p 3 actuaries you can understand 1 introduction to the actuarial valuation: funding and assumptions...

1P3 Actuaries you can

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Introduction to the Actuarial Valuation:

Funding and Assumptions

January 12, 2006

P


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Outline

• Basic Concepts and Terminology

• Developing Contributions

• Economic Assumptions


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Long Term Perspective

Contributions

Investment Return

Benefit Payments

Expenses

Money In = Money Out


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What funding methods do

Contribution Timing


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What funding methods do

Contribution Smoothing


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Funding Goal

Fully paid at retirement


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Do we have enough money?


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Actuarial Methods

• Liabilities

• Assets

• Amortization

• Contribution Smoothing


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Present Value (PV)

The money you need now to pay, using that money and earnings on that money, benefits you expect to pay in the future.


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Expect to Pay


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PV of Projected Benefits (PVB)

Present

Value of

Projected

Benefits

Assumptions


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PVB

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Age

Dol

lars


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Allocate Costs to Time Periods

Future

Past


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Actuarial Accrued Liability (AAL)

Present Value of

Future Normal

Costs

Actuarial

Accrued

L iability


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Asset Smoothing Methodology


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Competing GoalsDampen Volatility

Track Asset Value over

the long-term


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Current Approach

• Difference between expected and actual investment return spread over 5 years


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Current Approach

• Expected Return– Calculate semi-annually– Base on market value– Use assumed investment return at that

time

• Set 20% Corridor around Market Value


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Current Approach

-8

-4

0

4

8

12

16


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Current Approach

-12

-8

-4

0

4

8

12

16


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Unfunded Actuarial Accrued Liability (UAAL)

Assets

UAALPresent

Value of

Future

Normal

Costs


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This Year’s Contribution

Present Value

of

Future Normal

CostsNC

UAAL Amortization

Assets


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Member Contributions

BASIC

General

COLA

Supplemental

BASIC

Safety

COLA

SupplementalProposed Legislation

Based on Valuation

From 37 Act


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Basic – General MembersTier 1

• 31621.5. … the normal rate of contribution … shall be such as will provide an average annuity at age 60 equal to one 200th of the final compensation of members …

BASIC31621.5


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Basic – General MembersTier 2

• 31621.4. … the normal rate of contribution … shall be such as will provide an average annuity at age 60 equal to one 240th of the final compensation of members …

BASIC31621.4


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Basic – Safety MembersTier 1

• 31639.5. The normal rate of contribution shall be such as will provide an average annuity at age 50 equal to one 200th of the final compensation…

BASIC31639.5


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Basic – Safety MembersTier 2

• 31639.5. The normal rate of contribution shall be such as will provide an average annuity at age 50 equal to one 200th of the final compensation…

BASIC31639.5


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COLA Contributions

• 31873. Any increases in contributions shall be shared equally between the county or district and the contributing members …

COLA


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COL Contributions

• FCERA Board previously decided that “Any increases in contributions” means contributions for both Normal Cost and Unfunded Actuarial Accrued Liability.


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Supplemental Contribution

• …to the extent undistributed earnings are unavailable in the future to make additional contributions on members’ behalf…then the employer and employee contribution rates shall be increased …

Supplemental

31627


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Supplemental Contribution

• Lawyers not yet in agreement

• Look to proposed legislation for guidance

• Members electing Tier 2 would not make Supplemental Contributions

Supplemental

31627


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AB 2063 – General Members

• …the normal rates of contribution… shall be rates that provide an average annuity at age 55 years equal to the fraction of one 160th of the final compensation …

Supplemental

31627


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AB 2063 – Safety Members

• The normal rates of contribution… shall be rates that will provide an average annuity at age 50 years equal to the fraction of one 160th of the final compensation …

Supplemental

31627


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Actuarial Assumptions

• What are they?

• How do we set them?

• What are others doing?

• What are our recommendations?


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Assumptions

• Best guess of what will happen in the future


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Economic Assumptions

• Describe impact on money

• InflationSalary IncreasesReturn on InvestmentsCost-of-Living Adjustments


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Demographic Assumptions

• Describe member movement from one category to another

• TerminationDisabilityRetirementDeath


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Economic Assumption Model

Inflation Inflation Inflation

Merit & Longevity

Real Investment

Return

COLA (limited to 3.0%)

Salary Increase

Investment Return


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Annual Inflation Rate

-4%

0%

4%

8%

12%

16%

20%

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

Period Ended June 30

Per

cen

t C

han

ge

in C

PI


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Average Inflation Rate

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

1970

1975

1980

1985

1990

1995

2000

2005

30-Year Period Ended June 30

Ave

rag

e A

nn

ual

Infl

atio

n


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Inflation Spike: 1974-1982

0%

4%

8%

12%

16%

20%

1974

1975

1976

1977

1978

1979

1980

1981

1982

Period Ended June 30

Per

cen

t C

han

ge

in C

PI


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Average Inflation after Removing Spike

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1970

1975

1980

1985

1990

1995

2000

2005

30-Year Period Ended June 30

Ave

rag

e A

nn

ual

Infl

atio

n


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Inflation Assumptionsin 37 Act Systems

2

10

3 3

1

0

3

6

9

12

3.75

%

4.00

%

4.25

%

4.50

%

4.75

%

Inflation Assumption

Num

ber

of S

yste

ms


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Average Inflation Assumptionin 37 Act Systems

4.12%4.08%

4.28%

4.38%4.38%4.43%

3.50%

4.00%

4.50%

1999 2000 2001 2002 2003 2004


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Inflation Assumption

• Current4.00%

• Reasonable Range 3.00% - 5.00%


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Investment Return

Inflation

Real Investment

Return


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Real Investment Return

• Over 90% of Real Investment Return due to asset allocation


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FCERA Allocation Targets

Stocks – Domestic 38%

Stocks – International 18%

Bonds – Global 3%

Bonds – Core 28%

Cash & Equivalents 2%

Private Markets 11%


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Average Annual Real Returnsby Asset Class

(1/1/1926-6/30/2005)

Large Company Stocks 7.3%

Small Company Stocks 9.6%

Long-term Corporate Bonds 3.0%

Long-term Government Bonds 2.5%

Intermediate-term Government Bonds 2.3%

US Treasury Bills 0.7%Ibbotson Associates, Inc.


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Real Investment Return in 37 Act Systems

1 1

32

3

7

1 1

0

3

6

9

3.25% 3.50% 3.66% 3.75% 3.90% 4.00% 4.16% 4.25%

Real Investment Return Assumption

Num

ber

of S

yste

ms


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Average Real Investment Assumption

3.90%

3.96%

3.80%3.81%3.82%

3.73%

3.50%

3.75%

4.00%

1999 2000 2001 2002 2003 2004


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Real Investment Return

• Current4.16%



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Nominal Investment Return in 37 Act Systems

1

3

1

2

5 5

2

0

3

6

7.50% 7.75% 7.80% 7.90% 8.00% 8.16% 8.25%

Investment Return Assumption

Num

ber

of S

yste

ms


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Average Effective Investment Return

8.00%

8.04%8.07%

8.19%8.20%8.15%

7.75%

8.00%

8.25%

1999 2000 2001 2002 2003 2004


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Nominal Investment Return

• Current8.16%



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Questions

p 3 actuaries you can understand 1 introduction to the actuarial valuation: funding and assumptions...

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