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

Fairfax County Public Schools Pension 101 – “What did my actuary say?” April 24, 2017 Prepared by Aon Hewitt Retirement & Investment

Agenda  Actuarial Concepts and Terminology  Key Factors Impacting Contributions Pension 101 Aon Hewitt | Retirement & Investment 2 Proprietary & Confidential | Board Presentation – 04 24 2017

Actuarial Concepts and Terminology Aon Hewitt | Retirement & Investment 3 Proprietary & Confidential | Board Presentation – 04 24 2017

The “Big Picture” - Ultimate Plan Cost Contributions + Investment Return = Benefits + Expenses Employer contributions $ $ $ Net Investment $ Returns $ $ $ $ $ $ $ $ $ $ Assets $ $ $ $ $ $ $ Employee contributions PENSION FUND $ $ $ $ $ $ $ Administrative $ $ Expenses Benefit Payments Assumptions and funding methods affect only the timing of costs. “Nobody ever made a benefit payment from assumed interest!” Aon Hewitt | Retirement & Investment 4 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. Economic Assumptions Participant data (Interest Rate, (age, service, pay, Salary Growth, etc.) COLA, etc.) Present Value Of Projected Benefits ( PVB ) Demographic Assumptions Plan Provisions (Retirement, (i.e. contract terms) Turnover, Death and Disability) Aon Hewitt | Retirement & Investment 5 Proprietary & Confidential | Board Presentation – 04 24 2017

Actuarial Cost Methods PRESENT VALUE OF PROJECTED BENEFITS = AAL + PVNC $2,881 Million The Actuarial Cost Method is a mechanism to allocate the present value of projected benefits (PVB) Actuarial Accrued to time periods (i.e. benefits related to past service vs. future Liability (AAL) 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 Present Value of Liability (AAL) is the portion of Future Normal present value of projected Costs (PVNC) benefits (PVB) attributable to past service. $683 As of 12/31/2015 Million PVB = $3,564 Million Aon Hewitt | Retirement & Investment 6 Proprietary & Confidential | Board Presentation – 04 24 2017

Actuarially Determined Employer Contribution (“ADEC”) A DEC = 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) $2,188M Actuarial Value of Assets $693M Assets Unfunded Actuarial Accrued Liability ($81.9M) Present Value of Future Normal Costs Amortization of UAAL Normal Cost $683M NC plus the amortization of the UAAL equals the annual employer contribution Aon Hewitt | Retirement & Investment 7 Proprietary & Confidential | Board Presentation – 04 24 2017

Actuarially Determined Employer Contribution (in Millions) Current Asset 60% US Allocation 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). Aon Hewitt | Retirement & Investment 8 Proprietary & Confidential | Board Presentation – 04 24 2017

Key Factors Impacting Contributions Aon Hewitt | Retirement & Investment 9 Proprietary & Confidential | Board Presentation – 04 24 2017

Key Risk Factors Impacting Contributions Discount Rate Mortality Table (or Assumed Rate of Return)  FCPS uses an interest rate of  The Society of Actuaries 7.25% per annum net of released a new base mortality investment expenses. table (RP-2014) and longevity improvement scale (MP-2014)  Rate is generally based on long in October 2014 for private term expected return reflecting plans. asset allocation. ‒ An updated longevity  Based on changed asset improvement scale (MP- allocation to a passive 60% US 2016) was released in Equity/40% Fixed Income, the October 2016 30-year expected return is  The SOA is currently 6.47% per annum. undergoing a study of public  If FCPS lowered interest rate to pension mortality and will be the 6.47%, the unfunded releasing an updated table. actuarial accrued liability would  FCPS uses the RP-2014 with increase by approximately Scale MP-2014. Slightly $250-$325 million and the conservative table compared to funding policy contribution private plans. would increase by approximately $17-$22 million. Aon Hewitt | Retirement & Investment 10 Proprietary & Confidential | Board Presentation – 04 24 2017