University of Missouri System Board of Curators: Compensation & Human Resources Committee: A Review of Salary and Benefit Programs
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University of Missouri System Board of Curators: Compensation & Human Resources Committee: A Review of Salary and Benefit Programs University of Missouri System Board of Curators: Compensation & Human Resources Committee: A Review of Salary and Benefit Programs Presentation Transcript

  • University of MissouriBoard of CuratorsCompensation & Human Resources Committee
    A Review of Salary and Benefit Programs
    August 2009
    Betsy Rodriguez, Vice President for Human Resources
    and
    Mike Paden, Associate Vice President for Benefits
  • Total Compensation Overview
  • Compensation Philosophy
    Total Compensation Philosophy
    Attract and retain highly qualified employees through salary and benefits that are:
    Competitive (measured by peer comparisons)
    Cost effective (measured by national and regional benchmarks)
    Valuable (measured by employee surveys and peer comparisons)
  • University must manage and support its TALENT through programs and services that cover the employment and employee lifecycle.
    Note: Programs not traditionally considered part of total compensation include employee development and training, career progression opportunities, employee assistance programs, etc. and are not included in this presentation.
    Compensation Philosophy (continued)
  • Employees’ needs and values change throughout their employment and employee lifecycles …
    Compensation Philosophy (continued)
  • Lifecycle Events
    Employee demographics
    Average Age: 45
    Turnover Rate: 13% per year
    (higher turnover for those < 5 years)
    Salary level: 50% employees make < $50,000
    Average Length of Service: 9.8 years
    Other considerations
    Marital status
    Dependents
    Geographic location (rural vs. urban)
    Medical history
  • Workforce Demographics
    Benefits Eligible employees = 19,000
     
     
  • Workforce Trends
    Pending retirement of Baby Boomers
    (23% of UM population is 55 yrs and older)
    Smaller population to replace Baby Boomers
    (Labor shortage expected 2010-2016, especially in health care, info technology and education)
    Generational differences– different values and expectations from employees
    Increasing demand for work/life balance
  • Salary Overview
  • Salary Overview
    Most significant part of total compensation
    University spends $1 billion annually on benefits eligible salaries
    Lower public sector salaries are often viewed as counterbalanced by stability, job security, and substantial benefits package (especially retirement plans)
  • Salary Overview (continued)
    Initial Salary
    Job salary ranges based on: market, job level, job scope
    Individual salary based on: market and recruitment conditions, applicant skills and experience, and internal equity*
    Salary is not based on funding source
    Initial salary is critical given relatively minimal annual adjustments and career progression opportunities
    *New hire salaries often create significant internal equity issues.
  • Salary Overview (continued)
    Annual salary adjustments
    Adjusted in September, based on funds availability, within ‘pool’ established by board of curators
    Based on merit*, with available salary budgets distributed under locally administered processes
    Typically ‘base building’
    Occasional market adjustments (e.g. Fall ’08)
    Annual adjustments may include promotion (e.g. academic progression)
    Supervisors are expected to complete annual performance evaluations
    *Assumes salaries are already at market
  • Salary Overview (continued)
    Salary Decisions
    Executive Order 6 – establishes delegated responsibility
    Access to market data (through Human Resources or website)
  • Salary Overview (continued)
    Other salary programs:
    Extra Compensation (360.010) - pay for duties outside or above the 'normal' duties
    Executive Compensation/Incentive (by incentive plan or individual contract)
    Summer appointments (360.020) - pay for 9-month faculty who elect to teach or conduct other academic work during the summer months
    Incentive compensation (360.150) - incentive pay plans
    About 40 plans across campuses
    Typically done for revenue generating areas (sales, dining halls, athletics)
    Require President approval
  • Salary DatabyEmployee Group
  • Salary Data: Faculty
    Faculty-Unranked
    Titles such as Lecturer, Instructor, Research Associate, Program Director, Extension Specialist
    Approximately 2,280
    Term appointments (annual or no more than 3-year)
    Average salary = $47,940 (12-month)
  • Salary Data: Faculty
    Faculty-Ranked
    Assistant Professor, Associate Professor, Professor (including clinical/professional practice, research, teaching, and extension nontenure tracks)
    Approximately 3,200
    Term appointments and continuous
    Average salary ranked faculty = $74,048 (9-month)
    (tenured/tenure track = $78,338)
    (nontenure track = $60,194)
  • Salary Data: Faculty
    Salary Market Data – Faculty (Ranked)
    Established based on discussions with academic campus leadership
    Market comparisons by academic discipline
    Derived from the following data sources:
    • Association of American Universities (AAU)
    • Association of Public Land Grant Universities (APLU)
    • College & University Professional Association for Human Resources (CUPA-HR)
  • Salary Market Data – Faculty (Ranked)
    From data sources developed 5 market comparisons:
    AAU Inclusive (all 35 AAU institutions)
    AAU (excludes institutions in coastal states)
    CUPA-HR Public National (50 public institutions: doctoral granting; intensive research; 15,000 and higher enrollment)
    CUPA-HR Urban 21 (21 institutions located in urban areas)
    APLU (land grant institutions excluding coastal states)
    Salary Data: Faculty
  • Salary Data: Faculty
    Salary Market Data – Faculty (Ranked)
    Data are focused on the contiguous states (and one state removed)
    Updated annually but typically lags about six months
    Medical school faculty are excluded from all disciplines due to the higher salaries associated with MD degrees
    University and market data are accessible online to department chairs, deans, and provosts –SEE SAMPLE
  • Salary Data: Faculty
    Faculty market data are available online to all campus academic administrators, including department chairs
    See next slides for sample data by campus and selected disciplines
  • 11-Month Salaries
    Tenure and Tenure Track
  • 11-Month Salaries
    Tenure and Tenure Track
  • 11-Month Salaries
    Tenure and Tenure Track
  • 11-Month Salaries
    Tenure and Tenure Track
  • Peer Comparisons: Faculty Salaries
    Includes all ranked faculty per AAU definitions
    Chart shows percent growth in overall salary base, with an average salary
    Average salary ranges from $73k to $116.8k
    MU was only one of few schools with increase in 2008
    With strategic investment in Fall 2008, MU remains next to last
  • Salary Peer Comparisons: Faculty
  • Salary Peer Comparisons: Faculty
  • Salary Peer Comparisons: Faculty
  • Salary Comparison Samples
  • Salary Data: Hourly Employees
    Hourly employees
    Total payroll $233 million + benefits $49.8 million
     
    Service/Maintenance& Skilled Trades
    Titles such as Police Officer, Child Care Assistant, Food Services, Custodians, Power Plant Operators, Electricians, Pipefitters
    Approximately 2,150 employees
    Majority are union eligible positions (about 20% are union members)
    Meet and confer for annual agreement, nonbinding
    Average hourly rate = $14.50 (range from $8 to $31)
  • Salary Data: Hourly Employees
    Hourly employees (continued)
    Office administration / Support
    Titles such as Administrative Assistant, Office Support Staff, Fiscal Assistant
    Approximately 3,320 employees
    Average hourly rate = $14.50 (range from $7.25 to $35.00)
    Technical
    Titles such as Research Technician, Optician Assistant, Broadcast Technician, Reactor Operator, Computer Operator, Hygienist
    Approximately 2,050 employees
    Average hourly rate = $16.75 (range from$8.00 to $39.50)
  • Salary Data: Hourly Employees
    Salary Market Data – Hourly Employees
    Compared to local/regional markets
    Note: Columbia IS the market for many positions
    Union salary structure is discussed during annual ‘meet and confer’
    Union salary structure is a step system by which employees in same title with same length of service receive same hourly pay
  • Salary Data: Salaried Employees
    Salaried employees
    Total payroll $772 million + benefits $165 million
     
    Professional
    Titles such as Programmer / Analyst, Attorney, Psychologist, Accountant, Engineer, Chemist
    About 4,100 employees
    Average annual salary $50,400
  • Salary Data: Salaried Employees
      Salaried employees (continued)
    Administrative / Manager / Executive
    Titles such as Farm Supervisor, Ticket Manager, Admissions Director, Placement Director, Coach, Provost, Chancellor, President
    About 1,900 employees
    Average annual salary $79,000
  • Salary Data: Salaried Employees
    Salary Market Data – Professional, Administrators and Executives
    Sources: Salary.com and other purchased or generated market databases
    Administrative work varies across many industries (e.g., agriculture, entertainment, sports, retail, finance, print, power generation, restaurant, resource management, housing, research, healthcare, student services)
  • Salary Data: Salaried Employees
    Salary Market Data – Professional, Administrators and Executives (continued)
    Maintaining competitive pay across these industries is constant balancing act as each industry moves in response to economic conditions and labor markets
    Large salary differences across industries lead to issues of ‘fairness’ and ‘equity’ among university employees (e.g., typically student services have lower market salaries than finance)
    Assess markets and salary needs within Occupational Group(s)
    Exception: Senior Leadership and strategic valued position
    are often individually compared to market
  • Sample Staff Market Data: Salary.com
    Salary.com
  • Sample Staff Market Data: CUPA-HR
  • Salary Peer Comparisons: Staff
    Do not have complete data on every staff position compared to market
    Need to do significant work to develop accurate market comparisons (due to title inflation and other considerations)
    Selected 150 titles—salaried only for comparison
  • Salary Peer Comparisons: Staff
    Staff by Select Occupational Groups
    69.5% of mkt
    79.9% of mkt
    89.7% of mkt
    90.8% of mkt
    91.9% of mkt
    UNIV
    MKT
    79.6% of mkt
  • Salary Increase History: Faculty and Staff
  • Summary Observations of Salary
    UM salaries are below peers regardless of how data are analyzed
    We typically hire at lower end of range (which is below market) because of internal equity issues, but fall further behind quickly
    High turnover in the first 2-3 years is costly
    High turnover will be exacerbated as we reach workforce shortages
    Increasing market pressure on new hires creates salary ‘compression’ (new hires at or above longer term employees)
    Small annual merit pools have exacerbated market situation
    ‘Catch up’ will require strategic multi-year investment
  • Faculty & Staff Benefits
    August 20, 2009
  • UM Retirement and Staff Benefits Committee
  • UM Retirement & Staff Benefits Committee
    UM Retirement, Disability & Death Benefits Plan
    Rules and regulations for administration of the plan
    Interpretation and construction of the plan
    Rulings subject to review and final determination by Board of Curators
    Advisor to President on Benefits Issues
    Plan design and development
    New program offering
    Strategic planning
  • UM Retirement & Staff Benefits Committee
    Required Membership
    President of the University, Ex-Officio
    Chair – appointed by the President
    Other members – appointed by the President, with a majority being faculty
  • UM Faculty & Staff BenefitsAdministration
  • UM Faculty & Staff BenefitsOrganization and Responsibilities
  • BenchmarksHewitt Associates Benefits IndexRelative Value Study
    A Study of Comparative Benefit Values
  • Comparator Institution BenchmarksHewitt Associates Relative Value Study
    Indiana University
    Iowa State University
    Michigan State University
    Ohio State University
    Pennsylvania State University
    Purdue University
    Texas A&M
    University of Colorado
    University of Illinois
    The University of Iowa
    University of Kansas
    University of Michigan
    University of Minnesota
    University of Nebraska
    University of Texas
  • Comparator Institution BenchmarksHewitt Associates Relative Value Study
    Value vs. Cost – A Distinction
    Employer Value Index-Average=100
    Total Value Index-Average=100
    Employer Value Ranking
    Total Value Ranking
    Frequency-every 5 years
  • Comparator Institution BenchmarksHewitt Associates Relative Value Study
    *After 7/1/09 pension plan amendment
  • Benefit Eligibility
  • Employee Benefit Enrollment Eligibility
    Employees Eligible to Enroll
    75% FTE
    Appointment duration of at least 9 months
    Employees Not Eligible to Enroll
    Students
    Part time
    Temporary
  • Dependent Enrollment Eligibility
    Legal Spouse (domestic partners not recognized)
    Surviving Spouse
    Children
  • Benefit Plans Offered
    Conventionally Insured, No UM Subsidy
    Conventionally Insured, UM Subsidy
    Self Insured, UM Subsidy
    Pension and Deferred Compensation
    Other Employer Sponsored Plans
  • Conventionally Insured, No UM Subsidy Health and Welfare Plans
  • Conventionally Insured, UM Subsidized Health and Welfare Plans
  • Self Insured, UM Subsidized Health and Welfare Plans
  • Retirement & Deferred Compensation Plans
  • Flexible Benefits Plans No UM Subsidy
  • Other Benefit Plans
  • Benefit Plans Contribution AnalysisBased on 2009 Contribution Rates
  • UM Dental Benefits Plan
  • UM Dental Benefits Plan
    Self Insured
    50% UM Premium Subsidy
  • UM Dental Benefits Plan (cont.)
    $100 Deductible (not applicable to
    preventive care)
    Preventive Care = 100% coverage
    Other Care = 50% to 80% coverage levels
    Maximum Annual Benefit = $1,500
  • UM Dental Benefits Plan (cont.)
    Benchmark
    Observations:
    • Deductibles of other plans are $25 - $50
    • All other plans cover orthodontic
    • UM requires higher employee contribution
    percentage
  • UM Long Term Disability Plan
  • UM Long Term Disability Plan
    Self Insured
    Claims Payment – UM Faculty & Staff Benefits
    3 year pre-existing condition period
    5 month elimination period
    Integration with other plans
    Option A - 60% of salary benefit, no employee premium
    Option B - 67% of salary, employee premium required
  • UM Long Term Disability (cont.)
    Benchmark
    Observations:
    • Average benefit percentage - 62%
    • Average maximum benefit per month - $10,000
    • 10 of 15 require employee contributions for base
    coverage
  • UM Death Benefit Coverage
  • Death Benefits
    Group Term Life
    Insurer – Minnesota Life
    Up to 2X Salary
    UM Subsidized
    Supplemental Term Life
    Insurer – Minnesota Life
    Up to 3X Salary
    No UM Subsidy
  • Death Benefits (cont.)
    Accidental Death & Dismemberment
    Insurer – Minnesota Life
    Up to $150,000
    UM Retirement, Disability & Death Benefit Plan
    Vested Status Required
    Greater of 2X Salary or present value of future pension benefits
    UM Subsidized
  • UM Group Term Life Insurance
    Benchmark
    Observations:
    • Significant diversity in employer subsidized
    coverage from lower fixed amounts to higher
    multiples of salary
    • Lower Total Value primarily due to the average
    overall access is 6 X pay.
  • UM Medical Benefits Plan
  • UM Medical Benefits Plan
    Choice Health Care Program (Point of Service)
    Catastrophic Health Care Program
  • UM Choice Health Care Program
    Self Insured
    Network Based
    Eligible Population – Active and Retired Employees
    Active Employee Premium Subsidy – 73%
    Design Objectives and Features
  • UM Catastrophic Health Care Program
    Self insured
    Eligible Population – Active and Retired Employees
    Active Employee Premium Subsidy – 66-2/3%
    Non Network Based
    Design Objectives and Features
  • Medical Benefits Plan – Active Employees
    Benchmark
    Observations:
    • Narrow range among institutions in total value: 87.3 to 110.1
    • UM subsidizes slightly less than average of other institutions
  • Medical Program Premium Changes
    * projected
    Benchmark – Towers Perrin Health Care Cost Survey (500 employers, 10 million employees)
  • Towers Perrin 2008 Health Care Performance Study
    UM actual costs were 16% below the benchmark in total
    UM actual costs fall below the 25th percentile
    UM overall program efficiency is 16% below the database. Translates into current savings of $23.9 million
    UM administration fees are competitive and fall below the 25th percentile
  • Healthy for Life: T.E. Atkins UM Wellness Program
    UMHS pilot began in 2004; extended to campuses 2007
    Cost-Effectiveness: 524 employee volunteers; over 450 student volunteers per year; doctoral, masters, & undergraduate practicum students provide an array of program support
    Broad Penetration: 3,920 wellness fair employee attendees; 3,995 annual screenings; 2,333 pedometer program enrollees, 957 other physical activity program enrollees; 210 tobacco interventions
    Leveraging Resources: received grant to support the nation’s first use of self-management model for employee health & job satisfaction
    Benchmarking: data warehouse will aggregate & analyze data on health behavior, wellness program enrollment, sick leave, worker compensation/work injury, and claims experience
    Data-driven Planning: Goal to improve tools & incentives for annual health survey to monitor and mitigate emerging health risks
  • UM Pension and Deferred Compensation Plans
  • Deferred Compensation Program Alternatives
  • UM Retirement, Disability & Death Benefit Plan – A Hybrid Pension Plan
    Defined Benefit Plan
    5 Year Vesting
    Benefit Formula:
    2.2% X length of service X final average salary
    Final average salary – 5 highest consecutive
    Minimum Value Accumulation
    5% of salary
    7-1/2% interest rate
  • Deferred Vested Benefits
    Vested but not eligible for early retirement
    Lump sum distribution available
    Cash (taxable)
    Rollover non-taxable
    Reduced annuity benefits as early as age 55
    Full annuity benefit at age 65
  • Early Retirement Benefits
    Reduced Benefits
    Age 55 = 10 years of service
    Age 60 = 5 years of service
    Reduction factor = 3-1/3% for each year retirement precedes age 65
    Unreduced Benefits
    Age 62 = 25 years of service
  • Normal Retirement Benefits (unreduced)
    Age 65
  • UM Retirement, Disability & Death Benefit Plan
  • UM Retirement, Disability & Death Benefit PlanCurrent Benefit Recipients
  • History of Actual UM Contribution Rates
    % of payroll
  • UM Retirement Disability and Death Benefit PlanHistory of Major Amendments
  • Guaranteed Cost of Living Increase
    Employee Election
    Reduction in Initial Benefit
    2% Option
    4% Option
  • Comparison of CPI-W to UM Pension Ad Hoc Adjustments through September 2008
  • UM Retirement Disability and Death Benefit PlanRecent History of Pension Adjustments Awarded
  • UM Retirement, Disability & Death Benefit Plan
    Benchmark – Before 7/1/09 plan changes
    Benchmark – After 7/1/09 plan changes
  • Observations
    All institutions offer defined contribution pension plans
    5 institutions also offer defined benefit plans
    Average employer contribution rate = 9.6%
    Average employee contribution rate = 5.75%
    Employer contribution rate range = 6.8% to 15%
    Low total value ranking is due to other plans requiring higher employer contribution
  • UM Post Employment Benefits
  • Other Post Employment Benefits Liabilities
    GASB 45
    Annual Liability Accrual - $47.6 million
    Annual Funding Rate – 50%
  • UM Post Employment Benefits
    UM Subsidized
    Medical Benefits
    Dental Benefits
    Group Term Life Insurance (to age 70)
    • Long Term Disability Benefits
    Not UM Subsidized
    Supplemental Life Insurance
    Dependent Life Insurance
    Vision Benefits
    Accidental Death & Dismemberment
    Long Term Care
  • Retiree Medical PlansUM Premium Subsidies
    Retired Prior to September 1, 1990
    67% employee and spouse
    33% surviving spouse
    Retired on or after September 1, 1990
    Subsidy based on age + service
    Range for employee coverage = 33% to 73% (average 50%)
    Range for spouse coverage = 18% to 33%
    (average 25%)
  • UM Retiree Indemnity Medical Program
    Self Insured
    Eligible Population – Medicare Eligible Retirees
    Non Network Based
    Relationship to Medicare
    Design Objectives and Features
  • Medical Benefits Plan – Retired Employees
    Benchmark – Pre 65
    Observations:
    • In most instances plan design is same as active employee
    • Above average coverage
    • More liberal eligibility requirements
    • 3 Universities provide access only coverage
    (no employer subsidy)
  • Medical Benefits Plan – Retired Employees
    Benchmark – Medicare Eligible
    Observations:
    • 8 institutions use “carve out” approach with Medicare
    • 3 institutions provide access only coverage
  • Medical Benefits Plan – Retired Employees
    Benchmark – All Retirees
  • Summary Observations of Benefits
    In order to be competitive in the recruitment and retention of faculty and staff, UM benefit programs must at least be at the average of peer institutions
    UM offers a competitive array of benefit programs that are currently slightly below the average of its peer group
    UM, strategically, assumes risk through self-insurance when appropriate
    UM employees, through premiums/contributions bear a significant portion of the cost of providing UM benefit programs
  • Summary Observations of Benefits
    UM employees, at the time of purchasing health care services bear a significant portion of cost for services rendered
    Areas of significant deviation from the average of the peer group include:
    Above average
    Employer Paid Value of Long Term Disability Base Plan
    Employer Paid Value of Post Retirement/Pre 65 Medical Benefits
    Below Average
    Employer Paid Value and Total Value of Dental Benefits
  • Summary Observations of Benefits
    The 7/1/09 change that requires UM employees to contribute to the pension plan has resulted in a significant decrease in UM’s ranking among peer institutions in both the pension and overall categories
    The majority of peer institutions continue to offer subsidized post employment health care benefits
    UM is unique in offering a defined benefit plan as the primary pension plan avenue
  • Total Compensation: Salary and Benefits Compared to Peers
  • Total Compensation Compared to PeersRanked, Tenure-Track Faculty
    *22% of UM ranked faculty are on 9 month appointments salaries adjusted to
    11 month basis for comparison purposes
  • Total Compensation Compared to PeersStaff Job Families
  • Total Compensation Compared to PeersStaff Job Families (cont.)
  • Total Compensation Conclusions
    Both salary and benefits (total compensation) are critical factors for recruitment and retention
    On average UM total compensation is lower than peers, especially for salary
    Less competitive total compensation will exacerbate the impact of projected workforce shortage and high turnover rates
    CORRECTION WILL REQUIRE MULTI YEAR STRATEGY AND INVESTMENT
  • COMPARING DEFINED BENEFIT ANDDEFINED CONTRIBUTIONS PLANS
    Impact on Contributions and Benefits of Implementinga Defined Contribution Plan for New Employees
    August 2009
    Presented by:
    Howard Rog, FSA, MAAA, EASenior Vice President and Actuary
    This document has been prepared by The Segal Company for the benefit of the University of Missouri and is not complete without the presentation made to the University. This document should not be shared, copied or quoted, in whole or in part, without the consent of The Segal Company, except to the extent otherwise required by law.
    Copyright ©2009 by The Segal Group, Inc., parent of The Segal Company. All rights reserved.
  • 116
    Definitions
    Defined Contribution Plan
    Fixed annual contributions, defined under the plan, accumulate with investment income to a lump sum available at retirement
    Can be annuitized
    Monthly annuity income depends on how much has been accumulated
    Defined Benefit Plan
    Provides a monthly pension calculated under a benefit formula “defined” under the plan
    The University's retirement plan is a defined benefit/“hybrid” plan
  • 117
    Comparison of Accumulated Benefits
    UNDER THE UNIVERSITY’S PENSION PLAN VS. 10% OF PAY DEFINED CONTRIBUTION PLAN
    Early Retirement Subsidy
  • 118
    Key Employee Advantages
    Defined Benefit
    Employer assumes investment risk
    Benefits determinable prior to retirement
    Final average pay plans responsive to pay increases
    Rewards long service
    Provides protection against inflation and disability
    Employee can’t outlive benefits
    Provides vehicle for early retirement benefits
    Provides survivor benefits
    Defined Contribution
    Benefits are more portable
    Simplicity
    Employee investment control
    Faster account build-up for younger employees
    Provides capital accumulation
  • 119
    Key Employer Advantages
    Defined Benefit
    Favorable investment performance reduces costs
    Funding flexibility
    Design versatility
    Defined Contribution
    No investment risk
    Predictable budgeting
    Appreciation by younger workers
    Potential ease of administration depending upon number of investment choices
  • 120
    Impact of Implementing a DefinedContribution Plan for New Employees
    Objectives of the Study
    Explore the impact of introducing a defined contribution plan for new employees
    Determine the future retirement contribution requirements and unfunded pension plan liability by performing 20-year stochastic projections
    Understand potential impact on participants’ future benefits using stochastic modeling
  • 121
    Impact of Implementing a DefinedContribution Plan for New Employees continued
    Methodology
    Impact on Contributions and Unfunded Liability:
    Investment returns were projected using 1,000 Monte Carlo simulations
    The projections were performed under two alternatives
    The first was to assume that the pension plan continued to be open to new employees. The second was to assume that the pension plan would be limited to existing employees (“closed group”) and new employees would be covered by a new defined contribution plan
    The defined contribution plan’s projected contributions were based on an annual 10% of pay contribution from the University
  • 122
    Impact of Implementing a DefinedContribution Plan for New Employees continued
    Methodology
    Impact on New Employees’ Benefits:
    Benefits for a new employee hired at an age of 30 were studied
    Assumed the employee would invest their accounts in a “life cycle” fund
    A life cycle fund is one in which the asset allocation between equities and fixed income changes over time as the employee ages
    Benefits at termination ages prior to age 55 were studied by comparing the defined contribution account balance to the Minimum Value Accumulation Account
    Benefits at retirement ages of 55 and over were studied using income replacement ratios.
    An income replacement ratio represents the percentage of the annual retirement benefits (payable as a life time annuity) to the employee’s last year’s salary
  • 123
    Impact of Implementing a DefinedContribution Plan for New Employees continued
    Recent Events
    University’s Board of Curators approved a change to the Pension Plan which requires employee contributions to the plan to offset part of the University’s contribution requirement’s
    This change has not been reflected in this study
  • 124
    Impact On Contribution Requirements of Implementinga Defined Contribution Plan for New Employees
    On the basis that new employees will have the defined contribution plan offered to them, below are the percentages of total payroll covered by the two retirement programs change over time
    % of Payroll Covered
  • 125
    Impact On Contribution Requirements of Implementinga Defined Contribution Plan for New Employees continued
    Projected Contributions 2010 (Percentage of Payroll)
    • On an expected basis (mean/50% percentile basis), the long-term cost of the defined contribution plan for new employees is greater than if they participate in the pension plan
    • There is a narrower range of total University retirement contributions with the introduction of a defined contribution plan for new employees.
    • However, this comes with a higher total expected retirement cost to the University
  • 126
    Impact On Contribution Requirements of Implementinga Defined Contribution Plan for New Employees continued
    Projected Contributions 2025 (Percentage of Payroll)
    • On an expected basis (mean/50% percentile basis), the long-term cost of the defined contribution plan for new employees is greater than if they participate in the pension plan
    • There is a narrower range of total University retirement contributions with the introduction of a defined contribution plan for new employees.
    • However, this comes with a higher total expected retirement cost to the University
  • 127
    Impact On Employees’ Benefits of Implementinga Defined Contribution Plan for New Employees
    Using appropriate actuarial scenario techniques, we modeled the replacement defined contribution plan for a hypothetical employee of the University of Missouri hired at the age of 30
    Steps
    Select a typical employee (male academic employee hired at age 30)
    Model the Defined Contribution (DC) plan design
    Simulate changes in the employee’s compensation base and account value from hire date to various retirement dates
    Compensation base varies with salary inflation
    DC account balance varies with the assets’ monthly rates of return
    At retirement, convert the DC account into a life annuity
    The life annuity varies with the prevailing interest rate environment
    Determine the ratio of annuity conversion to the employee’s compensation base
    Perform this process many times so that robust measures of expectancy and risk can be quantified
    Compare the benefits from the DC plan with that of the current pension plan (DB)
  • 128
    Impact On Employees’ Benefits of Implementinga Defined Contribution Plan for New Employees continued
    Lump Sum Benefits prior to reaching early retirement eligibility (pre-age 55):
    The defined contribution plan provides for a 10% of pay contribution, while the Minimum Value Accumulation (“hybrid feature”) under the pension plan provides a 5% of pay credit
    The investment credit under the defined contribution plan is based on the actual market returns of the invested assets while the Minimum Value Accumulation in the pension plan provides a guaranteed investment credit of 7.5% annually
    At the 50th percentile, the lump sum paid to the employees prior to retirement eligibility is double what is paid from the pension plan
    There is a significant range of the lump sum payable from the defined contribution plan compared to that from the pension plan
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    Impact On Employees’ Benefits of Implementinga Defined Contribution Plan for New Employees continued
    PROJECTED ACCOUNT VALUE AS A PERCENT OF FINAL COMPENSATION
    Employee hired at age 30.
    Terminates prior to early retirement eligibility (pre age 55)
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    Retirement Income Benefits after reaching eligibility for retirement:
    At retirement age 65, approximately half of the time employees will be able to match or exceed the replacement ratio (RR) of the defined benefit plan:
    50% of the future scenarios show the DC plan providing a RR of 76% or more
    But, in worst case scenarios, employees face a catastrophic replacement ratio with serious consequences on their retirement viability:
    5% of simulations have a RR at age 65 equal to or less than 24% or approximately one third of the defined benefit plan
    At retirement ages prior to age 65, there is about a 40% probability that the defined contribution plan will provide equal or better benefits than the pension plan. At retirement age of 70, there is a 60% chance of it providing a greater benefit
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    Impact On Employees’ Benefits of Implementinga Defined Contribution Plan for New Employees continued
    INCOME REPLACEMENT RATIO ANALYSIS
    Employee hired at age 30
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    Questions and Discussion