Recent actuarial report not promising but better than projected
posted 04/30/09

The most recent actuarial valuation report presented by Pacific Actuarial Services, MISSA’s actuary, does not look promising but considered better than what the Administration projected.

According to the actuary, MISSA’s AAL as of October 1, 2008 totaled $225.8 million while total assets amounted to only $63.2 million. The imbalance resulted to an unfunded AAL of $162.6 million or 72%. Therefore, the funded AAL is only 28%.

The AAL represents the liability of the Administration for benefits already earned, including those in pay status, as well as benefits earned as of the valuation date for workers who are earning future benefits. One can think of this liability as the amount needed today to pay for all benefits earned as of today that are either already being paid or will be paid in the future.

This determination of the accrued liability does not include former workers who are no longer contributing to the Administration and are not fully insured (those with at least 38 quarters of coverage) and therefore, are not entitled to a future benefit. Should these workers re-enter the workforce in the future, their benefits will then be included in the category of workers currently earning benefits.

On October 1, 2001, MISSA’s AAL was estimated at $218 million while assets held at that time were valued at $35 million (or 16%) of the AAL. Although this condition indicated that MISSA may be unable to meet its future benefit obligations, the Administration has already started developing strategic plans to correct this potential funding deficiency such as continued long-term investment return, more rigorous tax collection, stricter administration of all system eligibility requirements and continued cost control.

Subsequent valuation report in October 1, 2003 showed that total AAL dropped to $205.7 million while total assets increased to $41.5 million. Consequently, it caused the funded AAL to jump to 20% (from 16%). The drop in AAL indicated a downward trend in reported income by active workers while the increase in total assets was the result of the strong performance of MISSA investments - gains of $7.5 million or an astounding net return of 31.23% in  calendar year 2003 alone.

Three years later (as of October 1, 2006), total AAL slightly increased to $207.7 million while total assets ballooned to $61.2 million. Proportionately, the funded AAL soared to 29.46%. The increase in total assets was again attributed to the consistent strong performance of MISSA investments - accumulated gains of $20.2 million (or an annual net return of 16.45%) since the appointment of MISSA’s new Investment Advisor (Investor Solutions, Inc.) and Investment Custodian (Fidelity Investments) in November 2002.

In their October 2001 valuation report, MISSA’s actuary has recommended that the Board consider a funding policy that seeks to raise the funded percent from 16% to 30% over 30 years. This can be attained with the passage of new legislations that will put tighter controls on survivor and disability benefits. However, on the contrary, the Administration were faced with several bills detrimental to the long-term viability of the RMI’s Retirement Fund. Fortunately, the majority of the Nitijela legislators remained supportive of MISSA’s stand to  protect the system and the next generations of beneficiaries.

The exceptional performance of MISSA investments peaked in October 2007 when its total market value (including BOMI & MISC stocks and BOMI TCDs) reached $66.6 million. Consequently, MISSA’s total assets increased to $71.9 million which were more than twice its total assets in 2001.

Had a valuation study done in October 2007, MISSA would have a funded AAL of about 32%-33%, which would have surpassed the actuary’s recommended funded AAL of 30%. This feat was achieved by MISSA without any of the recommended legislations that will put tighter controls on survivor and disability benefits. Likewise, had MISSA investments neither gained nor lost in FY 2008, the funded AAL would have been 32%.

In addition to the valuation study as of October 1, 2008, MISSA asked its actuary to prepare a study showing the impact of switching from a defined benefit plan to a defined contribution plan. This project was the result of an earlier initiative of President Litokwa Tomeing who, as the Nitija Speaker in 2004, appointed a special committee to conduct a comprehensive review of the Marshall Islands social security system and look at other forms of retirement schemes as possible alternatives to the current social insurance system in RMI.

DEFINED BENEFIT PLAN

The current social security system in the country is a defined benefit plan. A traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined by a set formula, rather than depending on investment returns. A traditional pension plan that defines a benefit for an employee upon that employee's retirement is a defined benefit plan.

Traditionally, retirement plans have been administered by institutions which exist specifically for that purpose, by large businesses, or, for government workers, by the government itself. A traditional form of defined benefit plan is the final salary plan, under which the pension paid is equal to the number of years worked, multiplied by the member's salary at retirement, multiplied by a factor known as the accrual rate. The final accrued amount is available as a monthly pension or a lump sum.

The benefit in a defined benefit pension plan is determined by a formula that can incorporate the employee's pay, years of employment, age at retirement, and other factors. For example, a plan offering $100 a month per year of service would provide $3,000 per month to a retiree with 30 years of service. While this type of plan is popular among unionized workers, Final Average Pay (FAP) remains the most common type of defined benefit plan offered in the United States. In FAP plans, the average salary over the final years of an employee's career determines the benefit amount.

Many DB plans include early retirement provisions to encourage employees to retire early, before the attainment of normal retirement age. Companies would rather hire younger employees at lower wages. Some of those provisions come in the form of additional temporary or supplemental benefits, which are payable to a certain age, usually before attaining normal retirement age. 

Defined benefit plans may be either funded or unfunded.

In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid. Pension arrangements provided by the state in most countries in the world are unfunded, with benefits paid directly from current workers' contributions and taxes. This method of financing is known as Pay-as-you-go (PAYGO or PAYG). The social security system in the USA and most European countries are unfunded, having benefits paid directly out of current taxes and social security contributions. In some countries, such as Germany, Austria and Sweden, company run retirement plans are often unfunded.

In a funded plan, contributions from the employer, and sometimes also from plan members, are invested in a fund towards meeting the benefits. The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits. Typically, the contributions to be paid are regularly reviewed in a valuation of the plan's assets and liabilities, carried out by an actuary to ensure that the pension fund will meet future payment obligations. This means that in a defined benefit pension, investment risk and investment rewards are typically assumed by the sponsor/employer and not by the individual. If a plan is not well-funded, the plan sponsor may not have the financial resources to continue funding the plan. In many countries, such as the USA, the UK and Australia, most private defined benefit plans are funded, because governments there provide tax incentives to funded plans (in Australia they are mandatory). In the United States, private employers must pay an insurance-type premium to the Pension Benefit Guaranty Corporation, a government agency whose role is to encourage the continuation and maintenance of voluntary private pension plans and provide timely and uninterrupted payment of pension benefits.

DEFINED CONTRIBUTION PLAN

In a defined contribution plan, contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, often through the purchase of an annuity which then provides a regular income. Defined contribution plans have become widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of defined benefit plans in the US has been steadily declining, as more and more employers see pension contributions as a large expense avoidable by disbanding the defined benefit plan and instead offering a defined contribution plan.

Money contributed can either be from employee salary deferral or from employer contributions. The portability of defined contribution pensions is legally no different from the portability of defined benefit plans. However, because of the cost of administration and ease of determining the plan sponsor's liability for defined contribution plans (you don't need to pay an actuary to calculate the lump sum equivalent that you do for defined benefit plans) in practice, defined contribution plans have become generally portable.

In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer. In addition, participants do not necessarily purchase annuities with their savings upon retirement, and bear the risk of outliving their assets. (In the United Kingdom, for instance, it is a legal requirement to use the bulk of the fund to purchase an annuity.)

The "cost" of a defined contribution plan is readily calculated, but the benefit from a defined contribution plan depends upon the account balance at the time an employee is looking to use the assets. So, for this arrangement, the contribution is known but the benefit is unknown (until calculated).

Despite the fact that the participant in a defined contribution plan typically has control over investment decisions, the plan sponsor retains a significant degree of fiduciary responsibility over investment of plan assets, including the selection of investment options and administrative providers.(Source: WIKIPEDIA)