Milliman Sustainable Income Plan — Public plans


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Keeping the retirement promise. Milliman Sustainable Income Plan™ (SIP): Revolutionizing risk management for public plans.

Benefits of the SIP

  • Remains well funded in all market conditions
  • Maintains a stable contribution level from year to year
  • Provides lifelong benefits by pooling longevity risk
  • Protects against inflation
  • Utilizes professional investment management to maximize returns and benefits
  • Avoids inequitable risk transfer from one generation of taxpayer to another

What’s a retirement plan for?

Retirement plans meet the social need for securing the income of people in old age. They are also an integral part of a desirable benefits package to attract and retain public employees and assist in succession planning.

What’s the problem?

Financial market risk. In recent years, poor investment returns have resulted in underfunding for many plans. Correcting underfunding often requires substantial increases in contributions, particularly in mature plans with a high percentage of retirees. There have been many claims that the resulting contribution volatility should be eliminated by changing from defined benefit (DB) to defined contribution (DC) plans.

DC plans fall short

The public plan community has had ample opportunity to learn from the experience of their counterparts in the corporate pension world. The overwhelming shift of corporate sponsors to DC plans was a response to contribution and funded status volatility that had threatened the viability of many companies.

However, as the first generation of DC-only participants begins to retire, it’s clear that the majority have inadequate retirement savings.

While DC plans solve the contribution and funded status volatility problems for employers, they leave participants on the hook for all major retirement risks, including investment, longevity, and inflation risks.

This shift has had unintended consequences. It has resulted in workforce management problems for employers. Older employees are working longer—sometimes too long. This, in turn, reduces promotion possibilities for younger workers who may leave for other opportunities. When participants do retire, they often have inadequate retirement savings and are vulnerable to poverty in old age. In addition to the social cost of poverty, this can strain public assistance programs.

Traditional DB and DC plans are falling short in meeting all stakeholders’ needs.

What taxpayers need

Taxpayers want superior service from their public employees for a reasonable price. Part of any good workforce management strategy is a desirable retirement plan. But taxpayers also want stable, predictable contributions from year to year.

Enter the SIP

The Milliman Sustainable Income Plan™ (SIP) addresses all of those needs. It’s a variation on a plan design that has been around since 1953. In that basic design, benefits accrue as in a traditional DB plan. The benefits then move up and down based on the fund’s actual investment return. This keeps liabilities and assets in balance, and the plan maintains 100% funding in all market conditions. However, in that design, retiree benefits routinely move up and down.

The SIP addresses the benefit volatility problem. By providing slightly smaller benefit increases when returns are particularly good, the SIP builds a reserve that is used to prevent benefit declines when investment returns are poor.

The SIP stays funded in all market conditions and provides lifelong increasing benefits to retirees, all with stable, predictable contribution requirements. The SIP truly provides the best of both worlds, combining the stability and predictability of the contributions found in a DC plan along with the secure lifelong benefits of a DB plan.

The SIP balances the risks

The chart shows how well plan designs compare on important features. Green squares are best. Gray squares are worst. You can see that defined contribution plans do well on funding considerations while defined benefit plans do well on benefits considerations.

The SIP meets both funding and benefit needs. It is a solution that can sustain the ability of public plans to provide retirement plans that provide lifelong financial security.

Comparing features of different retirement plans

  Plan type
Milliman SIP* Defined contribution Defined benefit
Funding considerations Intergenerational equity among taxpayers
 
 
 
Plan maintains 100% funding in all market conditions
 
 
 
Prevents investment losses from creating contribution volatility
 
 
 
Larger returns due to professional asset management
 
 
 
Benefit considerations Lifelong income and longevity pooling provides larger benefits
 
 
 
Designed to provide inflation protection in retirement
 
 
 
Retiree benefit never decreases
 
 
 
*The Milliman Sustainable Income Plan is a variation on the variable annuity plan design.