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PSERS An Update on the State of the Fund, the Employer Contribution Rate and Pending Legislation

PSERS An Update on the State of the Fund, the Employer Contribution Rate and Pending Legislation. Agenda. State of the Fund Investment Update Actuarial Process Funded Status The Employer Contribution Rate Pending Legislation Current Issues Questions

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PSERS An Update on the State of the Fund, the Employer Contribution Rate and Pending Legislation

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  1. PSERSAn Update on the State of the Fund, the Employer Contribution Rate and Pending Legislation www.psers.state.pa.us

  2. Agenda • State of the Fund • Investment Update • Actuarial Process • Funded Status • The Employer Contribution Rate • Pending Legislation • Current Issues • Questions • New Pension Administration System (NPAS) Update www.psers.state.pa.us

  3. State of the Fund www.psers.state.pa.us

  4. Investment Update www.psers.state.pa.us

  5. Audited Market Value of the Fund as of June 30, 2005: $52.7 billion www.psers.state.pa.us

  6. Unaudited Market Value of the Fund as of December 31, 2005: $54.8 billion www.psers.state.pa.us

  7. Unaudited Market Value of the Fund as of March 3, 2006: $56.7 billion www.psers.state.pa.us

  8. PSERS’ Investment Market Valuesas of December 31, 2005 (Unaudited) Market Value % of Target Policy Asset 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

  9. PSERS’ Net Pension Assets (in billions)

  10. PSERS’ Annualized Performance (Net of Fees) As of December 31, 2005 *PSERS’ Fiscal Year ends on June 30

  11. PSERS’ Portfolio Distributionas of December 31, 2005 (Unaudited)

  12. Actuarial Process www.psers.state.pa.us

  13. Actuarial Valuation • Although 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 www.psers.state.pa.us

  14. Actuarial Valuation • The 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

  15. Plan Funding • PSERS funding sources • Known 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%) www.psers.state.pa.us

  16. PSERS’ Sources of Funding Ten Year History (1996 to 2005) Employee Contributions 12% $6.0 Billion Employer Contributions 10% $4.7 Billion Investment Earnings 78% $37.6 Billion

  17. PSERS’ Sources of Funding Twenty Five Year History (1981 to 2005) Employee Contributions 12% $10.3 Billion Employer Contributions 20% $17.1 Billion Investment Earnings 68% $57.5 Billion

  18. 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 www.psers.state.pa.us

  19. Experience Study • As 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% www.psers.state.pa.us

  20. Actuarial Assumptions • Demographic • Service retirement • Disability • Death in active service • Withdrawal • Death after retirement • Economic • Rate of return on assets • Salary increase www.psers.state.pa.us

  21. Actuarial Assumptions • Economic • Rate 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% www.psers.state.pa.us

  22. Funded Status www.psers.state.pa.us

  23. PSERS’ Funded Ratio: 1991 – 2005 (in millions)

  24. The Employer Contribution Rate www.psers.state.pa.us

  25. The Rate • On December 9, 2005, the Retirement Board certified the employer contribution rate for FY 2006-2007 • The 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 www.psers.state.pa.us

  26. Employer Contribution Rate Valuation Date: June 2004 June 2005 Rate Components (FY 2005/2006) (FY 2006/2007) 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% www.psers.state.pa.us

  27. Total Contribution Rate www.psers.state.pa.us

  28. Detailed Total Contribution Rate Member Total Fiscal Normal Accrued Health Care Total Contribution Contribution Year Cost Liability Contribution Employer (Average) Rate 89/90 8.44 11.24 19.68 5.53 25.21 90/91 8.28 10.9 19.18 5.69 24.87 91/92 8.00 6.40 .50 14.90 5.46 20.36 92/93 7.90 5.84 .50 14.24 5.48 19.72 93/94 7.34 5.58 .25 13.17 5.51 18.68 94/95 6.43 4.18 .45 11.06 5.55 16.61 95/96 6.43 4.67 .62 11.72 5.59 17.31 96/97 6.44 3.56 .60 10.60 5.62 16.22 97/98 6.44 2.17 .15 8.76 5.65 14.41 98/99 6.33 (.44) .15 6.04 5.69 11.73 99/00 6.40 (2.04) .25 4.61 5.72 10.33 00/01 6.29 (4.65) .30 1.94 5.77 7.71 01/02 5.63 (6.05) 1.09 1.09 5.80 6.89 02/03 7.20 (10.03) .97 1.15* 7.10 8.25 03/04 7.25 (4.27) .79 3.77 7.08 10.85 04/05 7.48 (7.10) .23 4.23** 7.12 11.35 05/06 7.16 (4.28) .69 4.69** 7.16 11.85 06/07 6.62 (0.95) .74 6.46 7.21 13.67 *1% floor & 1.15% cap per Act 38 **4% floor per Act 40

  29. Act 38 & The Rate www.psers.state.pa.us

  30. Act 38 and the Rate • Act 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 www.psers.state.pa.us

  31. Act 38 and the Rate • One purpose of the smoothing methodology is to reduce the volatility of the employer contribution rate • The longer the smoothing period the greater the smoothing effect • The subsequent amortization of the recognized gains and losses further mitigates the volatility of the employer contribution rate versus www.psers.state.pa.us

  32. Act 38 and the Rate • Act 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 99-2000 • The impact of this immediate recognition was to be reflected in calculating the employer contribution rate for Fiscal Year 2002-2003 • The 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 www.psers.state.pa.us

  33. Act 40 & The Rate www.psers.state.pa.us

  34. Act 40 and the Rate • Enacted 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 www.psers.state.pa.us

  35. Act 40 and the Rate • Act 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 COLAS • The 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) www.psers.state.pa.us

  36. Pre Act 2003-40June 30, 2003 Valuation Rate Projection www.psers.state.pa.us

  37. Post Act 2003-40June 30, 2003 Valuation Rate Projection www.psers.state.pa.us

  38. Post Act 40 June 30, 2004 Valuation June 30, 2003 valuation

  39. The Future? www.psers.state.pa.us

  40. The Future?

  41. Legislative Process www.psers.state.pa.us

  42. 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 authority • Amendments to retain qualified plan status under the Internal Revenue Code • Protection of investment information under the Right-to-Know Law • These occasional efforts are at the direction of the PSERB

  43. Legislation: Adopted during 2005-2006 session • House 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 www.psers.state.pa.us

  44. Legislation: Enacted during 2005-2006 session • Act 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 www.psers.state.pa.us

  45. Current Issues www.psers.state.pa.us

  46. Current Issues • Rising 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 annuitants • Right-to-Know-Law (RTKL) dispute with PASR • Increased public scrutiny/transparency • Board Education Policy • DB vs. DC debate • Commonwealth Foundation Report www.psers.state.pa.us

  47. Questions? www.psers.state.pa.us

  48. Update on New Pension Administration System (NPAS) www.psers.state.pa.us

  49. NPAS Update • Recap of the first 20 months of operation • Status of Member Statements of Account • Status of Employer Statements of Account • Planned Improvements • Employer Statement of Accounts • Employer Reporting • Questions and Answers www.psers.state.pa.us

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