Majority Whip August 9, 2014 Question What is an Actuary? Answer: - PowerPoint PPT Presentation

Presented by: State Senator Pat Browne Majority Whip August 9, 2014

Question – What is an Actuary? Answer: Someone who found Accounting too Exciting 8/11/2014 Council of State 2 Governments

Pennsylvania State Employees Retirement System (SERS) Participants : All Individuals under state employment are allowed to participant Current Compliment : Active Members: 110,107 Annuitant Members: 109,639 Total MV of Assets (12/31/2013) - $ 32 million

Pennsylvania School Employees Retirement System (PSERS) Participants : All Individuals under school district employment are allowed to participant Current Compliment : Active Members: 279,701 Annuitant Members: 177,963 Total MV of Assets (12/31/2013) – $ 52 million

Number of Plans State & Local government pension plans in Pennsylvania estimated to comprise over 25% of total number of public employee pension plans in US With more than 3,200 plans, PA has more than 4 times as many plans as any other state 7

12.00% 10.85% 10.06% 10.00% 8.50% 7.13% 8.00% 6.46% 4.73% 6.00% 4.73% 4.69% 4.74% 4.73% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 2.00% 3.00% 0.00% FY 05/06 FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13 SERS PSERS 9

1,364,000 1,400,000 1,200,000 918,433 (In Thousands) 1,000,000 819,533 763,698 672,035 656,052 642,063 800,000 600,000 400,000 200,000 0 FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13 Estimates based on projected contribution rates and payroll data provided by PSERS consulting actuary. Future year employer contribution rates and the resulting contributions may increase 10 or decrease depending on investment performance.

387,000 400,000 (In Thousands) 200,000 SERS 122,161 61,451 4,851 0 0 0 0 FY 06/07 FY 07/08 FY 08/09 FY 09/10 FY 10/11 FY 11/12 FY 12/13 Estimates based on projected contribution rates and payroll data provided by SERS. Future year 11 employer contribution rates and the resulting contributions may increase or decrease depending on investment performance.

12

(In Thousands) Estimates based on projected contribution rates and payroll data provided by PSERS consulting actuary. Future year employer contribution rates and the resulting contributions may increase 13 or decrease depending on investment performance.

(In Thousands) Estimates based on projected contribution rates and payroll data provided by SERS. Future year 14 employer contribution rates and the resulting contributions may increase or decrease depending on investment performance.

Employer Contribution Rate Spike Standard for Reform The projected sharp rise in PSERS’ and SERS employer contribution rate is primarily the result of: The unfunded liabilities created by The FYs’ 2001 -2003, 2008-2009 down investment markets (48%) Act 2001-9 multiplier increase (19%) Assumption and cost method changes (5%) The Act 2002-38 phased COLA (2%) Demographic and Salary Experience (5%) The changes made by Acts 2002-38 and 2003- 40 to PSERS’ actuarial funding methodologies (21%)  Total due to market and DB management: 79% 16

Element of Unfunded Balance: • Act 2001-9 multiplier increase (19%) • The Act 2002-38 phased COLA (2%) Reform Pension Reform of 2010: Reduces the Future Cost of State/School District Employee Pension from Average 9% of Payroll to Average 3.37% of Payroll: Very Competitive 17

Defined Benefit Plan Design Reform For New Employees on or after PSERS: July 1 2011 SERS: January 1, 2011 Benefit Accrual Rate – 1) Class 1: reduced from 2.5% to 2% of payroll (Pre 2001 benefit level) Employee Contribution – (Post 2001 Level) PSERS – 7.5% SERS – 6.25% 2) Class 2: maintain higher 2.5% accrual rate with higher employee contribution PSERS - 10.3% SERS – 9.3% 18

Defined Benefit Plan Design Reform Vesting Period – Increased from 5 to 10 years for both systems; Disability period same Retirement Age – Increased to age 65 or at any age with 35 years of service (Previous – 60/62 and 30 years of service) State Police/Capitol Police/Park Rangers – Increased to 55 years and 20 year from 50 years (Arbitration Award – 20/50% - 25/75% maintained) Withdrawal of Contributions (Option 4) - Eliminated 19

Additional Cost Reductions: Pension Cap: The benefit under the DB plan will be limited to not more than 100% of the member’s Final average salary. (Eliminate “spiking” as a means for retirement to exceed salary) No Subsidy for Purchase of non-school/non-state service: Employee contributions for any purchase of non- school/non-state service (POS) will be at full actuarial cost . Exception: Military Service: under federal law (USERRA), we must allow members to purchase military service at the rate that they would have to pay if they were in active service. 20

Superannuation: Adopt Rule of 92 for determining superannuation age, but keep age 65 superannuation with 3 years of service. Common Method : Rule of “a number” – number is sum of age and length of service (i.e. 55 year old + 35 years of service = Rule of 90) Higher Number – Stricter Standard Reform: Rule of 92 Effect: Individuals starting in state service between ages 18 and 22 will be required to work longer than 35 years to receive unreduced pension Approx. 1,500 state employers per year in this category Highest rule in the country 21

Pension Obligation Bonds (POB) Prohibited In theory, POB can be used to reduce cost if cost of borrowing is less than investment rate of return on borrowed funds (positive arbitrage) Experience shows that: Positive arbitrage results are often not realized and presents excessive risk given current underfunded status Proceeds of POB, when deposited into plan, artificially inflates funding balance which encourages and often results in benefit enhancement, increasing underfunded status 22

Element of Unfunded Balance The FYs’ 2001 -2003, 2008-2009 down investment markets (48%)  Issue for Reform: Who Should Assume Risk of Investment Loss????  Defined Benefit: Risk in Investment Loss Fully on Employer/Taxpayer  Defined Contribution: Risk of Investment Loss Fully on Employee  Alternative: Sharing of Investment Loss Between Employer/Taxpayer and Employee 23

Senate Finance Committee 24

• Reform: “Shared Risk” Defined Benefit Plan Establish new DB plan which guarantees benefit but requires shared responsibility by employees for unmet investment assumptions and/or unfunded balance – Elements: • Base Rule: Commencing with the next 5- year actuarial experience study, PSERS/SERS will compare the actual investment rate of return to the actuarial assumed rate of return for a 10-year period. (Ten year Rolling Average) 25

Reform : “Shared Risk” Defined Benefit Plan Contribution Adjustment: For every 1% that the actual rate is less than the assumed rate, the employee contribution rate to the Defined Benefit (DB) plan will increase by .5%. For every 1% that the actual rate is more than the assumed rate, the employee contribution rate to the DB plan will decrease by .5%. If the difference is less than 1%, then there will be no change in the employee rate. The changes will be made only for whole numbered differences, so that if there is a difference of 1.6%, then the employee rate will change by .5%. If there is a difference of 2.4%, then the employee rate will change by 1%. 26

Reform: “Shared Risk” Defined Benefit Plan Range of Contribution Adjustment The employee contribution rate: PSERS (T-E) shall not drop below 7.5% nor go above 9.5%. PSERS (T-F) members shall not drop below 10.3% nor go above 12.3%. SERS (Class 1) shall not drop below 6.25% nor go above 8.25%. (Class 2) not drop below 9.3% nor go above 11.3% New hires will contribute at the rate in effect when they are hired. Contribution Rates will be reset every three years. Rates will not be reset more than .5% in any one period 27

Reform : “Shared Risk” Defined Benefit Plan Phase In: First 10 years – Rate Comparison will be made on three year increments (i.e.. First three years – 3 years; First 6 years – 6 years; First 9 years – 9 years; At 12 th year, look back will be previous 10 years) Debt Reduction: Employee contributions in excess of 7.5%/6.25% will be used to reduce the unfunded accrued liability (over a period of 30 years as a level percent of payroll Employer Payment Incentive: In any year the Commonwealth does not meet scheduled payment, employee shared risk is eliminated for that year 28

• Element of Unfunded Balance Assumption and cost method changes (5%) Demographic and Salary Experience (5%) Reform: Price Waterhouse Coopers Study 1) Valuation of System Assets: Reasonable 2) Actuarial Assumptions: Salary Experience: Reasonable Mortality Experience: Reasonable 29

Kicking the Can Down the Road??” 30