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  #311  
Old 04-26-2011, 01:31 PM
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They picked 80% because 100% is too expensive.
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  #312  
Old 04-26-2011, 01:37 PM
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Another question: how sensitive is the calculation of the unfunded actuarial liability to the wage growth assumption? Do the assumed future benefits and contributions move basically in lock step or is this an assumption that has a significant impact on the calculation of the UAL? How much does the answer depend on the discount rate, such as 8% versus 5%?
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  #313  
Old 04-26-2011, 01:38 PM
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Discount rate has a huge impact on the UAL, most definitely ... there's a reason Calpers wouldn't budge its rate even 25 bps.
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  #314  
Old 04-26-2011, 01:49 PM
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I have some experience with the 80%. I don't know where it came from, but plan sponsors love to quote it. The company I work for cautions against referring to it. It's just a made up number. There is nothing special about it.

In my opinion, the most important number is the contribution rate, and that can be split into the Normal Cost and the amortization of the UAAL. In a perfect world, the NC is the ongoing cost, and the amortization is for a certain number of years. Roughly speaking, if you are over 80% funded, then the amortization piece is quite a bit smaller than the NC. That's the relevence of the 80%. It means you're mainly paying NC and have a reasonable policy to get to 100%. But that's just loosely speaking. If a plan's assumptions are out of whack, then they can expect losses year after year and really have no chance of getting to 100%. The fact that they are 80% now isn't going to help them in the long run.

I wouldn't say they picked 80% because 100% is too expensive. The contribution rate always includes the cost of getting to 100%.
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  #315  
Old 04-26-2011, 01:56 PM
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Quote:
Originally Posted by awriter View Post
Another question: how sensitive is the calculation of the unfunded actuarial liability to the wage growth assumption? Do the assumed future benefits and contributions move basically in lock step or is this an assumption that has a significant impact on the calculation of the UAL? How much does the answer depend on the discount rate, such as 8% versus 5%?
Wage growth is a tricky one. A higher wage grow will increase the liability and NC. But since most public plans amortize the UAAL over an increasing payroll, a higher wage growth can lower their amortization payment.
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  #316  
Old 04-26-2011, 01:58 PM
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The 80% reference most likely came from PPA (Pension Protection Act).

If a single employer plan's funding percentage is below 80%, partial restrictions can apply to the plan.

Also, in the multiemployer plan world, being less than 80% funded is one of the triggers for being a "Yellow Zone" plan instead of "Green Zone".

So 80% does have relevance in the pension world for single employer and multiemployer plans, it is just that the public sector folks have somewhat erroneously adopted it as a general measure of pension health.
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  #317  
Old 04-26-2011, 02:08 PM
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http://www.nytimes.com/2011/04/26/us...s.html?_r=1&hp

Quote:
Conventional wisdom and the laws and constitutions of many states have long held that the pensions being earned by current government workers are untouchable. But as the fiscal crisis has lingered, officials in strapped states from California to Illinois have begun to take a second look, to see whether there might be loopholes allowing them to cut the pension benefits of current employees. Now the move in Detroit — made possible, lawyers said, because Michigan’s constitutional protections are weaker — could spur other places to try to follow suit.

....
Pension funds can run out of money. In Prichard, Ala., a small city outside of Mobile, the fund ran out in 2009. The city stopped sending pension checks to its 150 retired workers, defying a state law that requires it to pay what it has promised. In the 19 months since the checks stopped, 18 retirees have died while waiting for their money.

....
The struggles of Detroit, of course, are extreme. The report by the arbitrator, Thomas W. Brookover, noted that although the city’s unemployment rate was officially 28 percent, there was evidence that less than 37 percent of the city’s residents were actually working. The population had crashed. Property tax revenues were dwindling. Detroit had drained its rainy day fund, reduced overtime, offered property-tax amnesty, sold public assets, borrowed money, allowed casinos to set up shop — and still its deficits kept growing.

The average pension for retired police officers in Detroit is not especially rich: it is $28,501 a year. But with more than twice as many retirees as active workers, Mr. Brookover wrote, the costs of paying for the pensions “threaten both the city’s fiscal viability, as well as its wherewithal to provide public safety for its citizens.”

Detroit’s efforts to cover those costs through aggressive investing have not helped. In a 2010 report, an auditor warned that $103 million of alternative investments were unaccounted for. The city’s bets have included Tradewinds Airlines, which went bankrupt for the third time in 2008, and a luxury hotel in Detroit. The Securities and Exchange Commission is investigating.

The city initially sought to freeze its pension fund immediately, which is almost unheard of in the public sector. The arbitrator rejected that proposal, but agreed that the city could reduce the rate at which lieutenants and sergeants earn pension benefits from 2.5 percent of their salary per year to 2.1 percent. Although rare, the reduction is not particularly large, given the magnitude of Detroit’s problems. The arbitrator did not try to find a solution to the fund’s imbalance.

Michigan’s new Republican governor, Rick Snyder, has taken a carrot-and-stick approach to the state’s troubled cities. The carrot: He scrapped the old way of distributing state aid, and wants to make aid contingent on having cities adopt “best practices,” which he says should include reducing the rate at which workers earn pension benefits. The stick: A new law allowing the state to appoint fiscal managers with broad powers over distressed local governments.

I put up a new post on powip this morning, but my blog is blocked from work (probably a good thing). I'll link it later.
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  #318  
Old 04-26-2011, 02:08 PM
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Quote:
Originally Posted by Lane Meyers View Post
The 80% reference most likely came from PPA (Pension Protection Act).

If a single employer plan's funding percentage is below 80%, partial restrictions can apply to the plan.

Also, in the multiemployer plan world, being less than 80% funded is one of the triggers for being a "Yellow Zone" plan instead of "Green Zone".

So 80% does have relevance in the pension world for single employer and multiemployer plans, it is just that the public sector folks have somewhat erroneously adopted it as a general measure of pension health.
That would be telling if it were true. It's 80% using a different funding method and interest rate. The public sector said, "we like the 80%, but we'll keep our discount rate, thanks."
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  #319  
Old 04-26-2011, 02:19 PM
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Quote:
Originally Posted by Lane Meyers View Post
The 80% reference most likely came from PPA (Pension Protection Act).

If a single employer plan's funding percentage is below 80%, partial restrictions can apply to the plan.

Also, in the multiemployer plan world, being less than 80% funded is one of the triggers for being a "Yellow Zone" plan instead of "Green Zone".

So 80% does have relevance in the pension world for single employer and multiemployer plans, it is just that the public sector folks have somewhat erroneously adopted it as a general measure of pension health.
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Originally Posted by Runner View Post
That would be telling if it were true. It's 80% using a different funding method and interest rate. The public sector said, "we like the 80%, but we'll keep our discount rate, thanks."
But it isn't true. The 80% number has been around a lot longer than PPA. While I don't really know the origin, but your explanation is much more likely than Lane's.
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  #320  
Old 04-26-2011, 02:28 PM
tommie frazier tommie frazier is offline
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i think the important bit is why was 80% chosen. i think mpc is closest when she said "bc 100% was too expensive". she left out that 80% sounds like it is close enough to all of it.

was there a study that showed that 80% was meaningful? that plans could survive on only having n% of the required total funding, and n turned out to be close enough to 80 to round to it reasonably? I doubt it. it sounds like a cosmetic choice.
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