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Annual Report

por Adrian Mikeliunas
International Annual Report 2017
Annual Report
Informe Anual 2017 Internacional

International Plan

Letter from the Executive Secretary

I am pleased to present the 2017 Annual Report of the Sta Retirement Plan (Plan) of the Inter-American Development Bank (IDB) and Inter-American Investment Corporation (IIC).

Over the past six years, important reforms have been introduced to the Retirement Plans to enhance their financial situation and governance structure. Two reforms, in 2011 and 2014, introduced changes to the Plans’ benefits, which strengthened their long term financial sustainability and brought them in line with those of our immediate comparators. The Plans’ benefits remain competitive compared with similar institutions, and are a useful tool to attract and retain high quality professionals. Another reform, also in 2014, enacted a new governance structure for the Plans, clarifying responsibilities of the various governing committees, improving transparency, and strengthening the technical and managerial membership of the Managing Committees. These Managing Committees have provided a forum for senior management and representatives of active and retired staff to engage in technical dialogue, providing enhanced supervision and support to the Secretariat. For further detail, see the 2014 Annual Participant Report, and Section 6 of this Report.

Policies were introduced in 2015, in recognition of the relationship between the Retirement Plans and the IDBG as the Plans’ Sponsors.

In July 2015, the Board of Executive Directors (Board) approved a Risk Appetite (RA) Policy which establishes two risk metrics. The first metric sets a maximum asset-liability volatility level, while the second metric tests the soundness of the required return for actuarial funding, linking it to the Plans’ expected asset returns. The RA Policy is linked to the Bank’s Capital Adequacy Policy, which sets aside a portion of the Bank’s capital to financially-support the Plans, in recognition of the effect of the Plans on the Sponsors’ financial  statements, providing additional support in times of financial stress.

The second Policy was approved in December 2015, a Long-Term Funding (LTF) Policy for the Plans. It  establishes a: i) stable annual IDBG Plan Sponsor contribution rate (SCR) for each Retirement Plan, calculated based on net Active staff remuneration; ii) Stabilization Reserve (SR) Fund for each of the three largest Plans, to provide additional support to the SCR during periods of financial market stress; and iii) three-year initial term for the Policy’s implementation. The application of the LTF Policy has meant that the IDBG has provided annual contributions to the Plans that exceed theoretically-required contributions, as calculated by the Plans’ external actuaries. These annual contributions have been invested in the Plans’ SR Funds, in accordance with the LTF Policy’s provisions. As you will see in Section 3, in the first three years of the LTF Policy, the Plan’s SR Fund has grown to more than $125 million, or 3% of its total assets. For further detail on the LTF Policy’s purpose and components, please see the 2015 Annual Participant Report.

After the Directors’ 2015 approvals of RA and LTF Policies, the Plan’s Asset-Liability (A/L) Study was reinitiated in 2016 and completed in August 2017. The A/L Study resulted in a revision to the Investment Policy Statements and Strategic Asset Allocations of the Plan’s Funds, the Staff Retirement Fund (SRF) and its SR Fund, which are discussed in this year’s Special Report.

Concurrent with the reforms discussed above, the Secretariat of the IDBG Retirement Plans (VPF/SRP) has strengthened its team, with better analytical capabilities, deeper technical knowledge and more effective participant support. In terms of systems, a new pension administration system was adopted, a pension valuation software platform was licensed, and intranet and extranet websites were created to enhance transparency and improve communications with all stakeholders of the IDBG Retirement Plans.

All these changes have been accompanied by broadly favorable market conditions, which have led to a progressive strengthening of the financial position of the Plans. In both funding and accounting measures the Plan is solid. While the Plan’s condition has improved, we should not become complacent, as markets can be fickle and are generally cyclical. It is impossible to say when the present cycle will peak and the market’s sentiment change, but I can say that a lot has been done for the Plans and the Sponsors. The actions of the Secretariat, its governing Committees and the Board over the last six years have strengthened the resilience of the IDBG in its sponsorship of the Plans, and of the Plan which has already, in its more than 55 years since inception, shown resilience and strength through difficult and good periods. The Secretariat will continue, in line with industry best practices, periodically conduct in-depth reviews of the Plan’s assets and liabilities to incorporate new asset classes, emerging global economic and monetary conditions, and trends in the predominant drivers affecting the value of the Plan’s liabilities.
2017 was another strong investment year for the Plan, causing assets to reach their highest-ever year-end level: $4.23 billion. Despite intra-year fluctuations in the financial markets, as investors shifted from risk-avoidance to risk-seeking, by the end of the year, eleven of the Plan’s component asset classes had delivered positive returns.

In addition, due to strong full-year financial market results, excess returns earned by actively-managed strategies and the Secretariat’s rebalancing activities, the Plan delivered nominal and real returns which exceeded both required funding returns and the returns delivered by Policy Benchmarks. Specifically, the Plan’s 14.9% nominal asset return exceeded the actuarially-required nominal return of 6.5%1 and Policy Benchmark’s 14.2% return, and its 12.2% real return significantly exceeded the actuarially-required 3.5% real rate. The Plan’s SR Fund, which has received contributions in each of the past three years, totaled more than $125 million at year-end, and is diversified between two low-risk asset classes in compliance with the LTF Policy.

The financial health of the Plan can be assessed using two different perspectives. First, the actuarial funding method which is endorsed by the Society of Actuaries standards. This method aims at determining the sponsor contribution rate that is necessary to bring the actuarial obligations and assets of the plan into balance. Several assumptions are made to perform these calculations, notably the expected long-term real rate of return of investments which is set at 3.5% real. Since the accumulated returns on the Plans Assets have exceeded the expected real rate of return over the last few years, the required or theoretical contribution to the SRP has been determined by the Actuary to be 0.

Second, the accounting valuation method follows U.S. Generally Accepted Accounting Principles (U.S. GAAP), discounting the Plan’s benefits payments to a present value (PV) matching the Plan’s cash flows against a high-quality corporate bond yield curve. The Plan’s discount rate assumption declined 0.52% from 2016 year-end to 2017 year-end, from 4.06% to 3.54%, which caused the PV of liabilities to rise to their highest ever year-end level. The combined impact of the rise of accounting PVs of liabilities, about 13%, an additional year of accrued liabilities, the net payout of benefit payments over contributions of about 1.5% of total assets, and strong asset returns of more than 14%; resulted in a slight rise in the Plan’s funded status measured at year-end 2017. On an Accrued Benefit Obligation (ABO2) basis, to 107%, and on a Projected Benefit Obligation (PBO3) basis, to 97%.

As has been its practice in recent years, the IDBG’s Boards reviewed and approved IDB and IIC contribution rates to the Plans at a special meeting, based on the Plans’ actuarial valuations and, since 2015, based on the LTF Policy. The Plan’s 2017-approved SCR, at 20% of net international remuneration, represented the third year of the LTF Policy’s five-year initial term, and exceeded the actuarially-determined rate of 0%. As established in the LTF Policy, the excess of the approved 20% rate over the theoretical rate of 0%, or $48.7 million, was contributed by the IDBG to the Plan and invested in its SR Fund.

This year’s Special Report discusses the Plan’s A/L Study and resulting changes to its approved Investment Policy Statements for the SRF and SR Fund, Strategic Asset Allocations (SAAs) and status of implementation through year-end 2017. Full implementation of new asset class target weights will occur over twelve to twenty-four months, incorporating market conditions, due diligence and approval of external investment managers, completion of legal document negotiations and asset transitions.

We welcome your questions and comments, and can be reached at:

• Phone: (202) 623-3560
• Fax: (202) 623-2177
• Email: VPF/[email protected]
• Active Staff Intranet: http://retirement
• Retirees Extranet: https://www.iadb.org/en/retirees/pension%2C18204.html
• Mail: 1300 New York Avenue,
NW Stop E0507, Washington, DC 20577

Sincerely,

Kurt S. Focke,
Executive Secretary, IDB Retirement Plans

Local Annual Report 2017
Annual Report
Informe Anual 2017 Local

Local Plan

Letter from the Executive Secretary

I am pleased to present the 2017 Annual Report of the Local Retirement Plan (Plan) of the Inter-American Development Bank (IDB).

Over the past six years, important reforms have been introduced to the Retirement Plans to enhance their financial situation and governance structure.
Two reforms, in 2011 and 2014, introduced changes to the Plans’ benefits, which strengthened their long-term financial sustainability and brought them in line with those of our immediate comparators.
The Plans benefits remain very attractive and competitive compared with similar institutions, and are a useful tool to attract and retain high quality professionals. Another reform, also in 2014, enacted a new governance structure for the Plans, clarifying responsibilities of the various governing committees, improving transparency, and strengthening the technical and managerial membership of the Managing Committees. These Managing Committees have provided a forum for senior management and representatives of active and retired staff to engage in technical dialogue, providing enhanced supervision and support to the Secretariat. For further detail, see the 2014 Annual Participant Report, and Section 6 of this Report.

Policies were introduced in 2015, in recognition of the relationship between the Retirement Plans and the IDBG as the Plans’ Sponsors.
In July 2015, the Board of Executive Directors (Board) approved a Risk Appetite (RA) Policy which establishes several risk metrics. The first RA Policy metric sets a maximum asset-liability volatility level, while the second metric sets a minimum real return for the Plans’ assets. The RA Policy is linked to the Bank’s Capital Adequacy Policy, which sets aside a portion of the Bank’s capital to financially support the Plans, in recognition of the effect of the Plans on the Sponsors’ financial statements, providing additional support in times of financial stress.

The second Policy was approved in December 2015, a Long-Term Funding (LTF) Policy for the Plans. It establishes a: i) stable annual IDBG Plan Sponsor contribution rate (SCR) for each Retirement Plan, calculated based on net Active staff remuneration; ii) Stabilization Reserve (SR) Fund for each of the three largest Plans to provide additional support to the SCR during periods of financial market stress, and iii) three-year initial term for the Policy’s implementation.

The application of the LTF Policy has meant that the IDBG has provided annual contributions to the Plans that exceed theoretically required contributions as calculated by the Plans’ external actuaries.
These annual contributions have been invested in the Plans’ SR Funds, in accordance with the LTF Policy’s provisions. As you will see in Section 3, in the first three years of the LTF Policy, the Plan’s SR Fund has grown to more than $15 million, or 6.6% of its total assets. For further detail on the LTF Policy’s purpose and components, please see the 2015 Annual Participant Report.

Concurrent with the reforms discussed above, the Secretariat of the IDBG Retirement Plans (VPF/SRP) has strengthened its team, with better analytical capabilities, deeper technical knowledge and more effective participant support. In terms of systems, a new pension administration system was adopted, a pension valuation software platform was licensed, and intranet and extranet websites were created to enhance transparency and improve communications with all stakeholders of the IDBG Retirement Plans.

All these changes have been accompanied by broadly favorable market conditions, which have led to a progressive strengthening of the financial position of the Plans. In both funding and accounting measures the Plan is solid. While the Plan’s condition has improved, we should not become complacent, as markets can be fickle and are generally cyclical. It is impossible to say when the present cycle will peak and the market’s sentiment change, but I can say that a lot has been done for the Plans and the Sponsors. The actions of the Secretariat, its governing Committees and the Board over the last six years have strengthened the resilience of the IDBG in its sponsorship of the Plans, and of the Plan which has already, in its more than 55 years since inception, shown resilience and strength through difficult and good periods. The Secretariat will continue, in line with industry best practices, periodically conduct in-depth reviews of the Plan’s assets and liabilities to incorporate new asset classes, emerging global economic and monetary conditions, and trends in the predominant drivers affecting the value of the Plan’s liabilities.

2017 was another strong investment year for the Plan, causing assets to reach their highest-ever year-end level: at $226.0 million. Despite intra-year fluctuations in the financial markets, as investors shifted from risk-avoidance to risk-seeking, by the end of the year all ten of the Plan’s component asset classes had delivered positive returns.

In addition, due to strong full-year financial market results, excess returns earned by actively-managed strategies, and the Secretariat’s rebalancing activities, the Plan delivered nominal and real returns which exceeded both required funding returns and the returns delivered by Policy Benchmarks. Specifically, the Plan’s 15.3% nominal asset return exceeded the actuarially-required nominal return of 7.5% and Policy Benchmark’s 14.6% return rates, and its 12.2% real return significantly exceeded the actuarially-required 3.5% real rate.

The Plan’s SR Fund, which has received contributions in each of the past three years, totaled more than $15.4 million at year-end, and is diversified between two low-risk asset classes in compliance with the LTF Policy.

The financial health of the Plan can be assessed using two different perspectives. First, the actuarial funding method which is endorsed by the Society of Actuaries standards. This method aims at determining the sponsor contribution rate that is necessary to bring the actuarial obligations and assets of the plan into balance. Several assumptions are made to perform these calculations, notably the expected long-term real rate of return of investments which is set at 3.5% real. Since the accumulated returns on the Plan’s Assets have exceeded the expected real rate of return over the last few years, the required or theoretical Sponsors contribution to the LRP has been determined by the Actuary to be 5.26% Second, the accounting valuation method follows U.S. Generally Accepted Accounting Principles (U.S. GAAP), discounting the Plan’s benefits payments to a present value (PV) matching the cash flows against a high-quality corporate bond yield curve. The Plan’s discount rate assumption declined 0.54% from 2016 year-end to 2017 yearend, from 4.13% to 3.59%, which caused the PV of liabilities to rise to their highest ever year-end level. The combined impact of the rise of accounting PVs of liabilities, about 23%, an additional year of accrued liabilities, the net cash inflow as contributions exceed benefit payments of about 1.5% of total assets, and strong asset returns of more than 15%, resulted in a slight rise in the Plan’s funded status measured at year-end 2017. On an Accrued Benefit Obligation (ABO1) basis, to 115%, and on a Projected Benefit Obligation (PBO2) basis, to 95%.

As has been its practice in recent years, the IDBG’s Boards reviewed and approved IDB and IIC contribution rates to the Plans at a special meeting, based on the Plans’ actuarial valuations and, since 2015, based on the LTF Policy. The Plan’s 2017 approved SCR, at 25% of net national remuneration, represented the third year of the LTF Policy’s five-year initial term, and exceeded the actuarially-determined rate of 1.87%. As established in the LTF Policy, the excess of the approved 25% rate over the theoretical rate of 1.87%, or $6.6 million, was contributed by the IDB Group to the Plan and invested in its SR Fund.

This year’s Special Report discusses the extraordinary measures taken by the Secretariat to manage LRP pensions and benefits in countries facing hyperinflation economic pressures.

We welcome your questions and comments, and can be reached at:

• Phone: (202) 623-3560
• Fax: (202) 623-2177
• Email: VPF/[email protected]
• Active staff intranet site: http://retirement
• Retirees Extranet: https://www.iadb.org/en/retirees/pension%2C18204.html
• Mail: 1300 New York Avenue,
NW Stop E0507, Washington, DC 20577

Sincerely,

Kurt S. Focke,
Executive Secretary, IDB Retirement Plans

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