New Hampshire Retirement System Presentation for Decennial Commission August 2017 1
Contents • Overview • Membership • Investments • Contributions/Funding • Benefits • Other Topics • 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 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 Employer Members Public Members Donald Roy, N.H. School Boards Assoc. Richard Gustafson, Chair Julia Griffin, N.H. Municipal Association David McCrillis John Beardmore, State of N.H. Maureen Kelliher Stephen Marro, N.H. Assoc. of Counties Vacant Ex Officio Member Employee Members Bill Dwyer, State Treasurer Germano Martins, Employee George Walker, Fire William Hart, Police Tonya Angwin, Teacher Five Board committees: Audit, Benefits, Legislative, Governance, and Personnel, Performance and Compensation (PPC) 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 • Trust Fund at 6/30/17: $8.18 billion (unaudited) 6
Overview • Assets in billions: June 30, 2007 to present $8.178 $7.530 $7.460 $7.414 $6.428 $5.968 $5.891 $5.774 $5.597 $4.898 $4.461 6/30/07 6/30/08 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* * 6/30/17 is unaudited 7
Overview • Significant developments since 2007 • 2007: Change in actuarial methodology • 2008: HB 1645 • 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% 8
Membership • Group I • Employees • Teachers • Group II • Police • Fire • 470+ participating employers • State of NH, counties, school districts, communities, and other political subdivisions 9
Membership At June 30, 2016 Employees Teachers Police Fire Total Active 24,520 17,784 4,139 1,626 48,069 Retirees/ 16,142 11,410 3,629 1,595 32,776 Beneficiaries 10
Membership At June 30, 2016 • Active Members • Average Age: 46.9 • Average Service: 12.1 years • Average Salary: $54,118 • Retirees • Average Age: 70.1 • Average benefit: $20,694 11
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 12
Investments Strategy • Reviewed annually • Long-term time horizon (25-plus years) • Manage risk and liquidity • Diversified portfolio among different types of assets 13
Investments Allocation 14
Investments At June 30, 2016 Twenty-Year History of NHRS Total Fund Returns 25.0% 23.0% 18.6% 20.0% 17.5% 17.6% 16.0% 14.4% 14.9% 14.5% 13.2% 15.0% 12.9% 10.1% 10.0% 10.0% 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% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Fiscal Year Source Data: Time-weighted annual returns (net of fees) provided by NEPC, LLC 15
Investments • Historical returns at 6/30/16 • One-year return on investments: 1.0% • Three-year return: 7.1% • Five-year return: 7.2% • 10-year return: 6.0% • 20-year return: 7.0% • 25-year return: 8.2% Investment performance better than 65% of peer group over one-year period, better than 80% over three-, five-and 10-year periods, and better than 75% over 20- and 25-year periods • One-year return at 3/31/17*: 11.6% *Most recent available 16
Contributions/Funding • Member Contributions • Set by statute • Police: 11.55% • Employees: 7% • • Fire: 11.8% Teachers: 7% • Employer Contributions • Actuarially determined then certified by Trustees on biennial basis • Separate rates for Employee, Teacher, Police, and Fire groups • 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 17
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 70% of total employer rate 18
Contributions/Funding UAAL as a % of Total Employer Rate – FY 2018-19 Member Pension: Pension: Medical Total UAAL as a Category Normal UAAL Subsidy Employer % of Total Cost Rate Rate Emp. – State 2.16% 8.92% 1.07% 12.15% 73.4% Emp. – P. Sub. 2.16% 8.92% 0.30% 11.38% 78.4% Teacher 2.07% 13.63% 1.66% 17.36% 78.5% Police 5.67% 19.66% 4.10% 29.43% 66.8% Fire 7.05% 20.74% 4.10% 31.89% 65.0% 19
Contributions/Funding • Unfunded Actuarial Accrued Liability (UAAL) • The result of artificially low employer contributions coupled with transfer of ‘excess’ investment earnings to Special Account over an extended period; exacerbated by 2008-09 market downturn • $5.1 billion at the close of FY 2016, a funded ratio of 60.0% • UAAL grew due to reduction of assumed rate of investment return from 7.75% to 7.25% and other adjustments to actuarial assumption • Method is in place to amortize the liability through employer contribution rates over a 30-year period ending in 2039 20
Contributions/Funding Funded Ratio 100.0% 80.0% 67.8% 67.0% 60.7% 60.0% 59.2% 58.3% 58.5% 57.4% 56.7% 56.1% 60.0% 40.0% 20.0% 0.0% 2007 2008 2009 2010* 2011 2012 2013 2014 2015 2016 * Beginning of 30-year closed amortization period In addition to smoothed investment performance, the funded ratio was impacted by reductions to assumed rate of return and other actuarial assumption updates in 2011 and 2016, as well as legislative changes to benefit provisions in 2008 and 2011. 21
Contributions/Funding Actuarial Analysis • Biennial Actuarial Valuation • Calculates funding status • Used to set employer rates per statute • Based on numerous actuarial assumptions • When assumptions don’t match actual experience, there can be an actuarial gain or loss • Assumptions are reviewed periodically through experience studies 22
Contributions/Funding Actuarial Analysis • Actuarial Experience Study • Per statute, conducted every five years • Most recent - 2015 • Systematic evaluation of past experience in comparison to current actuarial assumptions • Demographic Assumptions • Retirement rates; disability; turnover; mortality; population size • Economic Assumptions, including assumed rate of investment return • Wage/price inflation; payroll growth; promotion/step pay increases; end-of-career payments • Takes both past experience and future expectations into consideration 23
Contributions/Funding Actuarial Analysis • Major Recommendations in 2015 Experience Study • Demographic • Update mortality assumptions • Retirees are living longer, especially teachers • Economic • Reduce investment assumption • Investment assumption is biggest driver of employer rates • Reduce inflation assumption • Additional adjustments for Teacher group 24
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