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37 Cards in this Set
- Front
- Back
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QBS 12: 1 of 38
Plan Designs that Differ from Traditional Designs Plan design structures accommodating longevity and investment risk allocations |
1) CB with shared investment risk
2) DB/DC hybrid design with shared investment risk 3) DC with shared investment risk |
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QBS 12: 2 of 38
Plan Designs that Differ from Traditional Designs CB plan with shared investment risk |
- Offer interest credits tied to passive indices and/or fixed rate
- Can give employee choice if like - Member provided lump sum at termination/retirement |
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QBS 12: 3 of 38
Plan Designs that Differ from Traditional Designs Advantages of the CB with shared investment risk approach |
1) Sponsor can fully or partially match employee choice
a) Investment risk transferred if no fixed rate offered and fully matched b) Windfall opportunity if members invest too conservatively |
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QBS 12: 4 of 38
Plan Designs that Differ from Traditional Designs Disadvantages of the CB with shared investment risk approach |
1) Regulatory status in question
2) Longevity risk transferred to member 3) Administratively complex |
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QBS 12: 5 of 38
Plan Designs that Differ from Traditional Designs DB/DC hybrid design with shared investment risk |
- DB benefit based on pensionable pay up to limit
- Limit is indexed - Provide either of the following benefits for pay above limit 1) DC, which is annitized at retirement, either: a) Er retains longevity and investment risk (fully annuitized) b) Er retains longevity risk but not investment risk (variable DB) i) Members can be offered investment choices 2) CB a) Er retains investment risk but not longevity risk (CB) |
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QBS 12: 6 of 38
Plan Designs that Differ from Traditional Designs Advantages of DB/DC hybrid design with shared investment risk |
1) Low and middle-income members protected from longevity and investment risk
2) High income members only bear investment risk on their DC account |
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QBS 12: 7 of 38
Plan Designs that Differ from Traditional Designs Disadvantages of DB/DC hybrid design with shared investment risk |
1) Legislative change required
2) Administratively complex |
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QBS 12: 8 of 38
Plan Designs that Differ from Traditional Designs DC design with shared investment risk |
- Investment performance guaranteed by er up to specified level
- Investment risk above level shared - Er portion excess return retained as reserve - Required er contributions allocated based on account balance - Small balances cashed out/rolled over - Large balances annuitized |
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QBS 12: 9 of 38
Plan Designs that Differ from Traditional Designs Advantage of DC design with shared investment risk |
1) Provides members investment guarantee with additional upside potential
2) non de minimus balances protected from longevity risk |
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QBS 12: 10 of 38
Plan Designs that Differ from Traditional Designs Disadvantages of DC design with shared investment risk |
1) May create nondiscrimination issues
2) Employer needs investment control to make work 3) Legislative change required |
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QBS 12: 11 of 38
Plan Designs that Differ from Traditional Designs Plan design facilitating DB portability |
- Allow direct DB to DB transfers
- Make cost neutral to both parties - Transfer asset equal to UC benefit/liability - Receiving plan determines service credit base on PUC liability - Use same interest and mortality assumptions |
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QBS 12: 12 of 38
Plan Designs that Differ from Traditional Designs Disadvantage of direct DB to DB transfers |
1) Employee has to take a gamble
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QBS 12: 13 of 38
Plan Designs that Differ from Traditional Designs Idea to encourage DB implementation among small employers |
- Multi-employer DB plan
- Sponsored by an investment or consulting firm - Benefit formula, either 1) FAP 2) Career average formula - Each employer selects benefit percentage - Withdrawal liability determined using multi rules |
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QBS 12: 14 of 38
Plan Designs that Differ from Traditional Designs Advantage of the multi-employer approach |
1) Investment and longevity risks pooled
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QBS 12: 15 of 38
Plan Designs that Differ from Traditional Designs Disadvantage of the multi-employer approach |
1) Legislative change needed
2) Fiduciary oversight needs to be defined 3) FAP approach not practical for this framework |
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QBS 12: 16 of 38
Plan Designs that Differ from Traditional Designs Disadvantage of traditional DB or DC structures |
- Currently need to decide whether the system should:
a) Insure individuals against economic retirement risks b) Provide enough wealth accumulation to meet the economic needs of retirement - One-size-fits-all DB or DC model won't accommodate all the needs of individuals |
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QBS 12: 17 of 38
Plan Designs that Differ from Traditional Designs Disadvantage letting individuals make choices |
1) Poor retirement planners and make poor choices
a) Inadequate retirement income b) Underestimate their life expectancy 2) Creates anti-selection opportunity |
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QBS 12: 18 of 38
Plan Designs that Differ from Traditional Designs Disadvantage employers find with traditional DB structures |
1) Contribution and accounting volatility
2) Assumption of long-term liabilities 3) Administrative costs 4) Fiduciary risk |
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QBS 12: 19 of 38
Plan Designs that Differ from Traditional Designs Comment about current retirement system |
- New retirement system needed to meet the balanced needs of stakeholders
a) Individuals b) Society c) Employers d) Markets - Traditional structure may be inadequate in meeting everyone's needs |
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QBS 12: 20 of 38
Plan Designs that Differ from Traditional Designs In response, SOA: |
1) Developed the Measurement Framework
2) Analyzed non-traditional retirement systems a) DB plan sponsored/administered by a third-party b) Local employer's involvement limited to contribution commitment c) Plans governed by independent board d) Board contained fully or in part by retirement/investment professionals e) Self-adjusting mechanisms |
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QBS 12: 21 of 38
Plan Designs that Differ from Traditional Designs Measurement Framework |
- Determines how well system meets stakeholder needs
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QBS 12: 22 of 38
Plan Designs that Differ from Traditional Designs Advantages of non-traditional system |
1) May increase coverage
2) Employers can provide benefits without sponsoring plan a) No fiduciary responsibility b) No administrative responsibility |
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QBS 12: 23 of 38
Plan Designs that Differ from Traditional Designs Non-traditional systems that were analyzed contained the following principles |
1) Strong governance framework
2) Alignment of roles with skills 3) Self-adjusting mechanisms 4) Plan participant solidarity 5) Use of groups 6) Degree of independence from employer 7) Use of nearly default free discount rates for measurement |
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QBS 12: 24 of 38
Plan Designs that Differ from Traditional Designs Governance Strong governance attributes |
1) Robust
2) Transparent 3) Well-understood |
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QBS 12: 25 of 38
Plan Designs that Differ from Traditional Designs Governance Key observations about boards for non-traditional systems |
1) Independent from the employer
2) Retirement and investment experts on Board 3) Operated under pre-set rules about changing contribution or benefit levels 4) Sets non-negotiable contribution rates 5) Sets benefit levels that are common for all members 6) Sets nonnegotiable benefits if plan covers union members |
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QBS 12: 27 of 38
Plan Designs that Differ from Traditional Designs Self-adjusting mechanisms Attributes of successful self-adjusting mechanisms in non-traditional systems |
1) Based on plan experience, plan can adjust:
a) Benefits (including benefits paid to retirees) b) Contributions 2) Mechanism allow plans to continue to take risks 3) Needs to be robust enough to withstand shocks |
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QBS 12: 28 of 38
Plan Designs that Differ from Traditional Designs Solidarity Ways of non-traditional systems increase member solidarity |
1) Organized plans around a particular profession
2) Make participation mandatory for everyone within the profession 3) Significant cost sharing through employee contributions 4) Adjust contributions or benefits based on fund performance |
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QBS 12: 29 of 38
Plan Designs that Differ from Traditional Designs Solidarity Factor that can strain member solidarity |
1) Shifting demographics
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QBS 12: 30 of 38
Plan Designs that Differ from Traditional Designs Use of groups Advantage of groups/pooling resources/limiting individual involvement |
1) Reduces information asymmetry
2) Reduces cost 3) May improve coverage 4) Portability if stay within covered group 5) Mortality risk is pooled |
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QBS 12: 31 of 38
Plan Designs that Differ from Traditional Designs Standardization vs. innovation Key item needed for the success of a retirement system |
- Innovation
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QBS 12: 32 of 38
Plan Designs that Differ from Traditional Designs Standardization vs. innovation Advantages of standardization |
1) Helps consumers:
a) Understand benefits b) Compare prices c) Quality 2) Decreases cost 3) May increase coverage |
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QBS 12: 33 of 38
Plan Designs that Differ from Traditional Designs Standardization vs. innovation Disadvantage of standardization |
1) Drives out innovation
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QBS 12: 34 of 38
Plan Designs that Differ from Traditional Designs Measurement Framework Sample Measurement Framework |
- Create table with the following fields
1) Stakeholder criteria 2) Objective of the criteria 3) Rating 4) Evaluation 5) Effect of adverse incentives - Use green through red rating system |
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QBS 12: 35 of 38
Plan Designs that Differ from Traditional Designs Measurement Framework Measurement framework criteria - society |
1) Adequate
2) Affordable 3) Sustainable 4) Robust 5) Does not promote economic risk 6) Does not promote political risk 7) Does not lead to system failure 8) Addresses imperfections of other stakeholders 9) Promote social solidarity and integrity |
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QBS 12: 36 of 38
Plan Designs that Differ from Traditional Designs Measurement Framework Measurement Framework Criteria - Individuals |
1) Guaranteed income
2) Predictability of income 3) Retirement flexibility 4) Portability 5) Sensitive to employment conditions 6) Sensitive to family needs 7) Requirement for individual skills 8) Investment risk 9) Longevity risk 10) Inflation risk 11) Premature retirement risk |
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QBS 12: 37 of 38
Plan Designs that Differ from Traditional Designs Measurement Framework Measurement Framework Criteria - Employers |
1) Supports primary business purpose
2) Workforce management: attraction & retention 3) Workforce management: transition of employees 4) Responsiveness to owners 5) Business risk 6) Regulatory risk 7) Fiduciary risk 8) Litigation risk |
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QBS 12: 38 of 38
Plan Designs that Differ from Traditional Designs Measurement Framework Measurement Framework Criteria - Markets |
1) Maximizes use of markets
2) Transparent cost 3) Strong governance 4) Efficient priced 5) Efficient risk bearing 6) Allocation of risk |
