Fairfax County Public Schools Pension 101 What did my actuary say? - - PowerPoint PPT Presentation

Prepared by Aon Hewitt

Retirement & Investment

Fairfax County Public Schools Pension 101 – “What did my actuary say?”

April 24, 2017

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Aon Hewitt | Retirement & Investment Proprietary & Confidential | Board Presentation – 04 24 2017

Agenda

• Actuarial Concepts and Terminology
• Key Factors Impacting Contributions

Pension 101

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Aon Hewitt | Retirement & Investment Proprietary & Confidential | Board Presentation – 04 24 2017

Actuarial Concepts and Terminology

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Aon Hewitt | Retirement & Investment Proprietary & Confidential | Board Presentation – 04 24 2017

The “Big Picture” - Ultimate Plan Cost

Net Investment Returns

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

$ $ $

$ $

Benefit Payments Administrative Expenses Employer contributions Employee contributions Contributions + Investment Return = Benefits + Expenses

Assumptions and funding methods affect only the timing of costs. “Nobody ever made a benefit payment from assumed interest!”

Assets

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Aon Hewitt | Retirement & Investment Proprietary & Confidential | Board Presentation – 04 24 2017

Present Value of Benefits (PVB)

The Present Value of Projected Benefits (PVB) is the total projected liability or “promise” for all participants, assuming all assumptions are met.

Present Value Of Projected Benefits (PVB)

Economic Assumptions (Interest Rate, Salary Growth, COLA, etc.) Participant data (age, service, pay, etc.) Plan Provisions (i.e. contract terms) Demographic Assumptions (Retirement, Turnover, Death and Disability)

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Aon Hewitt | Retirement & Investment Proprietary & Confidential | Board Presentation – 04 24 2017

Actuarial Cost Methods

Actuarial Accrued Liability (AAL)

Present Value of Future Normal Costs (PVNC)

PRESENT VALUE OF PROJECTED BENEFITS = AAL + PVNC

The Actuarial Cost Method is a mechanism to allocate the present value of projected benefits (PVB) to time periods (i.e. benefits related to past service vs. future service). ‒ The Present Value of Future Normal Cost (PVNC) is the portion of the present value of projected benefits (PVB) attributable to future service. ‒ The Actuarial Accrued Liability (AAL) is the portion of present value of projected benefits (PVB) attributable to past service.

$2,881 Million $683 Million As of 12/31/2015 PVB = $3,564 Million

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Aon Hewitt | Retirement & Investment Proprietary & Confidential | Board Presentation – 04 24 2017

ADEC = Normal Cost (NC) + Amortization (i.e., payment toward Unfunded

Actuarial Accrued Liability (UAAL))

• NC = Cost attributable to benefits accruing during upcoming year
• UAAL ($693M) = Actuarial Accrued Liability ($2,881M) – Assets ($2,188M)

Actuarially Determined Employer Contribution (“ADEC”)

Assets ($81.9M)

Normal Cost

Unfunded Actuarial Accrued Liability

Amortization of UAAL

Present Value of Future Normal Costs Actuarial Value of Assets

$2,188M $693M $683M NC plus the amortization of the UAAL equals the annual employer contribution

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Aon Hewitt | Retirement & Investment Proprietary & Confidential | Board Presentation – 04 24 2017

Actuarially Determined Employer Contribution (in Millions)

Current Asset Allocation 60% US Equity/40% BC Aggregate Index Actuarial Accrued Liability $2,881 $2,881 Funding Value of Assets* $2,188 $2,198 Unfunded Actuarial Accrued Liability, 12/31/2015 $693 $683 Funding Policy Contribution 6.40% 6.35% Budgeted FY 18 Employer Contribution $95.3 $94.6 Change in Asset Allocation Expected Return 7.25% 6.47% Actuarial Accrued Liability $2,881 $3,131 - $3,206 Actuarially Determined Employer Contribution $95.3 $111.6 - $116.6

*Assume that both portfolios achieve the same gross return except that the 60% US Equity/40% BC Aggregate portfolio has $10 million less of investment expenses. Estimated investment expenses for current portfolio are approximately $12 million. Estimated asset value as of 2/28/2017 was $2,219.2 million. Require 0.54% asset return to cover investment expenses. Hence, a gross return of 7.79% is required to achieve a net investment return of 7.25% per annum. Note that the passive 60% US Equity/40% BC portfolio has a 30-year expected return of 6.56% per annum (or 6.47% per annum net of investment expenses).

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Aon Hewitt | Retirement & Investment Proprietary & Confidential | Board Presentation – 04 24 2017

Key Factors Impacting Contributions

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Aon Hewitt | Retirement & Investment Proprietary & Confidential | Board Presentation – 04 24 2017

Key Risk Factors Impacting Contributions

Discount Rate

(or Assumed Rate of Return)

• FCPS uses an interest rate of

7.25% per annum net of investment expenses.

• Rate is generally based on long

term expected return reflecting asset allocation.

• Based on changed asset

allocation to a passive 60% US Equity/40% Fixed Income, the 30-year expected return is 6.47% per annum.

• If FCPS lowered interest rate to

the 6.47%, the unfunded actuarial accrued liability would increase by approximately $250-$325 million and the funding policy contribution would increase by approximately $17-$22 million.

Mortality Table

• The Society of Actuaries

released a new base mortality table (RP-2014) and longevity improvement scale (MP-2014) in October 2014 for private plans. ‒ An updated longevity improvement scale (MP- 2016) was released in October 2016

• The SOA is currently

undergoing a study of public pension mortality and will be releasing an updated table.

• FCPS uses the RP-2014 with

Scale MP-2014. Slightly conservative table compared to private plans.