Vol 5 | No. 1
Date:11/01/2021
Q&A—Pension Committee’s Life Expectancy Issue Brief
Cadenhead
Black
The Academy’s Pension Committee released an issue brief, Interpreting Pandemic-Related Decreases in Life Expectancy, that examines life expectancy in the context of Centers for Disease Control and Prevention (CDC) provisional life expectancy estimates—specifically those published in the CDC’s Vital Statistics Surveillance Report that show the average life expectancy of Americans declined by a year and a half in 2020, primarily due to the impact of COVID-19. The Academy also released a new Essential Elements paper on the subject.
The issue brief states that this number can be misleading. The CDC report uses “period” life expectancy, which assumes that the COVID-19 mortality experience of 2020 would continue for every year going forward. While this measure may be useful for year-over-year comparisons in normal times, it tends to exaggerate the effect of nonrecurring events.
The Retirement Report asked Pension Committee Chairperson Elena Black and Bruce Cadenhead, immediate past chairperson of the committee and a past Academy Board member, some questions about the issue brief.
What was the impetus for writing this issue brief?
The 1.5-year decrease in life expectancy was creating a lot of misunderstanding among the general public—and even among actuaries, many of whom were not familiar with the methodology used by the CDC.
What is the most important takeaway for readers of this issue brief?
To have a better understanding of what this statistic means. It may be a few years before life expectancy rebounds to pre-pandemic levels, and more information will come once the CDC processes data from 2021.
When people learn you are an actuary, they might ask “how long am I going to live?” So in the public’s mind, actuaries have knowledge of life expectancy. How does this issue brief contribute to public awareness about life expectancy?
Hopefully it will shed some light on the difference between two distinct methodologies: “period” life expectancy, as officially updated by the CDC each year, and “cohort” life expectancy, which is likely a better representation of how long an individual might expect to live. The Actuaries Longevity Illustrator is a great resource in this regard.
Actuaries Longevity Illustrator—An Effective Tool
The Actuaries Longevity Illustrator, sponsored jointly by the Academy and the Society of Actuaries, can help individuals estimate how long they might live, noting that actuaries are well positioned to help bring clarity to understanding of longevity and life expectancy.
This issue brief is based on CDC information published last July—the CDC then published updated information in December. Has the updated information changed any of the issue brief’s conclusions?
It hasn’t changed any of the basic conclusions, although the final statistics for 2020 show a 1.8-year decrease in period life expectancy, rather than a 1.5-year decrease as quoted in the issue brief based on the earlier CDC publication that used preliminary estimates of 2020 data. The more recent Essential Elements paper takes this into account.
How does the CDC determine life expectancy, and why might this be confusing for people to understand?
As the issue brief discusses, the CDC’s standard methodology is to use period life expectancy, which assumes that rates of death prevailing in a given year continue unchanged for all future years. When you consider a year like 2020—with substantially elevated rates of death due to COVID-19—this methodology produces what appears to be a significant drop in life expectancy. However, we don’t expect COVID-19 to continue to result in such high rates of death indefinitely. Rather, we expect to return to more normal patterns of mortality over the next few years, which should result in a substantial rebound in life expectancy, as measured by the CDC.
There have been more than 800,000 COVID-19 deaths in the U.S. How has COVID-19 impacted projected longevity improvements?
It’s too early to tell whether COVID-19 will have a long-term impact on rates of mortality improvement. Most actuaries are assuming that we will revert to historical long-term patterns of improvements in mortality rates over the next few years.
How should information about “average” life expectancy be evaluated in the context of the many factors that influences an individual’s life expectancy?
The CDC figures are averages for the U.S. population as a whole. There is considerable individual variation based on a wide variety of factors. For example, the CDC occasionally publishes life expectancy by state. This data shows a that life expectancy for a newborn in Hawaii is almost seven years more than for a newborn in West Virginia. The issue brief briefly discusses additional factors that affect mortality rates. Again, the Actuaries Longevity Illustrator is a great resource for helping someone understand how some of these factors can affect life expectancy.
March Capitol Forum Retirement Webinar to Feature EBSA Official Ali Khawar
Khawar
Ali Khawar, acting assistant secretary of the Employee Benefits Security Administration (EBSA) within the U.S. Department of Labor, will be a featured speaker in an Academy Capitol Forum webinar highlighting the Retirement System Assessment and Policy Committee’s series of issue briefs on a national retirement income policy. Mark your calendar for this event, to be held from 2-3 p.m. EST on Thursday, March 10. See our Events Calendar for the latest updates.
Pension Webinar: Funding Public Pension Plans—Theory and Practice
The Pension Practice Council’s Jan. 25 webinar, “Funding Public Pension Plans—Theory and Practice,” highlighted the Academy’s issue brief The 80% Pension Funding Myth; explored prudent funding practices for public plans; and examined considerations being made in the management of “surplus” for state and local public employee pension plans.
Presenters were Academy Pension Vice President Sherry Chan; Paul Angelo, a member of the Public Plans Committee; and Academy member David Lamoureux. Public Plans Committee Chairperson Todd Tauzer moderated.
Using the issue brief as a starting point, Tauzer laid the groundwork of the discussion in going over the basics of pension funding and a funded ratio. Funded ratios move in economic cycles and can be affected by assumption changes and are also subject to varying asset valuations and liability measurements, he said.
Plan projections go beyond a point in time measurement and can illustrate plan trajectory, which is a more robust indicator of plan health over time. Nevertheless, funded ratios continue to be used ubiquitously. Tauzer highlighted additional considerations to bring context, like financial health and investment strategy of plan sponsor, history of benefit changes, and adherence to funding policy.
Angelo elaborated on the latter, noting that “If you’re not going to fund the plan, the measurement you use doesn’t matter.” Presenters then led attendees through a brisk dive into funding policy, focusing on governance and professional standards, and providing detail about asset smoothing and amortization methods.
Chan and Lamoureux rounded out the presentation, bringing the subject matter to life with examples of New York City and California plans, respectively, and sharing their own experiences with them. Chan walked through of a real-world governance structure and its dynamics with respect to agency risk, while Lamoureux discussed California’s experience with surplus management over the past few decades. Attendees offered up an assortment of questions, ranging from technical questions about smoothing, amortization, assumption strengthening, current practices, and intergenerational equity.
Pension Webinar Examines Monetary Policy, Interest Rates
The Pension Committee’s Dec. 7 pension webinar—“What’s the Deal With Low Interest Rates? Are They Harming the U.S. Retirement System?”—included discussion of the implications of low interest rates and recent monetary policy.
Presenters Evan Inglis and Jerry Mingione looked at how the past decade’s low interest rates have been driven by systemic factors such as low growth, aging demographics, and an economic shift toward technology and services, as well as aggressive monetary policy, which has been a key driver of both low rates and high capital asset values and implications for employer-sponsored retirement programs. Senior Pension Fellow Linda K. Stone moderated.
Inglis walked through the effects of low interest rates on stock prices, saying that “when asset prices go up, that means future returns are going to be lower, and low interest rates increase asset prices.” In discussing the increase in inflation, he said the “recent spike … does seem to be accelerating the reversal of monetary policy or at least the slowing down of the monetary policy—the asset purchases that have pushed up prices so significantly—so that’s the immediate concern or direct relationship to assets and asset prices and future investment returns.”
Mingione discussed the impact of interest rates on public and private defined benefit plans, defined contribution plans, Social Security, and on risk mitigation strategies, concluding with an expectation that invested funds will earn less and securing retirement will become more challenging. Slides and audio are available free to logged-in Academy members.
Annual Meeting & Public Policy Forum Features Pension Issues
Chan (right) in the DE&I plenary session
The Academy’s Annual Meeting and Public Policy Forum, held Nov. 4–5 in the nation’s capital as a hybrid event, covered pension topics in both breakout and plenary sessions. Academy Pension Vice President Sherry Chan took part in a plenary session conversation on the pension public policy work in progress to advance diversity, equity & inclusion (DE&I). Chan—a co-founder of the new group Abacus Actuaries, which looks to empower Asian actuaries—also participated in a plenary-session discussion with actuarial groups that highlight the profession’s diversity and moderated breakout session on public plans issues.
Pension breakout sessions were “Funding Policies for Public Plans,” “The Multiemployer Pension System After PBGC Special Financial Assistance,” and “Smoothing Your Way to Increased Revenue—A Pension Success Story?”
For a complete recap of this outstanding event, including deep dives into the pension breakout sessions, be sure to check out the Annual Meeting and Public Policy Forum supplement, published alongside the November Actuarial Update.
RSAP Releases Retirement Policy, Risk Sharing Issue Briefs
The Retirement System Assessment and Policy (RSAP) Committee released two issue briefs:
- Retirement Policy: Potential for Changing Roles of Employers in Retirement Programs considers aspects of “decoupling”—shifting retirement plan responsibilities and related liability to a third-party entity and away from employers.
- New Retirement Plan Designs: Degrees of Risk Sharing examines issues pertaining to newer and novel plan designs as they relate to risk sharing between plan sponsors and participants.
‘Actuary Voices’ Features Pension Volunteer Christian Benjaminson
A recent “Actuary Voices” podcast episode features Christian Benjaminson, a PPC member and chairperson of the Multiemployer Plans Committee. He discussed his Academy volunteer service, which has allowed him and other committee members to provide Congress and other federal policymakers input to better understand some of the challenges multiemployer plans face. “I love the Academy’s role of educating stakeholders,” said Benjaminson, who received an Outstanding Volunteerism Award from the Academy in 2020. A Washington, D.C., area native, he also talks about the challenges of being a D.C. sports fan in Philadelphia, where he now lives. Download “Actuary Voices” on your favorite podcast platform. Listen now.
Committees Comment to ASB on ASOP No. 4
The Pension Committee, Multiemployer Plans Committee, and Public Plans Committee submitted comments to the Actuarial Standards Board regarding the third exposure draft of Actuarial Standard of Practice No. 4, Measuring Pension Obligations and Determining Pension Costs or Contributions.
In This Issue
- Q&A—Pension Committee’s Life Expectancy Issue Brief
- March Capitol Forum Retirement Webinar to Feature EBSA Official Ali Khawar
- Pension Webinar: Funding Public Pension Plans—Theory and Practice
- Monetary Policy, Interest Rates Examined in Webinar
- Annual Meeting & Public Policy Forum Features Pension Issues
- RSAP Releases Retirement Policy, Risk Sharing Issue Briefs
- ‘Actuary Voices’ Features Pension Volunteer Christian Benjaminson
- Committees Comment to ASB on ASOP No. 4
- Legislative/Regulatory Activity
- In the News
Legislative/Regulatory Activity
Following is a roundup of recent state and federal retirement-related legislative and regulatory activity.
Federal Activity
Nominations
The Senate Health, Education, Labor, and Pensions (HELP) Committee approved the nomination of Lisa M. Gomez to be assistant labor secretary for EBSA. Gomez was nominated for the EBSA assistant labor secretary position by President Biden in July. Her nomination is now expected to move to the full Senate for a vote, a date for which has yet to be determined.
Pension Smoothing
Congress passed, and President Biden signed into law, the Infrastructure Investment and Jobs Act (H.R. 3684). The law includes a provision permitting companies to employ “pension smoothing.” Pension smoothing is a practice in which companies can delay making mandatory pension contributions. Because these mandatory contributions are tax-deductible, some businesses will pay higher tax bills. However, increased federal revenues are temporary as firms must make up the deferrals later. The smoothing provision increases the funding stabilization percentages included in the American Rescue Plan Act (ARPA) enacted last March. The bill also further extends the stabilization period from 2029 to 2034. The law applies to plan years beginning after Dec. 31, 2021.
Portable Retirement Accounts
Rep. Jim Himes and Sen. Mark Warner introduced the Portable Retirement and Investment Account Act of 2021 (H.R. 5334 and S. 2870) to create new portable retirement accounts that are not tied to an individual employer. Under the bill, individuals would receive an account at the same time they receive a Social Security number. An independent board, working in consultation with selected financial institutions, would administer the PRIAs. After the creation of the initial account, account holders would have the option to choose investment options from a qualified financial institution. Individuals could choose to contribute to existing defined contribution plans like 401(k)s, 403(b)s, IRAs, or others. However, if they do so, they would be ineligible to contribute to a portable retirement account. As with other tax-deferred retirement accounts, there would be an annual contribution limits specified within the legislation.
Retirement (General)
Rep. Bobby Scott introduced the Retirement Improvement and Savings Enhancement (RISE) Act (H.R. 5891). Among other provisions, the bill would broaden the scope of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 spooled employer plans (PEP) to allow unrelated public education and other nonprofit employers to join a 403(b) plan, clarify that a named fiduciary is responsible for collecting contributions in a PEP and implementing written contribution collection procedures that are reasonable and diligent, and increase the limit from $5,000 to $7,000 that employers may transfer from former employees’ workplace retirement accounts into an Individual Retirement Account (IRA). Many of these provisions are included in the proposed bipartisan Securing a Strong Retirement Act of 2021 (H.R. 2954, “SECURE 2.0”), which is awaiting a vote by the full House of Representatives.
Retirement Lost and Found
Rep. Suzanne Bonamici introduced the Retirement Savings Lost and Found Act of 2021 (H.R. 5832). The legislation, intended to issues encountered by those who change jobs and leave retirement accounts behind, would create an Office of the Retirement Savings Lost and Found to provide workers with tools to locate and manage accounts after leaving an employer. The bill would authorize the use of data that employers are required to report to create a national lost and found database for workers to find their former employer-sponsored retirement accounts, to be overseen by the U.S. Department of Labor. The bill is the House companion to S. 1730, introduced by Sens. Elizabeth Warren and Steve Daines last year.
Social Security
Rep. John Larson and Sen. Richard Blumenthal introduced (H.R. 5723 and S. 3071), Social Security 2100: A Sacred Trust. Among other provisions, the bill would provide for an increase for all Social Security beneficiaries equivalent to an average of 2% of benefits to make up for cost-of-living adjustments since 1983 and end the five-month waiting period to receive disability benefits. The bill would also apply Social Security payroll taxes to wages above $400,000. Also, the bill would combine the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund into one trust fund, the Social Security Trust Fund.
Windfall Elimination Provision
Rep. Kevin Brady introduced the Equal Treatment of Public Servants Act (H.R. 5834) to replace the windfall elimination provision (WEP), a modified benefit formula that reduces the Social Security benefits of certain retired or disabled workers who are also owed pension benefits based on earnings from jobs that were not covered by Social Security and not subject to the Social Security payroll tax. The legislation would replace the WEP with a formula intended to more accurately reflect the proportion of a retiree’s career spent in government compared to their time in the private sector. The legislation would provide a $100 monthly rebate for retirees and a $50 rebate each month for surviving spouses aged 60 years and older currently impacted by the windfall elimination provision.
State Activity
Automatic Workplace Retirement
Maryland Small Business Retirement Savings Program (MarylandSaves) Chair Josh Gotbaum announced that MarylandSaves will begin offering an automatic workplace retirement and emergency savings program beginning in the summer of 2022. Individuals enrolled in the program will automatically have their assets converted into a monthly paycheck at retirement age unless they choose otherwise. They will also have an option to increase their Social Security payments by deferring Social Security enrollment and receiving their MarylandSaves funds first instead. The fund currently has a guaranteed interest rate of 1.4% and there are no separate investment fees. Employee participation is voluntary.
New York Gov. Kathy Hochul signed S. 5395A (A. 3213), that provides for the automatic enrollment of employees in the state’s Secure Choice Savings Program (which they can choose to opt out of). Private-sector employers that don’t offer retirement plans will be required to automatically enroll their workers in the state’s savings plan.
Public Pension Plan Accounting
Oregon Gov. Kate Brown signed HB 2906, a law that provides that, if Oregon Public Service Retirement Plan members’ monthly salary do not exceed $3,333, instead of $2,500, then the Public Employees Retirement Board shall credit all employee contributions made by members to employee accounts and credit no employee contributions made by members to employee pension stability accounts.
Public Pension Funding
New York Gov. Kathy Hochul signed S 6405 (A 7640), a law that changes the determination of the salary base for members of the City of New York Fire Department pension fund. The law provides that the salary base for members of the City of New York Fire Department pension fund whose employment with the fire department of the City of New York began on or after July 1, 2000, will be determined in the same manner as members whose employment commenced prior to that date.
Illinois Gov. J.B. Pritzker signed HB 3004, a law that amends the General Provisions Article of the Illinois Pension Code. Among other provisions, the law provides that no individual who is a board member of a pension fund, investment board, or retirement system may be employed by those entities for a period of five years after leaving their position. The law removes language providing that no pension fund, investment board, or retirement system may pay membership dues to a membership organization or association that has any pecuniary interest with any entity that provides services to a pension fund, investment board, or retirement system unless certain information is provided.
BNN Bloomberg and BloombergQuint published a Bloomberg Opinion column citing the illustrator as a useful tool for understanding retirement planning horizons. The article was reprinted by The Washington Post, Financial Planning, and Financial Advisor. A Bloomberg Radio broadcast also cited the illustrator.
A Forbes opinion piece cited the Multiemployer Plans Committee’s letter to the Pension Benefit Guaranty Corporation (PBGC) submitted in response to the PBGC’s request for comments on its interim final rule regarding special financial assistance pursuant to the American Rescue Plan Act of 2021.
BenefitsPro, Plan Sponsor, and Plan Adviser reported on the Academy’s issue brief Retirement Policy: Potential for Changing Roles of Employers in Retirement Programs, which considers aspects of “decoupling”—shifting retirement plan responsibilities and related liability to a third-party entity and away from employers.
The Topeka Capital-Journal (Kan.) cited the Academy’s Essential Elements paper “The 80% Pension Funding Myth.” The story was reprinted by Yahoo News and Leavenworth Times (Kan.).