Fairfax County School Board September 17, 2018 Presenter ELI - - PowerPoint PPT Presentation

Presentation to the Fairfax County School Board

September 17, 2018

Presenter

ELI MARTINEZ

Executive Director/CIO

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Agenda

• Executive Summary
• Membership Characteristics
• Financial Strength
• Cost Efficiencies
• Strategic Initiatives
• Summary
• Questions

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Executive Summary

2017 returns were above expectations and the funded ratio remains stable

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2001 Tier 2 1,700+

16%

2017 After Fees Fund Performance Competitive

• vs. Peers

Fund Expenses

Sustainability | Marketing | Messaging | Education

Funded Ratio

75.7%

December 31, 2017

Executive Summary

Membership Characteristics

ERFC serves members within three benefit plan structures; only the 2001 Tier 2 is open

4,488 15,629 1,724 10,657 1,072

ERFC Membership by Plan Type

December 31, 2017

Retired Active Legacy

1973 to 7/1/2001

2001 Tier 1

7/1/01 - 6/30/17

2001 Tier 2

7/1/2017 - Beyond

Closed

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Our Members

Are there any trends?

Legacy and 2001 Tier 1 members are driving retirements

9.4K 8.8K 8.4K 7.9K 7.4K 6.8K 6.2K 5.8K 5.3K 4.9K 4.5K 10.2K 10.9K 11.5K 12.2K 13.6K 14.7K 15.4K 15.6K 16.3K 16.9K 15.6K

2007 2009 2011 2013 2015 2017

ERFC Membership by Plan Type

Year Ending December 31

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2001 Tier 1 2001 Tier 2 Legacy

Plan Closed Plan Opened

Our Members

What if we drill down on the trends?

Retirements from the 2001 Tier 1 plan will

• utweigh Legacy plan retirements in the future

435 379 506 547 520 517 479 490 446 442 28 27 49 61 90 115 143 164 208 186 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Annual Retirements by Plan Type

Year Ending December 31

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2001 Tier 1 Legacy 2001 Tier 1 retirements expected to outweigh Legacy by 2029

Our Members

How much are we paying retirees?

Benefit payments to retirees as a percent of payroll have trended downward since 2010

11.09% 11.40% 11.95% 11.92% 11.76% 11.69% 11.69% 11.67% 11.36% 11.37%

Retiree Benefits Paid as Percent of Payroll

Year Ending December 31

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

5% Decrease

Our Members

How much does the average retiree receive?

Working longer for FCPS increases retirement benefits

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2001 Tier 1 Retiree

64 Years Old 12 Years of Service $6K Annual ERFC Benefit $19K Annual Including VRS

25% of Final Average Salary

Legacy Retiree

62 Years Old 24 Years of Service $20K Annual ERFC Benefit $48K Annual Including VRS

54% of Final Average Salary

Average Retiree Profile

December 31, 2017

Our Members

Not Including Social Security How does this compare to FCERS?

Fairfax County employees receive higher retirement benefits; FCPS employees paying more into retirement

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Our Members

• Min. Retirement Age

60 Retirement Eligible Rule 90 Salary Averaging 5 Years Total Employee Contributions 5.33%

FCERS Plan D*

Social Security with 5 yrs. Rule 90 5 Years 8-12%**

VRS Hybrid + ERFC 2001 Tier 2

* Changes under consideration by the Fairfax County Board of Supervisors to the FCERS Plan D would be effective July 1, 2019 ** 12% contribution assumes employee contributes 5% into VRS, 3% into ERFC, and maximizes into the Hybrid Plan at 4%

Multiplier 2% 1.8%

Differences Between FCPS & FCERS Possible Plan Changes

What about current employees?

Average Legacy plan members are only 4 years from full benefit status

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2001 Tier 2

• 35 Years Old
• 0.4 Years of Service
• $50K Current Annual Salary

2001 Tier 1

• 42 Years Old
• 7 Years of Service
• $64K Current Annual Salary

Legacy

• 54 Years Old
• 21 Years of Service
• $88K Current Annual Salary

Average Active Member Profile

December 31, 2017

Our Members

Newest Plan

What about the portfolio?

Financial Strength

ERFC’s portfolio is well diversified

Domestic Equity, 22.5% International Equity, 14% Emerging Market Equity, 3% Global Asset Allocation/Better Beta, 15% Domestic Fixed Income, 20% Unconstrained Bonds, 6% Emerging Market Debt, 3% Real Estate, 8% Hedge Funds, 5% Private Equity, 3.5% 15

ERFC Policy Asset Allocation

Stocks 39.5% Bonds 29% Alternatives 16.5%

Performance

…and performance?

Above average performance over longer periods compared to defined benefit plans >$1B

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12.1%

After Fees

Rank 64*

7.2%

After Fees

Rank 32*

ERFC Performance and Ranking

Fiscal Year Ended June 30, 2017

1 Year 15 Year

* Universe of 60 Defined Benefit pension plans greater than $1B in assets, shown in percentiles (lower number is better).

Performance

How do we compare vs. large plans?

ERFC outperformed some of the largest pension funds in the nation

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13.4%

12.1%

12.1% 11.2%

ERFC Performance vs. Large Public Pension Funds

Year Ending June 30, 2017 (After Fees)

209B 1,700 64% AUM* Staff Funded 2.4B 30 75.2% AUM* Staff Funded 78B 370 72.9% AUM* Staff Funded 326B 2,875 68.3% AUM* Staff Funded CalSTRS ERFC VRS CalPERS

Performance

How do we compare vs. local funds?

* Assets under management (AUM)

ERFC’s portfolio also performed well compared to Fairfax County Funds

12.1%

10.9% 9.3% 6.9% 8.3%

ERFC vs. Fairfax County Investment Performance

Year Ending June 30, 2017 (After Fees)

18 ERFC FC Uniformed Retirement System FC Police Officers’ Retirement System FC Employees’ Retirement System FC Weighted Average Return

2.4B 30 75.2% AUM Staff Funded 6.8B 26 80.3%* AUM Staff Funded

Performance

* Average funded status

How does this impact our funding?

ERFC has maintained a stable funded ratio

$521 $570 $561 $604 $631 $616 $610 $693 $753 $769

100000 200000 300000 400000 500000 600000 700000 800000 900000

Funded Ratio vs. Unfunded Liabilities

Year Ending December 31 (Millions)

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Unfunded Liability

Performance

What does a 75.7% funded ratio mean? Funded Ratio

76.9% 75.6% 76.5% 75.6% 75.4% 76.7% 77.7% 76.0% 75.2% 75.7%

The current funded status would allow ERFC to pay benefits for the next 25 years!

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Impact on contributions?

Performance

Less Likely

9 Years

Zero Investment Return No Contributions Doomsday Scenario: Assumptions Benefit Payments Normal

25 Years

Current Contributions Pessimistic Zero Investment Return

∞

Recognition of prior year losses contributed to increased employer contribution rates

4.04% 4.34% 5.34% 5.60% 5.60% 5.60% 5.60% 6.24% 6.26% 6.44% 4.00% 4.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Fiscal Year Contribution Rates

Employer

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Employee

Performance

…But when will we be fully funded? Future Years

Over time normal costs will decrease, and we’re gradually moving towards 100% funded

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Performance

Gradual Movement

Normal Cost 2001 Tier 2 Funded Status 100%

2040

Funded 100% How do we compare in costs?

Cost Efficiencies

ERFC’s overall costs are relatively low

106.9 94.0 76.2 75.4 68.4

Expense Comparison

Year Ending June 30, 2017

(Basis Points)

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Investment & Administrative Expenses

Expenses

What drives investment expenses?

FC Police Officers’ Retirement System FC Employees’ Retirement System FC Uniformed Retirement System ERFC VRS

Average Cost 84.2 Basis Points

Source: Fairfax County Comprehensive Annual Financial Report for the Fiscal Year ended June 30, 2017

Investment expenses are in line with expected costs for a plan of our size

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What drives administrative expenses?

Expenses

Linear Regression

R2 of 43%, P-Value of 0.003

$13.2M1

Expected Investment Expenses

$13.5M

ERFC Investment Expenses Link

Key Drivers of Investment Expense

• Scale
• Allocation
• Internal vs. external management
• Managed vs. unmanaged

We’re also administering benefits competitively on a per member basis

$263 $108 $961

Cost Per Member Per Year

June 30, 2017

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VRS ERFC FCRS*

Administrative Costs

June 30, 2017

90M 3M1 4M

Total Members

June 30, 2017

341K 32K1 38K

$155 more per member

Expenses

What are ERFC’s strategic priorities?

VRS ERFC FCRS

Source: Fairfax County Comprehensive Annual Financial Report for the Fiscal Year ended June 30, 2017

Strategic Initiatives

ERFC will continue to focus on sustainability and education; we’re increasing marketing efforts

Sustainability

• Risk-Adjusted Returns
• Governance
• Fees
• Processes

Marketing

• Awareness
• Recruitment
• Retention
• Branding

Messaging

• Clarity
• Cross Channel

Education

• Member
• Staff
• Trustee

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Initiatives

More on marketing?

Build awareness, increase retention of FCPS employees and become a greater asset in recruiting talent

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Marketing Plan

Relationships Segmentation

Initiatives

How is our Ambassador Program doing? Recruitment & Retention

We want an ERFC Ambassador at every FCPS location!

ERFC Ambassador Program

• On-site member volunteers
• Distribute basic ERFC info
• Guide to ERFC resources

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250 14

2016 2017

41 125

2018

Goal

2018

89

2019 Goal

117% growth since January 2018!

ERFC Ambassador Progress

Initiatives

Let’s recap

Summary

…In summary

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Marketability & Sustainability Relatively Low Costs

Stable Funded Ratio Performed Well

2001 Tier 2 is Growing

Summary

Questions?

Questions

Questions?

Q&A

Appendix

Investment fees are driven by portfolio size; ERFC in line with industry expectations

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R-Squared: 0.42915 P-Value: 0.0025732 𝑭𝒚𝒒𝒇𝒅𝒖𝒇𝒆 𝑮𝒇𝒇𝒕 = 𝟏. 𝟏𝟏𝟔𝟕𝟑𝟔𝟔 × 𝑩𝑽𝑵 + 𝟑𝟖𝟓, 𝟔𝟒𝟓

Actual $13.5M Difference $300k Expected1 $13.2M

Investment Fees

Expenses

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