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Annual Report 2015  

  International Plan  
Annual Report 2015

  Local Plan  
Annual Report 2015

International Plan


Letter from the Executive Secretary

 

 

I am pleased to present the 2015 Annual Report of the Sta Retirement Plan (Plan) of the Inter-American Development Bank (IDB) and Inter-American Investment Corporation (IIC).

 

At year-end 2015, the Plan’s assets, in the Sta Retirement Fund (SRF or Fund), were slightly below their highest-ever year-end level reached in 2014, at $3.53 billion. After a six-year rebound in nancial market assets from the 2008 crisis, markets changed focus mid-year from recovery to future economic growth trends, including China’s economic shift from manufacturing and exports to consumption, central bank policy trends, disruptive technologies and geo-political event risks. With slower-than-trend economic growth over the past six years, extraordinary monetary easing by many of the world’s central banks, technologies which are changing patterns of supply and demand, and increased geo-political instability, many markets retreated from all-time highs reached during the year. In light of these concerns, six of the Fund’s 12 asset classes delivered negative returns, including xed income securities responding to a rise in U.S. interest rates, and non-U.S. assets negatively-impacted by the stronger U.S. Dollar (USD). Consequently, the Fund’s Policy Benchmark - the Plan’s Strategic Asset Allocation (SAA) target weights in approved benchmark indices - delivered a -1.2% nominal return, and the Fund, while outperforming its Policy Benchmark, delivered a -0.6% return. While this was the rst year since 2008 that the Fund had delivered a negative return, its performance bene ted from active strategies implemented by external investment managers, rebalancing actions taken by the Executive Secretariat and internal management of in ation-indexed U.S. Treasury bonds. Please see Section III, Plan Assets, Investment Policy and Results, for further detail.

 

The financial health of a de ned bene t plan is assessed based on actuarial funding and accounting valuation measures. Following Society of Actuaries standards, actuarial health is assessed on the plan’s success in delivering expected real rates of return, which grow assets to meet long-term liability cash ows, and the ability of the Plan sponsor to meet its theoretical contribution rate. While the Fund’s 2015 returns lagged actuarially-assumed nominal (7.0%) and real (3.5%) rates, due to nancial markets’ declines during the year, over the longer-term it has generally met and/or exceeded both rates. The Plan’s success in delivering expected returns has supported a sustainable level of Plan Sponsor contributions as well, which has averaged 20% of net remuneration over the long-term. During 2015, the Pension Committee approved a new, industry best practice, actuarial valuation of assets (AVA) methodology.

 

Following U.S. Generally Accepted Accounting Principles (GAAP), accounting health is assessed by discounting plan liability cash ows to a net present value (NPV) using high-quality corporate bond rates. At year-end 2015, the Plan’s average discount rate was 4.24%, an increase of 0.36% over the rate at year-end 2014, which resulted in a lower NPV of liabilities. The IDB calculates two accounting measures of liabilities: on an accrued-to-date basis based on current salaries (the Accrued Bene t Obligation, or ABO), and on an accrued-to-date with future salary increases on applicable bene ts (the Projected Bene t Obligation, or PBO), the latter of which is reported in the IDB’s annual nancial statements. With the combined impact of a lower NPV of liabilities with an additional year of accrued liabilities and marginal asset declines, the Plan’s funded status remained essentially unchanged at year-end 2015 from year-end 2014: the ABO, at 107%, and the PBO, at 98%. Please see Section IV, Financial Health of the Plan, for actuarial, contribution and accounting detail.

 

In 2015, the Secretariat worked with several departments, outside consultants and actuaries to assist the Bank in its completion of the multi-year analysis and reform of the Retirement Plans. Two Policies were approved by the Bank’s Board of Executive Directors: in July, a Retirement Plan-related Risk Appetite Policy and, in November, Long-Term Funding Policies for the Plans. The Risk Appetite Policy established two risk metrics: the rst, related to long-term sustainability which focuses on the Plans’ real returns, and the second, related to short-term volatility which focuses on the Plans’ varying returns of assets and liabilities. The Long-Term Funding Policy established stable contribution rates (SCRs) for each Retirement Plan (20% of international net remuneration for the Plan), an initial ve-year term for the Plans’ SCRs, and a Stabilization Reserve for each of the three largest Plans, which are funded by Bank contributions in excess of each Plan’s theoretical Plan Sponsor rate as calculated by the Plans’ actuaries. See Section V for further detail on the two Policies.

 

As has been its practice in recent years, the Bank’s Board of Executive Directors reviewed and approved IDB contribution rates to the Plans at a special meeting, based on the Plans’ actuarial valuations and, in 2015, based on the Long-term Funding Policy. The 2015 contribution rate to the Plan, at 20% of net international remuneration, represents the rst of the Long-term Funding Policy’s ve year initial term, and exceeds the actuarially-determined theoretical rate of 7.75%. As established in the Long-term Funding Policy, the excess of the approved over theoretical rates, or 12.25% of net remuneration ($28 million) was contributed by the Bank to the Plan, but invested separately in the Plan’s Stabilization Reserve Fund.

 

As noted at the outset of this Letter, while the nancial situation of the Plan remains strong on both actuarial and accounting bases, shifts in global economic and monetary conditions support an in-depth review of the Plan’s assets and liabilities, which is done periodically. With the establishment of the Bank’s Risk Appetite metrics, Long- Term Funding contribution rates and Stabilization Reserve investments, the Plan’s Asset-Liability Study has been reinitiated. The Study will assess long-term expected returns of currently-approved and potential new asset classes, conduct stochastic and deterministic modeling including of various scenarios and, consistent with established Bank Policies, update the Plan’s Investment Policy Statement.

 

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

 

• Phone: (202) 623-3560
• Fax: (202) 623-2177

• Email: VPF/SRP@iadb.org

• Active Staff Intranet: http://retirement

• Mail: 1300 New York Avenue, NW Stop E0507, Washington, DC 20577

 

Sincerely,


Kurt S. Focke,
Executive Secretary, IDB Retirement Plans 

 

 

 


 

 

Local Plan


Letter from the Executive Secretary

 

 

I am pleased to present the 2015 Annual Report of the Local Retirement Plan (Plan) of the Inter-American Development Bank (IDB).

 

At year-end 2015, the Plan’s assets, in the Pension Reserve Fund of the Local Retirement Fund (LRF or Fund), had reached their highest-ever year-end level, at $175 million. After a six-year rebound in nancial market assets from the 2008 crisis, markets changed focus mid-year from recovery to future economic growth trends, including China’s economic shift from manufacturing and exports to consumption, central bank policy trends, disruptive technologies and geo-political event risks. With slower-than-trend economic growth over the past six years, extraordinary monetary easing by many of the world’s central banks, technologies which are changing patterns of supply and demand, and increased geo-political instability, many markets retreated from all-time highs reached during the year. In light of these concerns, ve of the Fund’s 10 asset classes delivered negative returns, including xed income securities responding to a rise in U.S. interest rates, and non-U.S. assets negatively-impacted by the stronger U.S. Dollar (USD). Consequently, the Fund’s Policy Benchmark - the Plan’s Strategic Asset Allocation (SAA) target weights in approved benchmark indices - delivered a -0.7% nominal return, and the Fund, while outperforming its Policy Benchmark, delivered a -0.5% return. While this was the rst year since 2008 that the Fund had delivered a negative return, its performance bene ted from active strategies implemented by external investment managers, rebalancing actions taken by the Executive Secretariat and internal management of in ation-indexed U.S. Treasury bonds. Please see Section III, Plan Assets, Investment Policy and Results, for further detail.

 

The financial health of a de ned bene t plan is assessed based on actuarial funding and accounting valuation measures. Following Society of Actuaries standards, actuarial health is assessed on the plan’s success in delivering expected real rates of return, which grow assets to meet long-term liability cash ows, and the ability of the Plan sponsor to meet its theoretical contribution rate. While the Fund’s 2015 returns lagged actuarially-assumed nominal (7.5%) and real (3.5%) rates, due to nancial markets’ declines during the year, over the longer-term it has generally met and/or exceeded both rates. The Plan’s success in delivering expected returns has supported a sustainable level of Plan Sponsor contributions as well, which has averaged 23% of net remuneration over the long-term. During 2015, the Pension Committee approved a new, industry best practice, actuarial valuation of assets (AVA) methodology.

 

Following U.S. Generally Accepted Accounting Principles (GAAP), a plan’s accounting health is assessed by discounting its liabilities to a net present value at year-end using high-quality, AA-rated corporate bond rates. At year-end 2015, the Plan’s average discount rate was 4.32%, an increase of 0.38% versus the year-end 2014 rate. The increase in discount rate caused a decline in the net present value of the Plan’s liabilities on two accounting measures. The two measures assess the Plan’s liabilities on an accrued-to-date basis based on current salaries (the Accrued Bene t Obligation, or ABO), and on an accrued-to-date with future salary increases on applicable bene ts (the Projected Bene t Obligation, or PBO). Despite asset declines, the increase in its discount rate and a currency bene t from the stronger U.S. dollar improved the Plan’s funded status from year-end 2014: the ABO, from 107% to 126%; and the PBO, from 87% to 103%. Please see Section IV, Financial Health of the Plan, for actuarial, contribution and accounting detail.

 

In 2015, the Secretariat worked with several departments, outside consultants and actuaries to assist the Bank in its completion of the multi-year analysis and reform of the Retirement Plans. Two Policies were approved by the Bank’s Board of Executive Directors: in July, a Retirement Plan-related Risk Appetite Policy and, in November, Long-Term Funding Policies for the Plans. The Risk Appetite Policy established two risk metrics: the rst, related to long-term sustainability which focuses on the Plans’ real returns, and the second, related to short-term volatility which focuses on the Plans’ varying returns of assets and liabilities. The Long-Term Funding Policy established stable contribution rates (SCRs) for each Retirement Plan (25% of national net remuneration for the Plan), an initial ve-year term for the Plans’ SCRs, and a Stabilization Reserve for each of the three largest Plans, which are funded by Bank contributions in excess of each Plan’s theoretical Plan Sponsor rate as calculated by the Plans’ actuaries. See Section V for further detail on the two Policies.

 

As has been its practice in recent years, the Bank’s Board of Executive Directors reviewed and approved IDB contribution rates to the Plans at a special meeting, based on the Plans’ actuarial valuations and, in 2015, based on the Long-term Funding Policy. The 2015 contribution rate to the Plan, at 25% of national net remuneration, represents the rst of the Long-term Funding Policy’s ve year initial term, and exceeds the actuarially-determined theoretical rate of 15.7%. As established in the Long-term Funding Policy, the excess of the approved over theoretical rates, or 9.3% of net remuneration ($2.5 million) was contributed by the Bank to the Plan, but invested separately in the Plan’s Stabilization Reserve Fund.

 

As noted at the outset of this Letter, while the nancial situation of the Plan remains strong on both actuarial and accounting bases, shifts in global economic and monetary conditions support an in-depth review of the Plan’s assets and liabilities, which is done periodically. With the establishment of the Bank’s Risk Appetite metrics, Long-Term Funding contribution rates and Stabilization Reserve investments, the Asset-Liability Study of the Sta Retirement Plan has been reinitiated, which will assess long-term expected returns of currently-approved and potential new asset classes, conduct stochastic and deterministic modeling including of various scenarios and, consistent with established Bank Policies, provide input to any future updates for the Plan’s Investment Policy Statement.

 

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

 

• Phone: (202) 623-3560
• Fax: (202) 623-2177

• Email: VPF/SRP@iadb.org

• Active staff intranet site: http://retirement

• Mail: 1300 New York Avenue, NW Stop E0507, Washington, DC 20577

 

Sincerely,


Kurt S. Focke,
Executive Secretary, IDB Retirement Plans