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

New Hampshire Retirement System Presentation for House ED& A Committee January 2019 1 Contents • Overview • Membership • Investments • Contributions/Funding • Benefits • Legislation • Appendices 2

Overview • 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 3 Overview • NHRS is a component unit of state government overseen 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 4

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 Employer Members Richard Gustafson, Chair Donald Roy, N.H. School Boards Assoc. Maureen Kelliher Scott Myers, N.H. Municipal Association Tim Lesko Michael Milligan, State of N.H. Robert Maloney Christopher Coates, N.H. Assoc. of Counties Employee Members Ex Officio Member Melvin Friese, Employee Bill Dwyer, State Treasurer Sue Ellen Hannan, Teacher George Walker, Fire William Hart, Police 5 Overview • NHRS Trustees have a fiduciary obligation to ensure that the plan is adequately funded Benefit Contributions Payments Trust Trust Fund Fund Investment Expenses Income Equation must balance in the long term • NHRS Trust Fund at 6/30/18: $8.874 billion 6

Overview • 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.” 7 Overview • Recent NHRS initiatives • Enhanced education/outreach for members, employers and the general public • Cyber security enhancements and training • Pension application upgrade (‘PGv3’) 8

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 of 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 9 Membership • Group I • Employees • Teachers • Group II • Police • Fire • 467 participating employers • State of NH, counties, school districts, communities, and other political subdivisions 10

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 11 Membership At June 30, 2018 • Active Members • Average Age: 46.8 • Average Service: 12.0 years • Average Salary: $57,194 • Retirees • Average Age: 70.6 • Average benefit: $20,248 12

Investments • 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 13 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.) 14

Investments Strategy • Reviewed regularly • Long-term time horizon (25-plus years) • Manage risk and liquidity • Diversified portfolio among different types of assets 15 Investments Allocation 16

Investments At June 30, 2018 • 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% 17 Investments At June 30, 2018 Twenty-Year History of NHRS Total Fund Returns 25.0% 23.0% 20.0% 17.6% 16.0% 14.4% 14.9% 14.5% 15.0% 13.2% 13.5% 12.9% 10.1% 10.0% 10.0% 8.9% 5.0% 3.5% 2.5% 1.0% 0.9% 0.0% -5.0% -4.6% -6.4% -6.7% -10.0% -15.0% -18.1% -20.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Fiscal Year Source Data: Time-weighted annual returns (net of fees) provided by NEPC, LLC 18

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 19 Contributions/Funding • Member Contributions • Set by statute • Employees: 7% • Police: 11.55% • Fire: 11.8% • 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 20

Contributions/Funding • 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 21 Contributions/Funding • 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 over closed periods of no more than 20 years 22

Contributions/Funding Employer Contribution Rates – FY 2018-19 Employer Pension Cost Total Medical Employer Normal Subsidy UAAL Rate Cost 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% 23 Contributions/Funding Employer Contribution Rates – FY 2020-21 Employer Pension Cost Total Medical Employer Normal Subsidy UAAL Rate Cost 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% 24

Contributions/Funding UAAL as a % of Pension Rate – FY 2020-21 Member Pension: Pension: UAAL as a % Medical Total Category Normal UAAL of Total Subsidy Employer Cost Pension Cost 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% 25 Contributions/Funding Actuarial Analysis • Actuarial Valuation • Calculates funding status • Used per statute to set employer rates in odd-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 26