= (904)262-3 , tax: (904) W-3374 E-mail: aaoacivartalaonaepta.aam Mr. Pedro G. Hernandez September 1, 2009 Page 2 forms will involve increasing liabilities to the City and thus over time increasing contribution requirements compared to the current plan. The current actuarial report appears to assume that 80% of employees would elect the 40% spousal option (80% of employees are assumed to be married, and the 100% of 40% spousal coverage being elected by all married employees is implied). There are no assumptions stated in the report that take into account any elections of the 50% and 100% spousal annuity options. Nonetheless, the plan would incur greater liabilities than otherwise under current plan provisions. This is because future retirees electing the 50% spousal annuity coverage would now pay only 1% reduction in their benefits rather than the current 2%, and those retirees electing the 100% spousal option would now pay only 5% reduction in benefits rather than the current 10% reduction in benefits. Thus, the plan would now provide greater annuities under these options than under the current provisions and plan costs would be greater than they otherwise would have been. It is difficult to analyze the specifics of this increase in liabilities as current election frequencies of these options are not readily available, and option election behavior would likely change as a result of these amendments. (More employees would tend to elect the 100% spousal option if the reduction in their benefits were less than it is now.) An analysis performed by Buck Consultants in May 2008 provided an estimate of the increase in contributions if the change in option reduction factors were implemented. The summary analysis performed by Mike Boudreaux, Director, Management and Budget, dated May 28, 2008, referenced the Buck study indicating the increase in estimated contribution requirements to be an additional $112,000 per year (note this dollar amount would be increased in a more current actuarial analysis due to the passage of time). We believe this analysis to be a reasonable estimate of the impact on contribution requirements should this ordinance be adopted. We also believe the caution that changes may have a greater impact on the City in future years is also appropriate. It is our belief that the option reductions as proposed are "fair" based on current assumed interest rate levels and mortality tables. This is to say the reductions as proposed appear to be approximate actuarial equivalents of the standard 40% spousal annuity form. The policy issue is whether or not the City wishes to increase its liabilities over what otherwise would have been in order to make these options actuarially neutral. Said another way, the City would give up the potential actuarial gains that COACQPA Mr. Pedro G. Hernandez September 2, 2009 Page 3 result from the current system of applicable option reduction charges. These gains have served to reduce the otherwise actuarial liabilities of the current plan. Sincerely, Michael J. Tierney Cgnc kpts