November 9, 2011 James Petrick, CFO

Transcription

1 Civil Service Pension Reform in the United States November 9, 2011 James Petrick, CFO Federal Retirement Thrift Investment Board

2 Part I. Antecedents

3 Reasons for Federal Pension Reform Cost of old system was perceived as too high and contributing to record fiscal deficits in the early 1980 s Costs not fully allocated to individual agency budgets seen as poor incentive structure System was viewed as limiting civil servants mobility and impediment to downsizing i of staffing levelsl Public pensions were seen as more generous than private sector inconsistent with prevailing political environment

4 Reasons for Reform (cont d) Emergence of 401(k) system as an alternative model Adjunct to Social Security reforms in Needed to include federal workers to enhance solvency Deficit reduction Accounting gimmick kept government securities on budget - since changed

5 Old Civil Service Pension System Civil Service Retirement System (CSRS) Traditional salary based Defined Benefit Accrual rate: 1 ½ % first 5 years, 1 ¾% years 5 to 10, 2% years above 10 (56 1/4% for 30 years) Maximum replacement rate of 80% Unused sick leave added d to service Reference Wage Highest Three Years Earnings Exempt from Public Social Security System CSRS Act established prior to creation of Social Security Employee Contribution - 7% of wage No tax deduction

6 CSRS Retirement Benefits Eligibility for full retirement at age 55 with 30 years service, age 60 with 20 years, 62 with 5 years Early retirement under specified conditions at age 50 with 20 years but with actuarial reduction for each year below 55 For certain occupations (law enforcement, fire fighters, air traffic controllers) mandatory retirement at age 57; eligible to retire at age 50 with 20 years of specific service with no actuarial reduction Full price indexing of benefits after retirement

7 Part II. The New Pension Scheme

8 Federal Employees Retirement System (FERS) All workers beginning service on or after Jan 1, 1984 Three part retirement benefit: Defined Benefit at 1% annual accrual rate 1.1% after age 62 with 20 years worked Mandatory enrollment in Social Security Enrollment in new Defined Contribution plan (TSP) Survivor and disability benefits included in defined benefit only Old workers remain in CSRS but with option to switch to FERS Prior CSRS service computed under CSRS DB rules; service upon switch and eligibility to retire under FERS rules CSRS eligible to participate in TSP as supplemental benefit

9 Worker Contributions to FERS Currently 0.8% of pay to new downsized defined benefit 1.3% for certain occupations with mandatory retirement age 4.2% of applicable wage base to Social Security Designed to replicate 7% contribution to CSRS but results in different distribution of benefits due to nature of benefit structure

10 Employer Contributions to FERS Depending upon occupation, agency contributes 11.4% or more based on employee s pay 10.4% of applicable wage base to Social Security Agency contributions to the TSP

11 FERS Defined Benefits Five year vesting period Normal retirement age of 55 with 30 years but gradually raised to 57 for those born after 1970 Or age 60 with 20 years or 62 with 5 years For certain occupations mandatory retirement at age 57; eligible ibl to retire under these occupations at age 50 with 20 years with no actuarial reduction Social Security benefits at moderately progressive replacement average of 40% Earliest Social Security retirement age 62 normal age 65 with increase to 67 in future years Paid supplemental benefit from OPM until age 62 when first eligible for Social Security

12 Differences Between FERS and CSRS DB Much lower accrual rate (about half) Raised early retirement age No price indexing of benefits for early retirees until age 62 Indexing rate differs between two DBs Recent legislation passed to allow FERS credit for sick leave 50% credit through 2012, then 100% credit after

13 Thrift Savings Plan (TSP) Provides tax-favored defined contribution individual accounts Designed to operate like US private sector 401(k) plans Provides individual savings vehicle with low costs and access to annuity conversion of account balances Participant-directed Participants decide how much to contribute and how to invest among options offered Intended to enable workers to match old system replacement ratios 56% of final three salary at 30 years and age 55; but not being tracked Original assumptions (interest rates, contribution limits) no longer valid

14 TSP Contribution Rules FERS and CSRS employees hired/rehired since August 2010 are automatically enrolled in TSP contributing 3% of salary earned each pay date FERS employees receive immediate agency automatic contribution equal to 1% of salary earned All employees can voluntarily contribute up to IRS limit annually, $17,000 in Over age 50, can contribute an additional $5, annually For FERS employees, government immediately matches first 5% of employee contributions each pay date 100% match on first 3% 50% match on next 2% Automatic (1%) contributions vested after 3 years; all other contributions tib ti vested dimmediately Employees can roll-in money from other eligible DC or IRA plans

15 TSP Investment Structure Law requires use of index funds for equity options Index funds are designed to follow entire markets or broad slices of markets Ensures investment management is passive Active decisions could be based on politics Index funds are low cost Board decided to use indexing for fixed income also Prohibition on active public agency involvement in corporate governance Prohibits direct voting of shares (proxies) Avoids voting shares for political reasons

16 Current TSP Investment Options G Fund Specially issued government securities F Fund U.S. corporate and government bond index fund. Tracks the Barclays U.S. Aggregate Bond index C Fund Large capitalization U.S. stocks. Tracks the S&P 500 index S Fund Small to medium capitalization U.S. stocks. Tracks the Dow Jones U.S. Total Stock Market index, minus the S&P 500 IF Fund International ti stocks. Tracks the EAFE index

17 The TSP Lifecycle (L) Funds Lifecycle or target date asset allocation funds Using combinations of underlying TSP funds chosen by expert consultant Participant decides when they need the money Farther out time horizon dates more aggressive (i.e. risky) investments, t with more equity As horizon date approaches, automatically change to more conservative investments, with more fixed income Provides investment allocations designed to give optimal returns for the amount of risk taken

18 The L Funds Five funds selected - 10 considered but rejected as too complex Income Fund For those already withdrawing their accounts 2020 Fund 2030 Fund 2040 Fund 2050 Fund 2050 Fund As a Lifecycle Fund reaches its maturity date and is retired, the TSP will introduce a new fund for the next generation of workers

19 Selecting TSP Investment Managers Board selects appropriate indexes Board chooses selection criteria Based on staff recommendations (with expert advice) Minimum criteria used to limit competition to firms that have necessary size, experience Board chooses weight to give to technical factors vs. cost. As criteria become more objective, cost weighting can be greater.

20 TSP Costs Total TSP expenses were $120.2 million in 2010 Includes both administrative and investment management costs Employing agencies provide some free services Expense ratio was 4.8 basis points (.048% or 48 cents per $1,000 of account balance) Forfeitures ($44.6 million) and loan fees ($14.0 million) reduced amounts charged to participants i t to 2.5 basis points (.025% or 25 cents per $1,000 of account balance)

21 Why Are TSP Administrative Expenses So Low? Use of low-cost index funds Simple plan structure t (only 5 investment t funds) Huge economies of scale Use of investment manager instead of mutual funds for investing Only invest one amount per fund each day investment manager maintains only one TSP account; not 4.37 million accounts Individual accounts are maintained in TSP record keeping system Competitive procurement of all functions

22 Political Independence of the TSP Statute establishing TSP Federal Employees Retirement System Act of 1986 (FERSA) provided basis for TSP independence from political influence Independent Board of Directors that governs separate administrative i ti body staffed by civil il servants Full asset segregation Amounts belong to participants i t held in trust t in individual id accounts Participants have legal ownership under U.S. law and Constitution

23 TSP s Independence (cont d) Fiduciary i responsibilities Enforceable in the courts Must act prudently and solely in the interest of the participants p and beneficiaries Executive Director and five Board members are accountable for all actions Independence of Board Board members appointed by the President (two upon recommendation of Congress) to fixed, staggered terms Cannot be easily removed (Do not serve at the pleasure of the President or Congress) Board members appoint the Executive Director

24 TSP s Independence (cont d) Budgetary independence Independent budget authority (not subject to White House control) All expenses paid from TSP funds (forfeitures and earnings) No Congressional appropriations (except for small start-up appropriation)

25 TSP Regulatory Oversight Government agency that oversees private pensions (Department of Labor) has oversight responsibility for TSP Performs annual series of audits and issues findings and recommendations Reports to the Board Congressional oversight Hearings GAO audits

26 TSP Loan Program Used to attract participants who might later need access to their money Loan rules One general purpose loan and one residential loan Limited to employee contributions and earnings Maximum loan amount $50, Loan deducted from participant s account balance. Loan is not a debt to the TSP Pay loan back to account with interest Interest rate is current G Fund rate If not repaid on schedule, loan principal and interest become taxable income

27 TSP Loan Program (cont d) Loans add cost and administrative complexity Can detract from retirement income TSP placed new restrictions on loans in Charging $50 loan fee Currently have about 870,000 loans outstanding. Decrease of over 200,000 since restrictions added About 4% in delinquent payment status 5 % take taxable distributions when leave service

28 TSP In-service Withdrawals Financial Hardship Certain defined hardship events Casualty loss, medical expenses, certain legal expenses Negative cash flow Age-based Age 59 ½ or older Onetimeonly These have been increasing in number with economic distress

29 TSP Post-Employment Withdrawals Three options: Lump-sum payment Monthly payments from TSP account Life annuity Can choose more than one option Can transfer certain payments to IRAs or other plans One-time partial withdrawal Required to begin a withdrawal election by age 70 ½ (and separated from Federal service)

30 TSP Life Annuities Only an option (not required unless spouse insists) 18 different annuity types (single life, joint and survivor, etc.) TSP selects vendor and monitors performance. No liability once annuity is purchased Annuity provider competitively procured Insurance companies compete on price Not yet a popular option, although numbers increasing Provides participant with lifetime source of income; with or without a survivor benefit

31 Death and Disability Upon death, designated beneficiaries receive account If no designated beneficiary, use statutory order of precedence Widow/er establishes own TSP account with same investment and withdrawal options as active participants All other beneficiaries receive direct payment with option to transfer to inherited IRA, if applicable Insurance for death or disability paid through optional Federal Life Insurance (FEGLI) or Long-Term Care (LTC) programs Lifetime disability paid by defined benefit component of FERS and CSRS

32 TSP Administration Approximately 100 TSP employees Policy Legal Accounting Oversee operations and IT system Other functions outsourced Investment management Record keeping Call centers Computer center

33 TSP Administration (cont d) Payroll function Essential to control data, prevent mistakes Contribution records must balance Accounting controls Individual account plan, need to balance every day Audit Have annual internal audit as required by law under US GAAP, certify books and records Auditors report directly to Board Computer system Robust computer system essential to proper functioning Run system every night

34 TSP Communications Website is now primary communications vehicle Transactions on-line: Investment decisions, some loans, withdrawals. Over 90% of investment transactions online Latest information Account balances and statements Website upgrade in progress Voice response system (ThriftLine) Automated t account information Some automated transactions Opt out to call centers p TSP Publications Printed by the TSP Available for download on the website Agency reps may order forms and publications to provide directly to employees Agency responsibilities to communicate enrollment and retirement information

35 Questions?