march 9, 2006 psers an update on the state of the fund, the employer contribution rate and pending...
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March 9, 2006 www.psers.state.pa.us 1
PSERSAn Update on the State of the
Fund, the Employer Contribution Rate and Pending Legislation
March 9, 2006 www.psers.state.pa.us 2
AgendaState of the Fund
Investment UpdateActuarial ProcessFunded Status
The Employer Contribution RatePending LegislationCurrent IssuesQuestionsNew Pension Administration System (NPAS) Update
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Audited Market Value of the Fund as of June 30,
2005:
$52.7 billion
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Unaudited Market Value of the Fund as of December
31, 2005:
$54.8 billion
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Unaudited Market Value of the Fund as of March 3,
2006:
$56.7 billion
Market Value % of Target PolicyAsset Class (in millions) Total Allocation Ranges
Domestic Equity $ 22,830.1 41.7% 40.0% 37.0% - 43.0% International Equity 12,354.3 22.5% 20.0% 17.0% - 23.0%
Private Equity 3,629.1 6.6% Private Debt 1,035.4 1.9% Venture Capital 498.5 0.9% Subtotal Alt. Investments 5,163.0 9.4% 11.0% 8.0% - 14.0%
Real Estate 3,283.3 6.0% 7.0% 5.0% - 9.0%
Total Equity 43,630.7 79.6% 78.0% 75.0% - 81.0%
Domestic Fixed Income 7,929.2 14.5% Global Fixed Income 1,689.9 3.1% Cash & Cash Equivalents * 1,555.7 2.8% Total Fixed Income 11,174.8 20.4% 22.0% 19.0% - 25.0% TOTAL FUND $ 54,805.5 100.0% 100.0%
* - includes Cash, Cash Equivalents, and net asset value accounting adjustments
PSERS’ Investment Market Values
as of December 31, 2005 (Unaudited)
PSERS’ Net Pension Assets (in billions)
54.851.8
48.3
42.343.548.148.9
53.4
19.1
44.839.3
25.825.5
0.84.9
2.1
17.322.3
28.833.7
$0
$10
$20
$30
$40
$50
$60
6/60 6/70 6/80 6/90 6/91 6/92 6/93 6/94 6/95 6/96 6/97 6/98 6/99 6/00 6/01 6/02 6/03 6/04 6/05 12/05
Month/Year
PSERS’ Annualized Performance (Net of Fees) As of December 31,
2005
Asset Class QuarterFiscal Year
to Date*1 Year 3 Years 5 Years
Equities
U.S. Issues 2.03% 6.22% 6.25% 16.53% 3.46%
International 5.16 18.39 19.03 26.13 7.53
Fixed Income
U.S. Issues 0.51 0.47 3.17 6.29 7.21
Global -1.22 -1.20 -3.96 6.65 7.42
Real Estate 8.42 16.20 29.62 23.50 16.31
Private Equity/Venture Capital/ Private Debt
8.52 11.08 27.27 19.23 4.80
TOTAL ASSETS 3.39% 8.58% 11.45% 17.01% 6.50%
*PSERS’ Fiscal Year ends on June 30
PSERS Performance Comparison
Total Returns of Total Fund Public Plans Periods Ended 12/31/05
Q
FYTD
YEAR
2 YEARS
3 YEARS
5 YEARS
10
YEARS
PSERS (Rank) 3.39 (1) 8.58 (1) 11.45 (1) 13.16 (1) 17.01 (2) 6.50 (12) 9.36 (23)
Policy Index (Rank) 2.42 (14) 7.00 (11) 9.01 (12) 10.51 (11) 14.42 (15) 4.99 (50) NA
Bp Difference 97 158 244 265 259 151 NA
Median 1.80 5.18 6.45 8.23 12.26 5.03 8.29
Bp Difference 159 340 500 493 475 147 107
# of Funds 138 138 133 129 123 111 66
(1) – per Wilshire’s public sponsors database
2.8%
9.4%6.0%3.1%
14.5%
22.5%41.7%
Domestic Equity
InternationalEquity
Domestic FixedIncome
Global FixedIncome
Real Estate
AlternativeInvestments
Cash & CashEquivalents
PSERS’ Portfolio Distributionas of December 31, 2005
(Unaudited)
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Actuarial Process
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Actuarial ValuationAlthough the annual actuarial valuation to determine PSERS’ employer contribution rate is fairly complex, its goal is relatively simple, i.e. to ensure that PSERS has sufficient funds to meet all benefit and expense requirements of the plan
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Actuarial ValuationThe actuarial valuation ensures adequate funding of the pension plan by determining:
The liabilities of the Fund, based on:• Membership data• Benefits provisions• Certain actuarial assumptions• Actual experience
The assets of the Fund, based on:• Market value of the assets• Actuarial value of the assets• Certain actuarial assumptions• Actual experience
The funding sources make up any “shortfall” between the assets and liabilities
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Plan Funding
PSERS funding sourcesKnown Variable - Employer Contribution Rate
• (4.23% for FY 2004-2005)• (4.69% for FY 2005-2006) • (6.46% for FY 2006-2007)• Generally split between the Commonwealth
and School Employers
Unknown Variable - Investment Earnings • (Assumed Rate of return 8.5%)
Fixed - Employee Contribution Rate• (5.25%/6.25%/6.50%/7.50%)
PSERS’ Sources of Funding Ten Year History (1996 to
2005)
Investment Earnings78%
$37.6 Billion
Employee Contributions12%
$6.0 Billion
Employer Contributions10%
$4.7 Billion
PSERS’ Sources of FundingTwenty Five Year History (1981 to
2005)
Investment Earnings
68%
$57.5 Billion
Employee Contributions
12%
$10.3 Billion
Employer Contributions
20%
$17.1 Billion
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Experience Study
An experience study reviews and compares actual demographic and actuarial experience with the Fund’s actuarial assumptions
An experience study is conducted every five years
An experience study was completed in 2005
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Experience StudyAs a result slight revisions were made to the Fund’s demographic and actuarial assumptions and were reflected in the employer contribution rate
Examples:• Salary growth rate was decreased from 6.25% to
6.00%• Updated postretirement mortality tables • Modified disability, death in service, and non-
vested withdrawal rates to reflect experience• Decreased assumed inflation from 3.5% to 3.25%• Increased assumed real rate of return on assets
from 5% to 5.25%
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Actuarial Assumptions
DemographicService retirementDisabilityDeath in active serviceWithdrawalDeath after retirement
EconomicRate of return on assetsSalary increase
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Actuarial Assumptions
EconomicRate of return on assets 8½%Active member salary increases 4¼% to 12%
6% average
Components of active member salary increases
Inflation 3.25%Real wage growth 1.00%Career scale 1.75%
6.00%
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Funded Status
PSERS’ Funded Ratio: 1991 – 2005 (in millions)
June 30
Date
Accrued Liability
Valuation
Assets
(Overfunded) Unfunded Accrued Liability
Funded Ratio
2005 $61,227 $51,219 $10,007 83.7% 2004 57,124 52,095 5,029 91.2 2003 54,443 52,900 1,543 97.2 2002 51,796 54,296 (2,500) 104.8 2001 47,917 54,830 (6,913) 114.4 2000 39,823 49,293 (9,470) 123.8 1999 37,499 44,606 (7,107) 119.0 1998 36,136 39,969 (3,833) 110.6 1997 33,210 34,873 (1,663) 105.0 1996 31,630 30,171 1,459 95.4 1995 30,073 26,971 3,102 89.7 1994 28,348 24,552 3,796 86.6 1993 25,947 22,644 3,303 87.3 1992 24,570 20,068 4,502 81.7 1991 22,574 17,962 4,612 79.6
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The RateOn December 9, 2005, the Retirement Board certified the employer contribution rate for FY 2006-2007The rate for FY 2006-2007 is 6.46% (0.74% for premium assistance and 5.72% for the pension rate)The pension rate of 5.72% is 0.90% below the employer normal cost of 6.62%The “employer normal cost” is the annual cost of the benefits earned by the members of the System payable by the employers
In other words, if PSERS met all of its actuarial assumptions, the annual employer contribution rate would be 6.62% plus the premium assistance rate
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Valuation Date: June 2004 June 2005Rate Components (FY 2005/2006) (FY 2006/2007)
Employer Contribution Rate
Normal Cost Rate 14.77%
13.83%
Member Rate (Average) (7.16%)
(7.21%)
Employer Normal Cost Rate 7.61%
6.62%
Unfunded Accrued Liability Rate (4.28)% (0.95)%
Preliminary Pension Rate 3.33% 5.72%
Pension Rate Floor 4.00% N/A
Health Insurance Rate .69% .74%
Final Pension Rate 4.00% 5.72%
Final Total Rate 4.69%
6.46%
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Total Contribution RateFiscal Year
Employer Employee Total Contribution Rate
06-07 6.46% 7.21% 13.67% 05-06 4.69 7.16 11.85 04-05 4.23 7.12 11.35 03-04 3.77 7.08 10.85 02-03 1.15 7.10 8.25 01-02 1.09 5.80 6.89 00-01 1.94 5.77 7.71 99-00 4.61 5.72 10.33 98-99 6.04 5.69 11.73 97-98 8.76 5.65 14.41 96-97 10.60 5.62 16.22 95-96 11.72 5.59 17.31 94-95 11.06 5.55 16.61 93-94 13.17 5.51 18.68 92-93 14.24 5.48 19.72 91-92 14.90 5.46 20.36 90-91 19.18 5.69 24.87
Member TotalFiscal Normal Accrued Health Care Total Contribution ContributionYear Cost Liability Contribution Employer (Average) Rate
89/90 8.44 11.24 19.68 5.53 25.2190/91 8.28 10.9 19.18 5.69 24.8791/92 8.00 6.40 .50 14.90 5.46 20.3692/93 7.90 5.84 .50 14.24 5.48 19.7293/94 7.34 5.58 .25 13.17 5.51 18.6894/95 6.43 4.18 .45 11.06 5.55 16.6195/96 6.43 4.67 .62 11.72 5.59 17.3196/97 6.44 3.56 .60 10.60 5.62 16.2297/98 6.44 2.17 .15 8.76 5.65 14.4198/99 6.33 (.44) .15 6.04 5.69 11.7399/00 6.40 (2.04) .25 4.61 5.72 10.3300/01 6.29 (4.65) .30 1.94 5.77 7.7101/02 5.63 (6.05) 1.09 1.09 5.80 6.89
02/03 7.20 (10.03) .97 1.15* 7.10 8.2503/04 7.25 (4.27) .79 3.77 7.08 10.8504/05 7.48 (7.10) .23 4.23** 7.12 11.3505/06 7.16 (4.28) .69 4.69** 7.16 11.8506/07 6.62 (0.95) .74 6.46 7.21 13.67
Detailed Total Contribution Rate
*1% floor & 1.15% cap per Act 38 **4% floor per Act 40
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Act 38 and the RateAct 2002-38, in addition to granting a phased COLA, required PSERS to use a five-year smoothing methodology for recognizing investment gains and losses, instead of PSERS’ former (Pre-Act 38) three-year smoothing methodology
Pre-Act 38, the selection of the smoothing methodology was within the Retirement Board’s discretion
Once recognized, the gains or losses, at the time of Act 38, were to be amortized over 10 years at level dollars
The 10 year amortization schedule for gains and losses was subsequently modified by Act 2003-40
Act 38 also provided for an employer contribution rate floor of 1%, exclusive of the premium assistance rate
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Act 38 and the Rate
One purpose of the smoothing methodology is to reduce the volatility of the employer contribution rateThe longer the smoothing period the greater the smoothing effectThe subsequent amortization of the recognized gains and losses further mitigates the volatility of the employer contribution rate
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Act 38 and the RateAct 38 also provided a transition rule for implementing the new five-year smoothing methodology
Essentially PSERS was directed to immediately recognize the investment gains and losses still unrecognized for actuarial purposes under the former smoothing methodology for FY 98-99 and FY 99-2000The impact of this immediate recognition was to be reflected in calculating the employer contribution rate for Fiscal Year 2002-2003The resulting reduction in the rate was attributable to the fact that there were no unrecognized losses for FY 98-99 and FY 99-2000, only gains, whose recognition was accelerated, plus the fact that the losses from FY 2000-2001 were to be recognized over 5 years not 3 years
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Act 40 and the RateEnacted December 10, 2003 Increased the statutory minimum employer rate floor from 1.00% to 4.00% plus premium assistance rate, for the PSERS’ employer contribution rate beginning July 2004 Also beginning in July 2004, Act 2003-40 changed the amortization period for the increased liabilities of Act 9 of 2001, for the outstanding balances of the net actuarial losses incurred in FY 2000/2001 and FY 2001/2002, and for the future gains and losses experienced in all future years from 10-year level dollars to 30-year level dollars
March 9, 2006 www.psers.state.pa.us 38
Act 40 and the RateAct 40 retained the current 10-year level dollar amortization period for all pre-Act 9 of 2001 unfunded liabilities, the Act 38 of 2002 asset valuation method change, and for future benefit changes and COLASThe net impact of Act 40 was to reduce the employer contribution rate for FY 2004-2005 from the projected rate of 9.69% (including premium assistance) to 4.23% (including premium assistance)If the rate floor was not in place, the employer contribution rate would have been .61% (including premium assistance)
March 9, 2006 www.psers.state.pa.us 39
Pre Act 2003-40June 30, 2003 Valuation Rate
Projection
Fiscal Year Ending Pre-Act 40 Retirement Code
Proposed 30-Year Amortization Schedule with
0% Floor on Pension Rate
June 30 Annual Payroll Employer Rate Contribution Employer Rate
2003/2004 10,554,969$ 3.77 % 397,922$ 2004/2005 11,059,845 9.69 1,071,699 2005/2006 11,411,594 15.87 1,811,020 2006/2007 11,748,838 21.41 2,515,426 2007/2008 12,076,340 24.43 2,950,250
2008/2009 12,396,057 25.45 3,154,797 2009/2010 12,709,943 25.52 3,243,577 2010/2011 13,021,185 25.38 3,304,777 2011/2012 13,350,084 25.05 3,344,196 2012/2013 13,704,746 32.11 4,400,594
2013/2014 14,091,010 27.34 3,852,482 2014/2015 14,512,093 22.12 3,210,075 2015/2016 14,973,250 17.27 2,585,880
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Post Act 2003-40June 30, 2003 Valuation Rate
Projection
Fiscal Year Ending Pre-Act 40 Retirement Code
Act 40 30-Year Amortization Schedule with
4% Floor on Pension Rate
June 30 Annual Payroll Employer Rate Contribution Employer Rate Contribution
2003/2004 10,554,969$ 3.77 % 397,922$ 3.77 % 397,922$ 2004/2005 11,059,845 9.69 1,071,699 4.23 467,831 2005/2006 11,411,594 15.87 1,811,020 4.82 550,039 2006/2007 11,748,838 21.41 2,515,426 8.07 948,131 2007/2008 12,076,340 24.43 2,950,250 10.11 1,220,918
2008/2009 12,396,057 25.45 3,154,797 10.93 1,354,889 2009/2010 12,709,943 25.52 3,243,577 11.15 1,417,159 2010/2011 13,021,185 25.38 3,304,777 11.23 1,462,279 2011/2012 13,350,084 25.05 3,344,196 11.20 1,495,209 2012/2013 13,704,746 32.11 4,400,594 27.73 3,800,326
2013/2014 14,091,010 27.34 3,852,482 26.61 3,749,618 2014/2015 14,512,093 22.12 3,210,075 25.08 3,639,633 2015/2016 14,973,250 17.27 2,585,880 24.53 3,672,938
10 Year Employer Contribution Rate Projection based on June 30, 2004 Valuation
Fiscal Year Ending June Employee
Employer Normal Cost
Unfunded Liability Rate
Preliminary Employer
Pension RateHealth Care Contribution
Total Employer
Rate2004/2005 7.12 7.48 (7.10) 4.00 0.23 4.232005/2006 7.16 7.61 (4.28) 4.00 0.69 4.69
2006/2007 7.19 7.51 (1.86) 5.65 0.73 6.382007/2008 7.21 7.44 (0.68) 6.76 0.73 7.492008/2009 7.24 7.36 (0.65) 6.71 0.71 7.422009/2010 7.27 7.29 (1.17) 6.12 0.72 6.842010/2011 7.29 7.24 (1.09) 6.15 0.71 6.86
2011/2012 7.32 7.19 (1.06) 6.13 0.70 6.832012/2013 7.35 7.17 14.61 21.78 0.68 22.462013/2014 7.37 7.15 13.61 20.76 0.68 21.442014/2015 7.39 7.13 12.27 19.40 0.66 20.062015/2016 7.41 7.11 11.82 18.93 0.64 19.57
The projection of contribution rates is based on the assumption that there are no changes in demographics or economic assumptions, no changes in benefit provisions, and no actuarial gains or losses other than gains or losses on the actuarial value of assets that result from recognizing currently deferred gains or losses on the market value of assets.
Post Act 40 June 30, 2004 Valuation
Prior Proj.
4.23 4.82
8.07 10.11 10.93 11.15 11.23
11.20 27.73 26.61 25.08 24.53
June 30, 2003
valuation
March 9, 2006 www.psers.state.pa.us 42
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10 Year Employer Contribution Rate Projection based on June 30, 2005 Valuation
Fiscal Year Ending June Employee
Employer Normal Cost
Unfunded Liability Rate
Preliminary Employer
Pension RateHealth Care Contribution
Total Employer
Rate
2005/2006 7.16 7.61 (4.28) 4.00 0.69 4.69
2006/2007 7.21 6.62 (0.95) 5.72 0.74 6.46**2007/2008 7.23 6.60 (0.21) 6.39 0.76 7.152008/2009 7.25 6.58 (0.57) 6.01 0.77 6.782009/2010 7.27 6.57 (1.51) 5.06 0.77 5.832010/2011 7.30 6.54 (1.82) 4.72 0.78 5.50
2011/2012 7.32 6.53 (1.85) 4.68 0.78 5.462012/2013 7.35 6.51 15.24 21.75 0.77 22.522013/2014 7.37 6.49 14.31 20.80 0.77 21.572014/2015 7.39 6.48 13.00 19.48 0.76 20.242015/2016 7.41 6.46 12.67 19.13 0.76 19.892016/2017 7.43 6.45 12.33 18.78 0.74 19.52
** 6.46% total employer contribution rate for fiscal year 2006/2007 adopted by the Board of Directors on December 9, 2005.
The projection of contribution rates is based on the assumption that there are no changes in demographics or
economic assumptions, no changes in benefit provisions, and no actuarial gains or losses other than gains or
losses on the actuarial value of assets that result from recognizing currently deferred gains or losses on the
market value of assets.
The Future?
March 9, 2006 www.psers.state.pa.us 44
Legislative Process
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Legislation: PSERS’ Role
Assists in drafting legislation Assists in editing legislation Provides cost estimates
Example: Act 2002-38 Occasionally “lobbies” for legislation:
Prudent person investment authorityAmendments to retain qualified plan status under the Internal Revenue CodeProtection of investment information under the Right-to-Know LawThese occasional efforts are at the direction of the PSERB
March 9, 2006 www.psers.state.pa.us 46
Legislation: Adopted during 2005-2006
sessionHouse Resolution 299 was adopted by the House of Representatives on June 29, 2005
The proposal directed the Legislative Budget and Finance Committee (LB&FC) to perform a comprehensive study involving a fiscal analysis, actuarial analysis, and policy analysis of various alternative proposals set forth in House Bill 130 and House Bill 131
HB 130 proposes a “30 & Out” early retirement incentive window, and a “rule of 80” retirement benefit
HB 131 proposes the institution of a permanent, automatic, annual COLA
The report has not yet been finalized and its release is expected during March 2006
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Legislation: Enacted during 2005-2006
sessionAct 5 of 2006- Governor Rendell signed into law on February 2, 2006
Act 5 provides an exemption for retirees from the continuing education requirements of Act 48 of 1999
Retired teachers are now permitted to be employed for a total of 180 days, during which time they would be exempt from the continuing education requirements and maintain active teacher’s certification
A large number of bills have been introduced that impact PSERS (COLAS, 30 and Out, etc.)
You can track the progress of a bill via the Internet by accessing the Session Information section of the Pennsylvania General Assembly website at: http://www.legis.state.pa.us/cfdocs/legis/home/session.cfm
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Current Issues
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Current IssuesRising employer contribution rate
Impact of Act 2001-9 (1/3)Impact of investment performance - 2001-2003 (2/3)Impact of Act 2003-40 - balloon payment in FY 2012/2013
Relationship with annuitantsRight-to-Know-Law (RTKL) dispute with PASR
Increased public scrutiny/transparencyBoard Education Policy
DB vs. DC debate Commonwealth Foundation Report
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Update on New Pension
Administration System (NPAS)
March 9, 2006 www.psers.state.pa.us 52
NPAS Update
Recap of the first 20 months of operationStatus of Member Statements of AccountStatus of Employer Statements of AccountPlanned Improvements
Employer Statement of Accounts
Employer Reporting
Questions and Answers