ncccma winter seminar michael williamson director, north carolina retirement systems
TRANSCRIPT
NCCCMA Winter Seminar
Michael WilliamsonDirector, North Carolina Retirement
Systems
How Did We
Get Here?
Benefit Enhancements?Purchasing Power of Retirement Benefits by Year of Retirement
Adjusted for Inflation, COLAs, and Formula Increases
80%
85%
90%
95%
100%
105%
110%
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Year of Retirement
Purc
hasi
ng P
ower
Now
Com
pare
d to
in Y
ear
of
Reti
rem
ent
Benefit Enhancements?LGERS Multiplier
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
2.00%
Year
3 Funding SourcesThe Retirement Systems Assets come
from 3 sources: Working employees contribute 6
percent of each paycheck Employers contribute annually based
on recommendations from the Systems’ actuary
The State Treasurer invests funds in the System, which generates investment earnings
Local Governmental Employees’ Retirement System
Year Ended December 31, 2007
Sources of Funds
Investment
Income
$1,386,248,218
71.5%
Employee
Contributions
$301,094,054
15.5%
Employer
Contributions
$252,165,044
13.0%
Other
Income
$99,880
0%
2008 Loss: $4.9 billion How did we lose $4.9 billion? 12/31/2007 Assets = $17,891 million 2008 actual return = -20%
Average large public fund = -26% S&P 500 = -37%
Expected return = 7.25% Loss of about 27.25% of $17,891 or
$4,875 Active LGERS payroll estimated at $5.3
billion. The losses we experienced equals about
92% of all the local payrolls in NC
Contributions:
Where are We?
Contribution History
LGERS Contribution History
0
1
2
3
4
5
6
7
1975 1980 1985 1990 1995 2000 2005 2010
Year Beginning July 1,
Ba
se
Co
ntr
ibu
tio
n a
s %
of
Pa
y
Employer Employee
FY 10-11 Contributions
LGERS
Estimated Salaries $5,321
FY10 Actual 4.80% Base = $255
FY11 ARC 6.35% Base = $338
Dollar amounts are in $ millions.
Some employers contribute more due to accrued liability or death benefit. Base rate for law enforcement = 6.41% after court cost offset.
Projected Employer Contributions
What Can We Do?
Invest our Way Out?
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
10/1/2007 1/9/2008 4/18/2008 7/27/2008 11/4/2008 2/12/2009 5/23/2009 8/31/2009 12/9/2009
S&P 500 Index
Required Return to Get Back
Need return on fund of 34% in 2010 to get back to funding situation at 12/31/2007.
Only 50% invested in stock market, so market needs to return 61%.
Increase ContributionsReasons to Contribute the ARC (Annual
Required Contribution): Required by statute Maintain bond ratings 68 year history of responsibility ARC is less than needed to remain 100%
funded Avoid burden on future taxpayers Avoid slippery slope
Contribution Benchmarks
Average public fund: 8.7% of pay (DB only, FY08 PFS, only Soc Sec systems)
Highest system in PFS: 31.5% of pay Neighbors:
SC: 8.05%TN: 9.36%VA: Varies, up to 22%GA: 10.39%
More Comparisons
Average large private-sector employer: 7.3% of pay (DB & DC, BLS, June 2009)
Cost of new benefits earned each year: around 6.3% of pay
Employer Contribution Context
LGERS Asset/Compensation/Contribution Values
-
1,000
2,000
3,000
4,000
5,000
6,000
Asset Loss ReportedCompensation
EmployerContributions
FY10
EmployerContributions
FY11
Increase inContributions
$ m
illio
ns
Slippery Slope
New Jersey: cut contribution in 1992, again in 1994, again in 2009, mostly for short-term political gain
Some abandoned after 2000-03 market drop thinking situation was temporary (it wasn’t): Maryland, Kentucky, Colorado, Pennsylvania
Some have never had the discipline, but tried numerous times to establish it: Illinois, West Virginia, Oklahoma, Washington
Contribution
Relief
Initial Contribution Relief
Losses occurred mostly in fall of 2008
Delay in effective date of valuation to July 1, 2010
5-year smoothing of assets, so phase into full contribution over 5 years beginning July 1, 2010
Roughly 14 year amortization period after phase in complete
Alternative Description of Contribution Relief
You borrow $10,000 at a 7% interest rate
Which of the following repayment approaches seems most prudent? Pay off in one year by cutting
expenses and selling possessions Payment similar to minimum
payment on credit card ($1,900 per year)
More Choices
Level payments over 15 years ($1,079 per year)
Pay interest only and pay off loan in the future ($700)
No payment for 2 years, then phase into full payment over 5 years. (produces payments of $0; $0; $170; $336; etc.)
Further Contribution Relief ARC in FY09-10 = 4.24% of pay
Actual contribution in FY09-10 = 4.80% of pay
Proposed that Board allow local governments to use that 0.56% of pay credit balance in first year to offset 6.35% contribution
Net result would have been 6.35% - 0.55% = 5.80% (0.01% difference is adjustment for timing)
Assumptions Contribution requirements depend
on assumptions about the future Examples:
How long retirees will live to collect benefits
How much investments will earnHow much salaries will increase (benefit based on final four years)
Salary Increase Assumption
Long-term assumption over next 20 to 30 years
Measures increase for an employee, not for a position
Two components: Budget for salary increases: 3.75% Promotions: varies by age, average about
1% Total increase about 4.75%
Salary Increase Assumption
Experience study will update 3.75% using forecasts based on current economic environment
Promotion component based on current pay structure, for example how much more you pay 30 year veteran compared to new hire
Both components fully up-to-date, not based on past that may not be as relevant
Retirement Assumption
Also a long-term assumption based on actual experience
We expected people to delay retirements with the recession
We were wrong
Benefit Changes
Explicit employee contribution increase Requires statutory change May face legal obstacles
Implicit employee contribution increase Limit pay increases and use funds to make
contributions
Design changes through Future of Retirement Study Commission
Commission to review and recommend system that: Provides adequate retirement income at
reasonable retirement ages after an acceptable period of employment
Effectively manages investments, longevity, inflation and other retirement-related risks