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

Tacoma Employees’ Retirement System May 9, 2013 Board Meeting January 1, 2013 Actuarial Valuation Actuarial Terminology and Funding Principles The Board’s Funding & Benefits Policy Presented by: Mark Olleman, FSA, EA, MAAA and Daniel Wade, FSA, EA, MAAA

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 2

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. 3

Funding Principles employer contributions $ $ $ investments $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Assets $ $ $ PENSION FUND $ $ employee contributions $ $ $ $ $ expenses $ $ Ultimately: benefits Contributions + Investment Earnings = Benefit Payments + Expenses 4

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. 5

The Four Necessary Elements of an Actuarial Valuation 6

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. 7

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 8

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. 9

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. 10

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 11

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 12

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 13

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. 14

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. 15

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 16

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% 17

Historical Funding Ratios Historical Funding Ratios 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1985 1987 1989 1991 1993 1995 1997 1998 1999 2001 2003 2005 2007 2009 2011 2012 2013 Market Assets Actuarial Assets 18

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”. 19

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. 20

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. 21

What is the Board’s Current Funding & Benefits Policy? employer contributions employer contributions $ $ $ $ $ $ investments investments $ $ $ $ $ $ Objective: $ $ $ $ $ $ $ $ $ $ � Provide guidance $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Assets Assets $ $ $ $ $ $ PENSION PENSION employee contributions employee contributions FUN D FUN D $ $ $ $ $ $ $ $ on adjusting $ $ $ $ $ $ expenses expenses contributions and $ $ $ $ benefits benefits benefits � Establish relatively stable contribution rate while the System provides its members superior retirement income 22

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 23

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.” 24

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 25