Csp Q15

Front 1

QBS 15: 1 of 34
Government's view for and against pension plans

Back 1

For
1) Encourage by governments because of social utility
2) Government program provides a reasonable minimum income
3) Er sponsored plans reduce reliance on government plan
4) Funding generates large amounts of capital needed to develop country's resources and industry
Against
1) Limits tax revenue

Front 2

QBS 15: 2 and 3 of 34
Employer's view for and against pension plans
(1 and 2 of 2)

Back 2

For
1) Contributions tax deductible and investment income tax free
2) Allows company to expense its pension costs in year pensions earned
3) Makes it easier to retire employees in an orderly manner as employees reach retirement age
4) Good pension improves employer's competitive position in attracting and maintaining ees
5) Certain types of plans can improve ee interest in profit objectives (e.g. profit sharing)
Against
1) Funded plans require company to invest outside of its company
2) Discouraged by rising administration costs to comply with legislation
3) Company may be subsidizing government reduction rather than assisting the company's pensioners
4) Some feel it is the employee's responsibility to save for retirement

Front 3

QBS 15: 4 and 5 of 34
Employee's view for and against pension plans
(1 and 2 of 2)

Back 3

For
1) Er plan combined with gov't plan can provide adequate retirement income
2) Funding plan gives employee confidence benefit will be there
3) Allows employee ot save on a tax deferred basis
4) Changing three-legged stool, demographics, and economic events have created greater interest in pension issues
Against
1) Registered plans have statutory limits
2) Companies under pressure to provide restoration benefits

Front 4

QBS 15: 6 of 34
Main problems perceived about DB plans in the public sector

Back 4

1) Unfunded liabilities
2) Complex, can be gamed and manipulated
3) Large pool of assets susceptible to political raids
4) Vested benefits erode through inflation when change jobs

Front 5

QBS 15: 7 of 34
Perceived advantages of DC plans in the public sector

Back 5

1) Fully funded
2) Less opportunity for political raids
3) Portable
4) Ee controls investments
5) Ee bears investment risk

Front 6

QBS 15: 8 of 34
Public Pension Stakeholders and Their Economic Interests

Back 6

1) Plan beneficiaries
a) Seek to maximize compensation
2) Taxpayers
a) Seek services at the lowest possible cost
b) Want to avoid raids on large pool of assets
3) Elected Administrators and Regulators
b) Exchange long term costs for short term accommodation

Front 7

QBS 15: 9 of 34
Reasons to sponsor a DB plan

Back 7

1) Attract and keep committed workers
2) Competitive reasons
3) Reduce expensive turnover (referred to as "golden handcuffs")
4) Encourage older workers to voluntarily retire in an orderly process
a) DB accruals can provide strong incentive for workers to retire early or no later than NRA
b) Can affect further by capping benefit service
c) DC plan has opposite effect because waiting increases balance and reduces annuity factor
d) DB helpful during a restructuring

Front 8

QBS 15: 10 of 34
Workers interested in retirement plans for several reasons

Back 8

1) Maximize the effectiveness of saving while working
2) Optimize the management of savings
3) Insure against risks while saving for retirement
4) Tax savings of qualified plans

Front 9

QBS 15: 11 of 34
What are the typical perceptions of participants regarding pension plans

Back 9

1) Perceived value function of age
2) Young worker places high value on DC plan but not DB plan
3) Older worker looks at DB benefit as a source of retirement income and DC benefit as a supplement to make up any shortfall, or any unexpected costs

Front 10

QBS 15: 12 and 13 of 34
Courses of action company can take when employee becomes superannuated
(1 and 2 of 2)

Back 10

1) Employee can be terminated
2) Retain employee without changes to compensation and absorb opportunity cost
- Costly and creates low morale
3) Transfer employee to less demanding job at same or reduced pay
- Disadvantages of moving them and keeping the pay the same:
a) Limited number of transfer positions exist
b) Employee generally overpaid in transferred position
c) Only defers productivity problem
4) Establish a pension plan
- Advantages:
a) Humane and nondiscriminatory alternative to continued employment
b) Should increase morale
c) Keeps promotion channels open
d) Can replenish workforce

Front 11

QBS 15: 14 of 34
Limitations of DC plans

Back 11

1) Difficult to implement a phased DC retirement program
2) Difficult to control postponed retirement
3) Can't provide past service benefits
4) Attracting mid-career employees difficult
5) Death benefit continues to grow while employee's need tends to decrease
6) Have higher turnover costs
7) Balances high in good economy which encourages retirement at time when might need to retain employees and vice versa
8) Unwinding administrative mistakes are difficult
9) Account balance at end of career can vary widely
10) May not accomplish what sponsor thought it would accomplish

Front 12

QBS 15: 15 - 17 of 34
Disadvantages of DB plans
(1 - 3 of 3)

Back 12

1) Not understood
2) Ee under appreciates value and risk being borne by the sponsor
3) Some designs have been overly engineered
a) Difficult to communicate
b) Difficult to administer
c) Potential litigation risk
d) Increases under appreciation
4) Risks can be entered into the design
a) Including bonuses and overtime in the pay definition
b) Early retirement subsidies
5) Regulations make phased retirement difficult
6) Difficult to increase NRA when longevity costs
7) Employee contributions increases risk
a) Employer picks up difference in fluctuating cost where employee contributions are typically a fixed percentage of pay
b) Surplus ownership risk
c) Administrative risk
d) Communication risk
e) Implementation of past service improvement risk
8) Replacement ratio adequacy risk for career average plan
9) Final average pay risk

Front 13

QBS 15: 18 of 34
Some design ideas that can manage risk

Back 13

1) Can provide group annuity quotes to DC plan members
2) Variable benefit DB plan
3) Have an indexed career average pay plan
a) If assets outperform assumptions then provide pay updates

Front 14

QBS 15: 19 of 34
Advantages of DB plans over DC plans

Back 14

1) Income-replacement objectives can be more easily accommodated
2) Can integrate benefits with government benefits more efficiently
3) DB benefits can be more cost focused on retirement benefits
4) More equitable allocation of employer contributions
5) DB can provide pre-retirement inflation protection more easily
6) Many employers don't feel employee should bear investment risk
7) Incremental cost of a young employee is relatively small

Front 15

QBS 15: 20 of 34
Advantages of DC plans

Back 15

1) Deferred profit sharing plans provide employers maximum flexibility in cost commitment while increasing productivity
2) Can achieve greater employee identification by investing in the company's securities
3) Better appreciated among younger employees
4) Employee contributions can be made pre-tax unlike DB plans
5) Plan administration costs may be lower
6) PPA allows investment advice through fiduciary advisers

Front 16

QBS 15: 21 of 34
Disadvantage of DC plans

Back 16

Employees tend to invest conservatively

Front 17

QBS 15: 22 of 34
Reasons why people don't save

Back 17

1) Payoff for behavioral change is uncertain
2) Don't buy idea of future payoffs
3) Pleasure tomorrow is perceives as pain today
4) Wrong decisions may yield instantaneous gains
5) No immediate tangible reward for saving now
6) Can postpone saving decisions without immediate penalty
7) No functional deadlines for actions

Front 18

QBS 15: 23 of 34
Problems employers face when educating employees

Back 18

1) Financial illiteracy
a) Don't understand risk/reward characteristics
b) Not skilled in finance and mathematics
c) Providing more investment choices can be confusing
2) Irrational investing
a) Believe investing in company stock is less risky than investing in diversified portfolio
3) Lack of action-based interest
a) Not interested in advancing their financial awareness
b) Don't act on education they receive
4) Long-term thinking is foreign and difficult to grasp
5) Many prefer lump sums over annuities
6) Many retiree earlier than expected

Front 19

QBS 15: 24 of 34
DC plan design features that should be considered to help employees address retirement risks

Back 19

1) Automatic enrollment
2) Quick enrollment option
a) Participation voluntary
b) Deferral rate and default fund pre-selected
3) Automatic increases in savings
4) Managed investment and specifically designed funds (e.g. lifestyle investing)
5) Distribution options
a) Can provide group annuity quotes to DC plan members

Front 20

QBS 15: 25 of 34
Effects of Automatic Enrollment on Plan Utilization

Back 20

- Most employees don't opt out
- Most keep their money invested in the default fund

Front 21

QBS 15: 26 of 34
Types of lifestyle funds

Back 21

1) Constant allocations
2) Automatic rebalancing based on a target maturity date

Front 22

QBS 15: 27 of 34
Advantages of Constant Allocations

Back 22

1) Pick fund matches objectives (customization)
2) Can move from one fund to another when desire (flexibility)

Front 23

QBS 15: 28 of 34
Advantage of Automatic Rebalancing

Back 23

1) Many investors neglect to review the appropriateness of their asset allocation

Front 24

QBS 15: 29 of 34
Advantages of lifestyle approaches

Back 24

1) Enhances the savings program
2) An effective investment approach
3) Helps investor avoid common mistakes:
a) Not taking on enough risk
b) Lack of diversification
c) Portfolio rebalancing
4) Addresses concerns of participant education
5) Portfolio is well-diversified
6) Benefit from professional management
7) Helps sponsor meet their fiduciary responsibility
8) A single, convenient investment vehicle

Front 25

QBS 15: 30 of 34
Common lifestyle mistakes made by investors

Back 25

1) Diversifying across several lifestyle funds
2) Many choose their maturity date to be their retirement age

Front 26

QBS 15: 31 of 34
Way to counter over diversification

Back 26

1) Limit the number of lifestyle funds

Front 27

QBS 15: 32 of 34
Way limit effect of electing a maturity date that is too early

Back 27

1) Choose a later target maturity date

Front 28

QBS 15: 33 of 34
DC issues and concerns that need to be addressed through communications

Back 28

1) Employees have more control over their retirement planning
2) Want DC participants to be disciplined savers to sustain standard of living in retirement
3) Need to provide sufficient information to help member reach target benefit
4) Information needs to be communicated in a way members can understand
5) Want participation to be high in plans with voluntary ee contributions
6) Members need to be aware of longevity risk
i) If manage themselves, risk overspending or being too conservative

Front 29

QBS 15: 34 of 34
List some different methods of communicating benefits to plan members to increase perceived value?

Back 29

1) Printed material
2) Video and audio presentations
3) Automated voice-response systems
4) Computer retirement planning and simulation models
5) Focus groups and surveys