New Hampshire Retirement System Presentation for House ED& A - - PDF document

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New Hampshire Retirement System

Presentation for House ED& A Committee

January 2019

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• Overview
• Membership
• Investments
• Contributions/Funding
• Benefits
• Legislation
• Appendices

Contents

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• NHRS is a contributory, multi-employer,

defined benefit plan established in 1967

• Provides retirement, disability, and death

benefits, as well as a post-retirement Medical Subsidy, to eligible members and their beneficiaries

• Once members attain eligibility, they can receive

a guaranteed lifetime pension

• Pension benefits are funded through employee

and employer contributions and investment income

• Investment returns have historically provided the majority of

funding for pension benefits

Overview

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• NHRS is a component unit of state government
• verseen by a Board of Trustees
• Board of Trustees and Independent Investment Committee

are fiduciaries

• NH Legislature is the plan sponsor (RSA 100-A)
• NHRS staff implements statute, rules, policies
• Internal Revenue Code
• NH Constitution Art. 36-a
• Protects funds ‘for the exclusive purpose’ of providing

benefits

• Requires Board to certify employer rates based on sound

actuarial practice

• Requires employers to pay the rates certified

Overview

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Overview

Board of Trustees

The members of the New Hampshire Retirement System (NHRS) Board of Trustees are appointed and serve pursuant to RSA 100 A:14 Public Members Richard Gustafson, Chair Maureen Kelliher Tim Lesko Robert Maloney Employee Members Melvin Friese, Employee Sue Ellen Hannan, Teacher George Walker, Fire William Hart, Police Employer Members Donald Roy, N.H. School Boards Assoc. Scott Myers, N.H. Municipal Association Michael Milligan, State of N.H. Christopher Coates, N.H. Assoc. of Counties Ex Officio Member Bill Dwyer, State Treasurer

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• NHRS Trustees have a fiduciary obligation

to ensure that the plan is adequately funded

Trust Fund Trust Fund

Contributions Investment Income Benefit Payments Expenses

Equation must balance in the long term

Overview

• NHRS Trust Fund at 6/30/18: $8.874 billion

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• Mission:

“To provide secure retirement benefits and superior service.”

• Vision:

“NHRS will fulfill our role as fiduciary of the trust and deliver retirement benefits to our members and beneficiaries through a commitment to value, innovation and excellence.”

Overview

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• Recent NHRS initiatives
• Enhanced education/outreach for members,

employers and the general public

• Cyber security enhancements and training
• Pension application upgrade (‘PGv3’)

Overview

• Significant developments since 2007
• 2007: Change in actuarial methodology
• 2009: Independent Investment Committee formed
• 2010: 30-Year Amortization of UAAL begins
• 2011: Board reduced rate of return to 7.75%
• 2011: HB 2 – Legislation increased member

contributions, reduced benefits, changed composition

• f NHRS Board, and eliminated state employer

contribution subsidy to political subdivisions

• 2014-16: NH Supreme Court upholds legislative

changes

• 2016: Board reduced rate of return to 7.25%
• 2017: Decennial Commission

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Overview

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• Group I
• Employees
• Teachers
• Group II
• Police
• Fire
• 467 participating employers
• State of NH, counties, school districts,

communities, and other political subdivisions

Membership

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Membership

At June 30, 2018 Employees Teachers Police Fire Total Active 24,511 17,752 4,197 1,661 48,121 Ret/Dis/Ben 18,193 13,223 3,923 1,673 37,012

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• Active Members
• Average Age: 46.8
• Average Service: 12.0 years
• Average Salary: $57,194
• Retirees
• Average Age: 70.6
• Average benefit: $20,248

Membership

At June 30, 2018

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• Board of Trustees
• Approves investment policy, including asset allocation
• Hires investment consultant
• Independent Investment Committee
• Created by Legislature, effective Jan. 1, 2009
• Recommends investment policy to the Board
• Oversees the administration of the investment

program within Board’s policies

• Hires investment service providers, such as the

custodian and investment managers

• Prepares a Comprehensive Annual Investment

Report (CAIR) for approval by the Board

Investments

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Investments

Independent Investment Committee

The members of the NHRS Independent Investment Committee are appointed and serve three-year terms pursuant to RSA 100-A:14-b

Trustee Members Maureen Kelliher, Chair Tim Lesko Public Members Christine Clinton Keith Quinton Daniel LaPlante

“Each member of the independent investment committee shall have substantial experience in the field of institutional investment or finance, other than their experience as trustees of the New Hampshire retirement system, taking into account factors such as educational background, business experience, and professional licensure and designations.” (RSA 100-A:14-b II.)

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• Reviewed regularly
• Long-term time horizon (25-plus years)
• Manage risk and liquidity
• Diversified portfolio among different types
• f assets

Investments

Strategy

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Investments

Allocation

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• One-year return on investments: 8.9%
• Three-year return: 7.7%
• Five-year return: 8.7%
• 10-year return: 7.1%
• 20-year return: 6.4%
• 25-year return: 8.0%

Assumed rate of return is 7.25%

Investments

At June 30, 2018

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Investments

At June 30, 2018

8.9% 13.5% 1.0% 3.5% 17.6% 14.5% 0.9% 23.0% 12.9%

• 18.1%
• 4.6%

16.0% 10.0% 10.1% 14.9% 2.5%

• 6.4%
• 6.7%

13.2% 14.4%

• 20.0%
• 15.0%
• 10.0%
• 5.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 Fiscal Year Source Data: Time-weighted annual returns (net of fees) provided by NEPC, LLC

Twenty-Year History of NHRS Total Fund Returns

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Investments

At June 30, 2018

• Investment performance better than

90% of its peers over the three and five- year periods and better than 80% over the one-, 10-, 20-, and 25-year periods

• Since inception, IIC performance

relative to the peer median has added more than $500 million to Trust Fund

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• Member Contributions
• Set by statute
• Employees: 7%
• Teachers: 7%
• Employer Contributions
• Actuarially determined then certified by Trustees on

biennial basis

• Separate rates for each member group
• Consist of three parts: Normal cost, UAAL, Medical

Subsidy

• NH Constitution requires the payment of the

employer contributions

• Local employers have paid 100% of contributions for

teachers, police and fire since state subsidy was repealed in 2011

• Police: 11.55%
• Fire: 11.8%

Contributions/Funding

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• Normal Cost
• Estimated annual value of pension benefits as

they are earned

• Unfunded Liability
• Estimated value of NHRS benefits earned in the

past, but not yet funded

• Medical Subsidy
• Funded at pay-as-you-go level for most member

groups Unfunded liability accounts for more than 75% of total employer pension rate

Contributions/Funding

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• Unfunded Actuarial Accrued Liability (UAAL)
• $4.99 billion at the close of FY 2018,

a funded ratio of 63.6%

• The result of artificially low employer contributions

coupled with transfer of ‘excess’ investment earnings to Special Account over an extended period beginning in early ’90s

• Exacerbated by market downturn in 2008-09;

however, liability existed before then

• Further impacted by reductions to assumed rate of

return in 2011, 2016

• Method is in place to amortize the current liability

through 2039 via employer contribution rates

• Future biennial gains or losses after 7/1/17 will be amortized
• ver closed periods of no more than 20 years

Contributions/Funding

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Contributions/Funding

Employer Contribution Rates – FY 2018-19 Employer Pension Cost Medical Subsidy Total Employer Rate Normal Cost UAAL GROUP I

• Emp. - State

2.16% 8.92% 1.07% 12.15%

• Emp. - P. Sub.

2.16% 8.92% 0.30% 11.38% Teachers 2.07% 13.63% 1.66% 17.36% GROUP II Police 5.67% 19.66% 4.10% 29.43% Fire 7.05% 20.74% 4.10% 31.89%

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Contributions/Funding

Employer Contribution Rates – FY 2020-21 Employer Pension Cost Medical Subsidy Total Employer Rate Normal Cost UAAL GROUP I

• Emp. - State

1.92% 8.96% 1.05% 11.93%

• Emp. - P. Sub.

1.92% 8.96% 0.29% 11.17% Teachers 1.86% 14.13% 1.81% 17.80% GROUP II Police 5.04% 19.73% 3.66% 28.43% Fire 6.35% 20.08% 3.66% 30.09%

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Contributions/Funding

UAAL as a % of Pension Rate – FY 2020-21 Member Category Pension: Normal Cost Pension: UAAL UAAL as a %

• f Total

Pension Cost Medical Subsidy Total Employer Rate

• Emp. – State

1.92% 8.96% 82.4% 1.05% 11.93%

• Emp. – P. Sub.

1.92% 8.96% 82.4% 0.29% 11.17% Teacher 1.86% 14.13% 88.4% 1.81% 17.80% Police 5.04% 19.73% 79.7% 3.66% 28.43% Fire 6.35% 20.08% 76.0% 3.66% 30.09%

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• Actuarial Valuation
• Calculates funding status
• Used per statute to set employer rates in
• dd-number years
• Assumptions derived in experience study
• Actuarial Experience Study
• Conducted every five years (Most recent: 2015)
• Evaluates assumptions
• Demographic Assumptions
• Economic Assumptions, including assumed rate of

investment return

• Rate of return reduced from 7.75% to 7.25% in 2016

Contributions/Funding

Actuarial Analysis

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• Four types of retirement: service,

disability, early, and vested deferred

• Different benefit provisions apply to

Group I and Group II

• Different benefit provisions apply based
• n vested status and date of hire
• Pension benefits are determined by

statutory formulas that consists of three components:

• Creditable Service
• Average Final Compensation
• Benefit Multiplier

Benefits

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• Service Retirement Age: 65
• Service Retirement Formula:

AFC divided by 66, multiplied by creditable service = annual pension $50,000 ÷ 66 = $758 x 30 years = $22,727

Benefits

Group I Service Retirement: Hired On/After 7/1/11

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$50,000 x 0.20 = $1,000 x 25 years = $25,000

Note: Group II members do not participate in Social Security

• Service Retirement Age: 52.5 (with minimum

25 years of service)

• Service Retirement Formula:

AFC multiplied by 0.20%, multiplied by creditable service = annual pension

Benefits

Group II Service Retirement: Hired On/After 7/1/11

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• In FY 2018, $741.8 million in pension

benefits were paid to retirees and beneficiaries

• In the same period, $49.3 million in

post-retirement Medical Subsidy payments were paid on behalf of eligible retirees and beneficiaries

• 80% of annuitants live in NH

Benefits

Group I

• Employee: $13,693
• Teacher: $22,028

Group II

• Police: $36,328*
• Fire: $39,764*

All Retirees

• Average: $20,248

Note: Plan does not include automatic cost-of-living adjustments

* Group II members do not participate in Social Security

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Benefits

Average Annual Pension Benefits at June 30, 2018

• Annual benefit under $10k: 29%
• Annual benefit under $25k: 66%
• Annual benefit under $50k: 94%
• Annual benefit greater than $75k: 1.2%

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Benefits

Distribution of Benefits at 12/31/18

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• 2018 session
• 13 NHRS-related bills introduced
• Seven bills enacted into law
• 2019 session
• More than 10 LSRs introduced
• Since 2007, more than 90 changes have

been made to the statute governing NHRS

Legislation

Recent Activity

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• 2017 Decennial Commission
• Final report issued in January 2018
• Covers specific charges listed in statute (RSA 100-A:57)
• Made 12 recommendations, including four each

regarding funding and working after retirement

• Includes appendices, historical data and independent

report from the Center for Retirement Research at Boston College

• Key themes:
• Major emphasis on growth of UAAL
• Recognizes the success of NHRS Independent Investment Committee
• Cost is the major roadblock to restoring COLAs, employer contribution

subsidy

Legislation

Decennial Commission

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• Provide data and objective analysis
• Fiscal Note Worksheets
• “Bill Briefs”
• Testimony
• Informational materials (annual reports,

actuarial valuations, etc.)

Legislation

NHRS’ Role

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Appendices

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Appendix

Trust Fund Assets

$4.461 $4.898 $5.891 $5.774 $6.428 $7.414 $7.530 $7.460 $8.293 $8.874

6/30/09 6/30/10 6/30/11 6/30/12 6/30/13 6/30/14 6/30/15 6/30/16 6/30/17 6/30/18*

• Assets in Billions: June 30, 2009 to June 30, 2018

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Appendix

Trust Fund Assets

• Actuarial funded ratio : June 30, 2009 to June 30, 2018

58.3% 58.5% 57.4% 56.1% 56.7% 60.7% 59.2% 60.0% 61.8% 63.6% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Funded ratio impacted by reductions to assumed rate of return and revised actuarial assumptions in 2011, 2016

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Appendix

Members and Beneficiaries 2009-2018

• Active Members
• 2018: 48,121
• 2017: 47,886
• 2016: 48,069
• 2015: 47,812
• 2014: 48,307
• 2013: 48,688
• 2012: 48,625
• 2011: 49,738
• 2010: 50,467
• 2009: 51,032
• Retirees/Beneficiaries
• 2018: 37,012
• 2017: 35,694
• 2016: 32,776
• 2015: 31,350
• 2014: 31,054
• 2013: 29,729
• 2012: 28,454
• 2011: 27,130
• 2010: 25,845
• 2009: 24,501
• State vs. Political Subdivision
• Membership by Gender

Employees Teachers Police Fire Total State 9,901 1,047 67 11,015 Political Subs. 14,610 17,752 3,150 1,594 37,106 Total 24,511 17,752 4,197 1,661 48,121

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Employees Teachers Police Fire Total Female 14,926 13,920 564 37 29,447 Male 9,585 3,832 3,633 1,624 18,674 Total 24,511 17,752 4,197 1,661 48,121

Appendix

Membership Data at June 30, 2018

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Appendix

Expenses

• NHRS investment and administrative expenses

are paid from the pension Trust Fund, not the General Fund

• NHRS expenses as a percentage of assets

0.33% 0.10% 0.44% 0.12% 0.40% 0.19%

0.00% 0.10% 0.20% 0.30% 0.40% 0.50% Investment Expenses Administrative Expenses NHRS NEPC Public Fund Universe (35 DB funds greater than $1B) NCPERS Universe (164 public DB funds)

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Appendix

Timeline for Setting Employer Rates

• Biennial Actuarial Valuations
• 6/30/15 valuation determined FY 2018-19 rates
• 6/30/17 valuation determined FY 2020-21 rates
• 6/30/19 valuation will determine FY 2022-23 rates
• Biennial NHRS Trustee Rate Certification
• 9/16 Trustees certified FY 2018-19 rates
• 9/18 Trustees certified FY 2020-21 rates
• 9/20 Trustees will certify FY 2022-23 rates

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Appendix

Recent Legal Challenges to Pension Changes

• HB 1645 suit (2008 legislative changes)

American Federation of Teachers v. State of NH

• HB 2 contribution suit (2011 legislative changes)

Professional Fire Fighters of NH v. State of NH

• HB 2 benefits suit (2011 legislative changes)

Professional Fire Fighters of NH v. State of NH

• State contribution subsidy (2009 legislative changes)

City of Concord & a. v. State of NH State prevailed in all cases

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The New Hampshire Retirement System (NHRS) is governed by New Hampshire RSA 100-A, rules, regulations, and Federal laws including the Internal Revenue Code. NHRS also implements policies adopted by the Board of Trustees. These laws, rules, regulations, and policies are subject to change. Even though the goal of NHRS is to provide information that is current, correct, and complete, NHRS does not make any representation or warranty as to the current applicability, accuracy, or completeness of any information provided. The information herein is intended to provide general information only, and should not be construed as a legal

• pinion or as legal advice. Members are encouraged to address

specific questions regarding NHRS with an NHRS representative. In the event of any conflict between the information herein and the laws, rules, and regulations which govern NHRS, the laws, rules, and regulations shall prevail.