dallas police fire pension investments
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The bad news for the Dallas Police and Fire Pension FundTRANSCRIPT
Dallas Police and Fire Pension System Investment Return Assumption
July Board Meeting July 9, 2015
Investment Return Assumption
• The Board has adopted an assumption for the long-term rate of return on
assets
– The assumption should be the best estimate of future experience
– The assumption is used to value the liabilities of the System
– The current assumption is 8.5%, net of investment and administrative
expenses
• In order to develop the assumption, we take into account past experience,
future expectations, and professional judgment
– Buck uses a model called GEMS® Economic Scenario Generator from
Conning and Company to produce asset return forecasts
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GEMS®
• The GEMS is particularly well suited to develop the long-term market
assumptions suitable for public pension
– GEMS is calibrated to reflect current conditions
– Over the longer term, GEMS allows for a broader range of economic and
capital market environments and related asset performance, determined in
part by historical observations
– The broad range of economic and capital market simulations produced by
GEMS provides a more complete picture than more static models of the
potential rewards and risks that a pension fund will be exposed to over its
lifetime
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Investment Return Analysis
• The results of the asset return analysis produced by GEMS is shown on the
following slides
– Please note that we are providing the results at a 30 year investment horizon,
as well as a 20 year investment horizon, for comparison with results produced
by other sources
– The results assume administrative expenses of 0.24%
– The results assume average annual rates of inflation of roughly 2.75% over
20 years and 3.00% over 30 years
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Expected Arithmetic Return
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Horizon
Expected
Real
Return
Assumed
Inflation
Expected
Nominal
Return
Administrative
Expenses
Expected Nominal
Return Net of
Expenses
20 years 6.32% 2.79% 9.11% 0.24% 8.87%
30 years 6.61% 3.04% 9.65% 0.24% 9.41%
Expected Geometric Return
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Geometric Net Nominal Return
Horizon 40th Percentile 50th Percentile 60th Percentile
20 years 7.52% 8.21% 8.86%
30 years 8.07% 8.81% 9.40%
- Assumes Administrative Expenses of 0.24%
- 20 year horizon: assumed annual rate of inflation of 2.77%
- 30 year horizon: assumed annual rate of inflation of 3.01%
Recommended Return Considerations
• When recommending a return assumption, in the past we have looked at a 30-year horizon, and assumed that future experience will be close to the 50th percentile of the distribution of expected returns over that horizon
• The System currently maintains a not insignificant portion of its holdings in “non-traditional” assets
– The assets have no liquid market
– The revaluation of these assets has resulted in significant write-downs in 2013 and 2014
• The report we issued in May showed an actuarial loss of $279 million on assets in 2014
– Please note that since the January 1, 2014 valuation did not reflect the final audited asset values, a portion of the $279 million actuarial loss is due to losses that actually occurred in 2013
• Since May more 2014 asset values have been reported
– The resulting actuarial loss for 2014 is now closer to $460 million
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Recommended Return Considerations
• Considering the magnitude of the 2014 and 2013 losses, as well as the size of
the non-traditional assets, we may need to re-evaluate how the asset return is
determined
– Specifically, if we assume that these non-traditional assets will continue to be
a drag on the fund in the near term, we may want to look at an asset return
that is lower than the 50th percentile
• As noted on a previous slide, the 40th to 50th percentiles of the distribution of
future asset returns were in the ranges of:
– Over a 20 year horizon, 7.52% to 8.21%
– Over a 30 year horizon, 8.07% to 8.81%
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Recommended Return Considerations
• A reduction of the long-term assumed rate of return could be accompanied by a
somewhat greater reduction in the short-term assumed rate of return, if it is
expected that the performance of the non-traditional assets will continue to
dampen the return in the near future
– This would be implemented in the form of a select-and-ultimate return
assumption
– We would assume that the return is somewhat lower over the near term (the
select period) but will rise to the long-term expected rate of return is after the
select period is over
– For example, if we believe the long-term rate of return is actually 7.75%, but
we expect lower returns on the non-traditional assets in the near term, we
might assume the return is 7.5% for 2015 – 2019 but then increases to
7.75% for 2020 and beyond
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Impact of the Asset Losses
• The following slide shows the impact of the asset losses for 2014 on the
System’s funded percentage (i.e. the ratio of Actuarial Value of Assets to
Accrued Liability)
– The “2014 Report” line shows the projection based on the 1/1/2014 valuation
• It assumes that the fund earns 8.5% in 2014
• It reflects the Plan changes that were implemented in 2015
– The “May 2015 Report” line shows the projection based on the 1/1/2015
valuation that was presented in May
• It reflects that the fund had a $279 million actuarial loss in 2014
– The “Updated July 2015 Assets” line shows the projection based on the
1/1/2015 valuation and reflects the most recent 2014 asset valuation
information
• It reflects that the fund had a $460 million actuarial loss in 2014
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Impact of the Asset Losses - Current Plan Provisions
Assumed Future Asset Returns of 8.5%
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0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
Fu
nd
ed
Perc
en
tag
e
2014 Report
May 2015 Report
Updated July 2015 Assets
Impact of Asset Losses
• As seen on the previous graph, under the current plan provisions the asset loss
in 2014 leads to the projection that the System will run out of money, even if it
makes the 8.5% return every year after 2014
• Based on the stochastic projections we provided in 2014, without significant
gains in the near future, the return for 2014 puts the results in about the 25th
percentile of those projections
• If the asset return assumption of 8.5% is lowered, the results are even worse
since the plan will have less asset return to pay for future benefit payments
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Impact of Revised Asset Assumption
• The following slide shows the impact on the same funded percentage
described earlier if the long-term asset assumption is changed
• We have made projections under the following assumed rates of asset returns:
– 8.50% (current assumption)
– 8.00%
– 7.75%
– 7.50%
– 7.50% for 2015 – 2019 and 7.75% for 2020 and beyond
– 7.25%
– 7.00%
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Impact of Revised Asset Assumption Current Plan Provisions
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0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
Fu
nd
ed
Perc
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8.50% Return
8.00% Return
7.75% Return
7.50% Return
7.50% for 2015-2019, then 7.75%
7.25% Return
7.00% Return
Impact of Revised Asset Assumption
• The January 1, 2015 funded percentage (i.e. the ratio of Actuarial Value of
Assets to Accrued Liability) under each of the scenarios is as follows:
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Return Assumption Funded Percentage
8.50% 71.4%
8.00% 68.3%
7.75% 66.8%
7.50% 65.3%
7.50%/7.75% 66.4%
7.25% 63.8%
7.00% 62.3%
Impact of Revised Asset Assumption
• The asset return assumption should be our best estimate of what we believe
the future long-term return on assets will be
• If we believe that certain assets are going to continue to be a drag on the fund,
that should be reflected in the assumed rate of asset return
• The GEMS output indicates that the 40th percentile of expected long-term asset
returns is between 7.52% and 8.07%
• If ongoing problems with non-traditional assets lead us to expect that future
returns will be in that range, it will be necessary to adjust the assumption
accordingly
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GASB 67 Impact
• The asset return assumption also impacts the Total Pension Liability (TPL)
under GASB 67
– The long-term rate of return on plan assets can only be used to measure the
TPL if the plan is projected to have assets
– If there is a point where assets are no longer projected to be available to pay
for benefits, a municipal bond rate would need to be used.
– Therefore, if assets are projected to be depleted, the result is a blended rate
that would be lower than the long-term rate of return on plan assets
– As shown on the previous graphs, as a result of the most recent asset write-
downs the plan is projected to run out of assets, even if returns of 8.5% per
year can be achieved
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GASB 67 Impact
• The following shows the impact of the blended rate, as well as an example of
the impact of changing the return assumption to something lower than 8.5%
– The blended rate is computed by applying a discount rate of 3.34% to
benefits projected to be paid after assets are projected to be depleted, which
is based on the S&P Municipal Bond 20 Year High Grade Rate Index
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Assumed Rate of Return 8.50% 7.75% 7.50%
Net Pension Liability
at Assumed Rate of Return
$ 2,211,158,099
$ 2,591,207,587
$ 2,729,480,109
Blended Discount Rate 6.19% 5.20% 5.01%
Net Pension Liability
at Blended Discount Rate
$ 3,566,972,478
$ 4,353,822,629
$ 4,523,257,470
Assumed Rate of Return 7.25% 7.00%
Net Pension Liability
at Assumed Rate of Return
$ 2,874,106,889
$ 3,025,458,414
Blended Discount Rate 4.83% 4.67%
Net Pension Liability
at Blended Discount Rate
$ 4,689,884,750
$ 4,843,214,819
Projection Assumptions
• Except as noted in the presentation, results were based on the same plan
provisions, assumptions, methods, assets and data as noted in the 2015
valuation report issued in May.
• Specifically assets are assumed to earn the returns noted in the presentation
for 2015 and beyond.
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Certification
Future actuarial measurements may differ significantly from current
measurements due to plan experience differing from that anticipated by the
economic and demographic assumptions, increases or decreases expected as
part of the natural operation of the methodology used for these measurements,
and changes in plan provisions or applicable law. An analysis of the potential
range of such future differences is beyond the scope of this report.
Use of this presentation for any other purposes or by anyone other than the
Dallas Police and Fire Pension System may not be appropriate and may result in
mistaken conclusions because of failure to understand applicable assumptions,
methods, or inapplicability of the report for that purpose. This presentation should
not be provided without a copy of this certification. No one may make any
representations or warranties based on any statements or conclusions contained
in this presentation without Buck Consultants’ prior written consent.
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Certification
The results were prepared under the direction of David Driscoll and David Kent
who meet the Qualification Standards of the American Academy of Actuaries to
render the actuarial opinions contained herein. These results have been
prepared in accordance with all applicable Actuarial Standards of Practice, and
we are available to answer questions about them.
David L. Driscoll, FSA, EA, MAAA David Kent, FSA, EA, MAAA
Principal, Consulting Actuary Director, Consulting Actuary
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Questions?
THANK YOU
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