Tacoma Employees Retirement System May 9, 2013 Board Meeting - - PowerPoint PPT Presentation

Tacoma Employees’ Retirement System May 9, 2013 Board Meeting

Presented by: Mark Olleman, FSA, EA, MAAA and Daniel Wade, FSA, EA, MAAA

January 1, 2013 Actuarial Valuation

Actuarial Terminology and Funding Principles The Board’s Funding & Benefits Policy

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Agenda

• 1. This Presentation will cover:

Actuarial Terminology, Funding Principles, the Board’s Funding & Benefits Policy, and Risk

• 2. January 1, 2013 Actuarial Valuation Report

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Actuarial 101

The actuary provides the Retirement Board with sound information based on probability and statistics, so that the Board can make informed decisions concerning the System’s funding and benefits.

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Funding Principles

Ultimately: Contributions + Investment Earnings = Benefit Payments + Expenses

investments

$ $ $ $

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

Assets

$ $ $ $ $ $ $

$ $ $

$ $

benefits

expenses employer contributions employee contributions

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Actuarial Valuations

Purpose: determine if (a) scheduled contributions in combination with (b) future net investment earnings and (c) invested assets are projected to be sufficient to finance future member benefits. TERS Actuarial Valuations are now performed every year beginning in 2011.

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The Four Necessary Elements

• f an Actuarial Valuation

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Data

2012 2013 3,038 2,861 Contributing Active Members 1,950 2,106 Receiving Benefits 397 427 Vested Terminated Members 188 193 Non-vested Terminated Members 5,573 5,587 Total Members Age, sex, salary, service, employee contributions, benefit amount, form of payment.

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Assumptions

All liability calculations rely on assumptions studied last summer Price inflation/Wage inflation/Discount Rate all dropped 0.25% from 3.25% / 4.25% / 7.75% to 3.00% / 4.00% / 7.50% Most significant demographic assumption change was increased longevity for males Other assumptions also changed, but they had less impact All assumptions will be studied again in 2016 Exhibits D-4 and D-5 for History

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Assumptions (Appendix A)

Economic

Price and Wage inflation Net Investment Return (Discount Rate)

Demographic

Individual Pay Increases Retirement/Termination/Disability Mortality (Life Expectancy)

“I don't want to achieve immortality through my work... I want to achieve it through not dying.” - Woody Allen "I think some of us will make it through” - Ray Kurzweil of Google referring to Baby Boomers hoping to live forever.

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Superior Retirement Benefits

Adequacy

Currently a TERS member with 30 years of service receives at least 60% (before reductions for beneficiary protection) of pre-retirement income with a 2.125% COLA (could be less for some in low inflation years). For TERS members, Social Security is likely to provide somewhere between 27% and 37% of pre-retirement income at 65 to 67 with a Full CPI COLA.

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Superior Retirement Benefits

• 2% formula when age + svc = 80, age 60, or

30 years of service

• 2.125% Guaranteed COLA

(not to exceed 100% of original purchasing power)

• 50% Guaranteed Restoration COLA
• Benefits based on Employee Contributions

(not including increases above 6.44% starting in 2009)

2 x Contributions Minimum Vested Withdrawal Benefit = 1.5 x Contributions

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Normal Cost Rate

• Normal Cost Rate = Level % of pay that will fund a

member’s benefit if paid over his or her entire career.

(Based on 7.50% returns, and all other assumptions)

• Normal Cost Rate

= 17.80% of Pay

• Contribution Rate (Starting January 1, 2012)

= 20.00% of Pay

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Actuarial Accrued Liability

• Actuarial Accrued Liability (AAL)

= all past Normal Costs added together

• This is the target level of assets, IF:
• 1. Contribution Rate = Normal Cost Rate
• 2. All future experience = Actuarial Assumptions
• No provision for adverse experience

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Actuarial Value of Assets

Actuarial Assets smooth market value gains and losses over 4 years. $152M = actual return in 2012 = 14.1% $( 83M) = expected return based on previous 7.75% assumption $ 69M = difference or “gain.” The $69M gain is recognized in four equal ~$17M pieces at January 1 of 2013, 2014, 2015 & 2016.

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Actuarial Value of Assets (continued)

At January 1, 2013 the following gains and losses have not been recognized:

¾ of the $ 69M gain from 2012 = $ 52M ½ of the $ 70M loss from 2011 = $ (35M) ¼ of the $ 60M gain from 2010 = $ 15M

Therefore, at January 1, 2013 the $1,187M Actuarial Value of Assets is $32M smaller than the $1,219M Market Value of Assets.

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Unfunded Actuarial Accrued Liability

• Funding Reserve

= Actuarial Assets - Actuarial Accrued Liability (AAL)

• Unfunded Actuarial Accrued Liability (UAAL)

= Opposite of Funding Reserve

Financing requires Contributions > Normal Cost Rate

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Comparing Assets to Liabilities

2013 Unfunded Actuarial Accrued Liability = Assets – AAL

Actuarial Assets - AAL = $1,187.1M – $1,306.6M = ( $119.5M) Market Assets - AAL = $1,218.7M – $1,306.6M = ($ 87.9M)

2013 Funding Ratio = Assets ÷ AAL

Actuarial Assets = 90.9% Market Assets = 93.3%

2012 Funding Ratio

Actuarial Assets = 90.1% Market Assets = 91.3%

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Historical Funding Ratios

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 130%

1985 1987 1989 1991 1993 1995 1997 1998 1999 2001 2003 2005 2007 2009 2011 2012 2013

Historical Funding Ratios

Market Assets Actuarial Assets

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Amortization Period

• When there is a UAAL, the “Amortization Period”

is the time required for: Contributions - Normal Cost to pay off the UAAL.

• Contribution Rate – Normal Cost Rate

= 20.00% - 17.80% = 2.20%.

• 2.20% is sometimes called the “UAAL Rate”.

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Amortization Period

2013 Amortization Period = 65.3 years. Using Actuarial Assets the 2.20% UAAL rate is projected to pay for the $119.5 million UAAL over 65.3 years (35.0 years at 1/1/2012). Using Market Assets the 2.20% UAAL rate is projected to pay for the $87.9 million UAAL over 31.8 years (27.7 years at 1/1/2012). Longer than 2012 valuation because UAAL rate decreased from 2.66% to 2.20% due to Normal Cost rate increasing with assumptions from 17.34% to 17.80%. Note that 1/1/2012 valuation with 1/1/2013 assumptions implied infinite amortization period.

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GASB Statements No. 67 and 68

In August 2012, GASB issued statements to replace current standards. Fundamental break in reporting of assets, liabilities, and expenses. GASB 67 for plans and effective for plan years starting after June 15, 2013 (in other words 2014 for TERS). GASB 68 for employers effective one year later. Implementation guide for 67 this summer, 68 next winter. Net Pension Liability similar to UAAL based on market value of assets will be on balance sheet – would be $87.9M as of January 1, 2013. Currently negative NPO for system shown as an asset. Both balance sheet and expense will be much more volatile.

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What is the Board’s Current Funding & Benefits Policy?

Objective:

Provide guidance

• n adjusting

contributions and benefits Establish relatively stable contribution rate while the System provides its members superior retirement income

investments

Assets

benefits

expenses employer contributions employee contributions

investments

Assets

benefits

expenses employer contributions employee contributions

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Funding & Benefits Policy

• Why is this important?

Ensure decisions are made based on sound, consistent and thoroughly examined criteria Road Map / Strategic Policy Revised in February Fiduciary Duty of Care

“The responsibility to administer the plan efficiently and properly. The duty of care includes consideration and monitoring of the financial sustainability of the plan design and funding practices.” GFOA Best Practice on Governance, Approved March 5, 2010

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Fiduciary Duty of Care

Why is plan design included in the Fiduciary Duty of Care? Funding is not independent of benefits. If strategic policies do not include plan design:

Benefit improvements may be made that jeopardize the plan’s funding. Current plan designs may not be adjusted until after the plan’s funding deteriorates.

Proactive is better than reactive. The political process is subject to “moral hazard.”

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What is the Board’s Funding & Benefits Policy?

When the Funding Ratio is:

a) Above 120% - Investment de-risking considered. Then, the potential for contribution reductions and/or benefit improve- ments will be reviewed provided the funding status is expected to remain stable after improvements b) Between 95% and 120% - “No action zone” if:

• 1. The Contribution Rate is greater than or equal to the Normal Cost Rate,

OR

• 2. The Funding Reserve is expected to last at least 20 years.

If neither of the above is true, then consider a contribution increase.

c) Between 80% and 95% - Consider a contribution increase d) Under 80% - Review and re-evaluate Funding & Benefits Policy

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What is the Board’s Funding & Benefits Policy?

Additional Guidelines:

a) Maintain a Contribution Rate greater than or equal to the Normal Cost Rate b) Contribution increases may be in small increments c) Requests for increases should be made at least one year prior to beginning of financial biennium d) Contribution increases should consider amortizing the UAAL

• ver 30 years or less

e) Consider calculations based on Market Value of Assets f) Consider long-term funding projections

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Implications of the Board’s Funding and Benefits Policy

Consider Contribution Increase: The Funding Ratio of 90.9% is in the range of 80% to 95% where the policy says the Board should consider a contribution increase. 30-Year Amortization: The 65.3 year amortization period is outside the 30-year guideline. 20.97% required for 30-year goal. Market Value of Assets: 31.8 year amortization period is much closer to the 30-year guideline. 20.08% for 30-year goal. 20% contribution rate is greater than the normal cost. Long-term Funding Projections in the valuation show current contributions funding benefits if experience follows assumptions. Conclusion: The Funding and Benefits Policy says the Board should consider a contribution increase, but has indicators going both ways.

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Tacoma Contribution Rate History

Time Period Total Contribution Rate 1980 – 1996 19.33% 1997 – 2000 16.70% 2001 to 2008 14.00% 2009 16.00% 2010 18.00% 2011 19.00% 2012 and after 20.00%

• Shared Contributions, 46% by employees and 54% by the City

is the long-standing pattern. Everyone shares the cost.

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Why do we have a Defined Benefit Plan?

• Defined benefit plans are the most cost-effective

way of providing adequate retirements for public employees

Nebraska and the West Virginia Teachers returned to defined benefit pension plans to provide their employees adequate retirement benefits at a better cost Higher investment returns Lower investment and administrative expenses Longevity pooling That’s why 90% of public employees are in a defined benefit plan.

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Why do we have a Defined Benefit Plan?

• Defined benefit plans are the most cost-

effective way of providing adequate retirements for public employees

A study by the National Institute on Retirement Security “A Better Bang for the Buck” found defined benefit plans provided the same retirement income as defined contribution plans, including 401(k)s, for 46% less cost.

Available at www.nirsonline.org

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Why do we have a Defined Benefit Plan?

• Defined benefit plans provide lifelong income

Participants in defined contribution plans, including 401(k)s, have to worry about outliving their assets. Defined benefit plans pool longevity experience. Participants in defined contribution plans, including 401(k)s, may have to change their retirement plans after bear markets.

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Why do we have a Defined Benefit Plan?

• Defined benefit plans are more attractive to

government employees

In states where new hires were given a choice between defined benefit plans and defined contribution plans, only 3% to 26% have chosen defined contribution More likely to attract and retain employees

Study available at: http://publications.milliman.com/publications/eb-published/pdfs/nirs_decisions_decisions.pdf

• r www.nirsonline.org

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Risk – Contribution Volatility

• “Asset Volatility Ratio”

CalPERS, with over 3,000 employer contribution rates, found the ratio of assets / payroll to be key in determining a specific employer’s contribution volatility TERS “Volatility Ratio” grew from 1.4 in 1976 to a high of 6.3 in

• 2007. Current ratio is 5.9.

Increase from last year partially due to payroll decline. A 10% asset loss increases total contributions approximately:

Volatility Ratio 30 Year Amortization 15 Year Amortization 1.4 0.8% of pay 1.2% of pay 5.9 3.1% of pay 5.0% of pay

(Total increase would be slightly more after adjustment for return of member contributions.)

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TERS Historical Asset Volatility Ratio

Market Assets / Payroll

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

1976 1979 1982 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2012 2013

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Risk – Adverse and Favorable Experience

Estimated ranges of future compounded net returns

(using capital market assumptions from Wilshire, adjusted for 3.00% inflation and 0.35% investment expenses. See experience study.)

Percentile Results for Net Returns Horizon in Years 5th 25th 50th 75th 95th 1

• 9.50%

0.23% 7.61% 15.54% 27.98% 10 1.87% 5.22% 7.61% 10.06% 13.67% 30 4.26% 6.22% 7.61% 9.02% 11.07%

5.22% return for 10 years would reduce a 125% Funding Ratio to approximately 101%. This assumes the Contribution Rate = the Normal Cost Rate. (5.22% is 2.28% less than the 7.50% assumption)

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Investment Return Assumption

• We assume a 7.50% return.
• Used to budget future costs (with other assumptions).

Contributions and/or benefits must adjust to the extent actual long-term experience does not match assumptions Most important assumption Prior slide indicates a wide range of potential future returns

• Sustainable?
• What is the “Risk” of underperformance?

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Is the Plan Sustainable?

Adequacy: How much is enough? Contributions: How much is too much? Risk:

– Is the risk too high? – Should more be done

to manage the risk?

Funding / Contribution Policy Investment Policy Benefits Policy

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Remember

From time to time adjustments need to be made to keep a retirement plan in balance. Contributions + Investment Income = Benefits + Expenses

investments

$ $ $ $

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

Assets

$ $ $ $ $ $ $

$ $ $

$ $

benefits

expenses employer contributions employee contributions

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Official Document

January 1, 2013 Actuarial Valuation Report

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Caveats and Disclaimers

This presentation is based on the data, methods, assumptions and plan provisions described in our January 1, 2013 actuarial valuation report. The statements of reliance and limitations on the use of this material is reflected in the actuarial report and apply to this presentation. These statements include reliance on data provided, on actuarial certification, and the purpose of the report. Milliman's work product was prepared exclusively for TERS for a specific and limited purpose. It is a complex, technical analysis that assumes a high level of knowledge concerning TERS operations, and uses TERS data, which Milliman has not audited. It is not for the use or benefit of any third party for any

• purpose. Any third party recipient of Milliman's work product who desires

professional guidance should not rely upon Milliman's work product, but should engage qualified professionals for advice appropriate to its own specific needs.