Funding Status Public Employees’ Retirement System Teachers’ Retirement System Presented By:Alaska Division of Retirement and Benefits
Overview of Valuation Process • PERS and TRS Actuarial valuations are performed annually. • Buck Consultants was selected as the new actuary last fall. • Buck began by replicating the last PERS and TRS valuations prepared by Mercer. • Reviewed Plan provisions. • Reviewed benefit calculations prepared by the Division. • Reviewed assumptions and methods. • Physically replicated the 2004 valuation results. • To ensure complete understanding of Mercer’s valuation process. • To ensure complete understanding of the PERS and TRS Defined Benefit plans. • To ensure accuracy of pension and medical liability calculations generated from their systems.
Results of Replication Process • PERS • Minor differences in pension benefits. • Buck’s work revealed that Mercer understated healthcare benefits by 7 percent. • Buck’s accrued liability 2.80 percent higher than Mercer’s. • Buck’s normal cost 4.21 percent higher than Mercer’s. • Buck’s actuarial employer contribution rate 7.73 percent higher than Mercer’s. • TRS • Buck’s results matched Mercer’s results closely. • Buck’s accrued liability 0.17 percent higher than Mercer’s. • Buck’s normal cost 0.65 percent lower than Mercer’s. • Buck’s actuarial employer contribution rate 0.07 percent lower than Mercer’s.
2005 Actuarial Valuation Results • 2005 Actuarial Valuation Results presented to the ARMB in March: • Final actuarial valuation reports and the PERS supplement report will be presented to the ARMB at their June meeting. Once approved by the ARMB, reports will be available on the Division’s website.
Actuary Valuation Report FY 01 FY 02 FY 03 FY 04 FY05 Fiscal Year Employer Rate FY 04FY 05FY 06FY 07FY08 Actual Investment Return (5.25%) (5.48%) 3.67% 15.08% 8.95% Actuarial Investment Return 8.25% 8.25% 8.25% 8.25% 8.25% Cumulative Dollar Shortfall, in billions $0.1 ( $2.5 ) ( $2.9 ) ( $3.4 ) ($4.4 ) (in billions, market value) Average Calculated Rate 6.77% 24.91% 25.63% 28.19% 32.43% Board Adopted Rate 6.77% 11.77% 16.77% 21.77% TBD 6/2006 Funding Ratio – Assets \ Liabilities Total Benefits 100.9% 75.2% 72.8% 70.2% 65.7% Alaska Public Employees’ Retirement SystemEarnings–Actuarial Rate–Employer Rates–Funding Ratios Three primary factors contribute to the unfunded liability for PERS: (1) rising health care costs (2) loss of investment income and (3) change in assumptions due to actual plan experience.
Actuary Valuation Report FY 01 FY 02 FY 03 FY 04 FY05 Fiscal Year Employer Rate FY 04FY 05FY 06FY 07FY08 Actual Investment Return (5.35%) (5.49%) 3.68% 15.08% 9.01% Actuarial Investment Return 8.25% 8.25% 8.25% 8.25% 8.25% Cumulative Dollar Shortfall, in billions ( $0.6 ) ( $1.7 ) ( $2.1 ) ( $2.3 ) ($2.5) (in billions, market value) Average Calculated Rate 14.44% 35.57% 38.85% 41.78% 42.14% Board Adopted Rate 12.00% 16.00% 21.00% 26.00% TBD 6/2006 Funding Ratio – Assets \ Liabilities Total Benefits 95.0% 68.2% 64.3% 62.8% 60.9% Alaska Teachers’ Retirement SystemEarnings–Actuarial Rate–Employer Rates–Funding Ratios Three primary factors contribute to the unfunded liability for PERS: (1) rising health care costs (2) loss of investment income and (3) change in assumptions due to actual plan experience.
Introducing the Public Employees’ Retirement System Teachers’ Retirement SystemDefined Contribution Retirement Plan Defined Contribution Retirement Plan Presented By:Alaska Division of Retirement and Benefits
During the 2005 Special Session the Legislature passed, and Governor Murkowski signed into law Senate Bill 141 Chapter 9 FSSLA 2005. This legislation created Tier IV Public Employees’ Retirement System (PERS) and Tier III Teachers’ Retirement System (TRS). All new employees who first enter a PERS or TRS covered position, on or after July 1st, 2006, will be members of these new tiers. Background
PERS Tier IV and TRS Tier III will have a Defined Contribution Retirement (DCR) Plan, death and disability benefits, medical coverage, and a Health Reimbursement Arrangement (HRA) account. Nonvested members of PERS and TRS will have the option to convert their Defined Benefit plan to the DCR Plan. This is only available if the employer has elected to participate in the conversion option found in AS 39.35.940 and AS 14.25.540. Background (continued)
The newly created Alaska Retirement Management Board (ARMB) currently performs the duties formerly assigned to: Public Employees’ Retirement Board, Teachers’ Retirement Board, and Alaska State Pension Investment Board. The AS 37.10.210 states, “Consistent with standards of prudence, the board has the fiduciary obligation to manage and invest these assets in a manner that is sufficient to meet the liabilities and pension obligations of the Systems.” Background (continued)
The amount in an individual’s account is funded by three sources: Member contributions (8 percent PERS and TRS). Employer contributions (5 percent PERS and 7 percent TRS). Investment gains or losses, net of expenses. The member is in the driver seat. Each member decides how the money in their account is invested from a list of ten investment options approved by the Alaska Retirement Management Board. Defined Contribution Retirement Plan General Features
Employee Contributions: Members will contribute 8 percent of their salary to their individual account AS 39.35.730 and AS 14.25.345. Members will also have the option to contribute a higher percentage, up to federal limitations, on a monthly basis. Members will also be able to roll in funds from other qualified plans. PERS/TRS DCR Plan
Employer Contributions: Employers will, in total contribute: PERS Employer Rates: 10.12 percent for “all other,” (10.48 percent for “peace officers and firefighters”). 5 percent contribution to the DCR Plan. 1.75 percent contribution to the DCR Plan for retiree medical. 3 percent contribution to the Health Reimbursement Arrangement. 0.37 percent contribution for Occupational Death/Disability for “all other.” CS HB475 0.73 percent contribution for Occupational Death/Disability for “peace officers and firefighters.” CS HB475 TRS Employer Rates: 12.01 percent. 7 percent contribution to the DCR Plan. 1.75 percent contribution to the DCR Plan for retiree medical. 3 percent contribution to the Health Reimbursement Arrangement. 0.26 percent contribution for Death and Disability. CS HB475 PERS/TRS DCR Plan
Investments will be member directed Each member has the opportunity to decide how the money in their account will be invested. Managed Accounts. Financial Advice. Financial Education. Members can elect to change or transfer all or a portion of their existing account balance among available investment funds as often as once a day. PERS/TRS DCR Plan
Vesting Member contributions are immediately 100 percent vested including related earnings. Employer contributions are 100 percent vested after 5 years. (AS 39.35.790 and AS 14.25.390) 25 percent with two years of service. 50 percent with three years of service. 75 percent with four years of service. 100 percent with five years of service. PERS/TRS DCR Plan
Medical Benefits are available to members in accordance with AS 39.35.870-880 and AS 14.25.470-480. Retire directly from the plan and be active member 12 months prior to retirement. 25 years of membership service as peace officer or firefighter. 30 years of “all other” and TRS service. 10 years of membership service and reach normal retirement age. “Normal Retirement Age” means the age set for Medicare eligibility at time member retires. Eligible for Retirement and Medical Eligibility
Medical Benefits are available to members in accordance with AS 39.35.870-880 and AS 14.25.470-480. If not eligibility for Medicare member must pay full monthly premium for retiree major medical. After satisfying AS 39.35.870 and AS 14.25.470 and being Medicare eligible, the retiree will pay the percentage of monthly premium based on years of service. 10 percent with 30 or more years of service. 15 percent with 25 to 29 years of service. 20 percent with 20 to 24 years of service. 25 percent with 15 to 19 years of service. 30 percent with 10 to 14 years of service. Medical Benefits
Employer’s will make a fixed dollar contribution (based on 3 percent of the average salary of employees who participate in the plans) CSHB475 clarifies that this amount should not be based on a separate calculation for each employer. Members are eligible for the HRA in accordance with AS 39.35.870 and AS 14.25.470. 25 years peace officer and firefighter. 30 years “all other” and teachers. Reaches normal retirement age (i.e., Medicare eligible) and has at least ten years of membership service. Member is reimbursed for medical expenses as defined by U.S.C. 213(d). Health Reimbursement Arrangement (HRA)
Occupational Disability (AS 39.35.890 and AS 14.24.485). Must be presumably permanently and totally disabled from an accident, injury, or illness caused by job. 40 percent of salary at the time of termination because of disability. Converts to normal retirement when member first attains eligibility for normal retirement. Peace officers and firefighters may choose between accessing retirement savings account or receiving lifetime monthly benefit in accordance with AS 39.35.370(c). Disability Benefits
Nonoccupational death benefit Balance of retirement savings account, including employee contributions, vested portion of employer contributions, and net gains or losses experienced. Occupational death benefit Peace officers and firefighters: 50 percent of salary at time of death. All others and teachers: 40 percent of salary at time of death. Converts to normal retirement when participant would have reached normal retirement age. Death Benefits
During the time a disabled member or surviving spouse is receiving benefits the employer will continue to pay the employee and employer contributions into the participant retirement savings account, the HRA, and the retiree medical account. The participant retirement savings account can be accessed at normal retirement unless, for peace officers and firefighters, an alternate lifetime monthly benefit is elected. Disability/Death Benefits
Medical benefits are not provided during the period the participant or a surviving spouse is receiving death or disability benefits. Service continues to accrue towards medical eligibility until participant would have reached normal retirement. Access to medical benefits and premium subsidy at time of normal retirement. Disability/Death and Medical Benefits
Portable Options and Lifetime Annuity Options If the member leaves a PERS or TRS covered position there are several options available to the member found in AS 39.35.820 and AS 14.25.420: Leave the account balance in PERS/TRS Retirement Systems. Rollover the account balance into another employer sponsored retirement fund or individual retirement account. Single Life Annuity. Joint and Survivor Annuity. Life Annuity with period certain payment. Cash-in the account balance. Upon Termination of Employment
What does all of this mean to Employers? • Different retirement plans for employer’s employees. • DB plan for those who first became members prior to July 1, 2006. • DCR Plan for those who first become a member on or after July 1, 2006. • Different rate structure for the two separate plans. • Defined Benefit rate structure. • One rate for every DB employee. • Defined Contribution rate structure. • One retirement savings account rate for every DCR Plan employee. • One HRA dollar amount for every DCR Plan employee. • One Retiree medical account rate for every DCR Plan employee. • One Occupational death and disability rate for every DCR Plan employee.
What does all of this mean to Employers? • New reporting tool • eReporting will replace DataEntr on July 1, 2006. • Record layout changes have been communicated to employers. • Training for users of the new reporting tool. • Training sessions in Juneau, Anchorage and Fairbanks in May. • Electronic enrollment now available. • Training video distributed in May. • Webinar in June.
What does all of this mean to Employers? • Conversion • Employer needs to make a decision. • Tools to assist the employer with this decision. • Conversion Eligibility Report. • Actuarial data to identify the impact on employer’s defined benefit costs. • Employer submits a resolution and a Participation Agreement Amendmentto the Division indicating their decision to allow conversion. This decision is irrevocable once made. • Division accepts the Employer’s resolution and amendment. • Division notifies nonvested employees of employer’s decision. • Tools to assist the employee with decision. • Choice Kit. • Employee non-biased seminars co-sponsored by Recordkeeper and the Division. • Recordkeeper’s advice service.
What does all of this mean to Employers? • Conversion (continued) • Employees notify the Division when they choose to convert. • Division notifies employer of employee’s choice and bills the employer for the matching conversion balance. • The employer’s matching contribution shall be from funds other than the trust funds of the DB Plan. • Employer has 30 days to satisfy the matching requirement.
What does all of this mean to Employers? • HB 475—A technical clean-up bill for SB 141. Provisions that affect employers. (continued) • Allows the past service rate component of the DB Plan rate to be calculated over the employer’s entire payroll base (DB and DCR Plan members) effective July 1, 2006. Will add another rate to the DCR Plan rate structure. • Postpones the implementation of a minimum contribution rate equal to the normal cost rate until July 1, 2008. • Requires employers in the TRS DCR Plan to pay occupational disability and death benefits through actuarially calculated contributions. FY07 rate set at 0.26 percent.
What does all of this mean to Employers? • HB 475—A technical clean-up bill for SB 141. Provisions that affect employers. (continued) • Adjusts the occupational disability and death rates for the PERS DCR Plan to 0.73 percent for peace officers and firefighters and 0.37 percent for all other plan members. • Once a member is appointed to occupational disability, the member becomes fully vested in employer contributions regardless of years of service. • Occupational disability is redefined.
What does all of this mean to Employers? • HB 475—A technical clean-up bill for SB 141. Provisions that affect employers. (continued) • Provides a time limit with regard to conversion—once the employer consents to conversion an eligible member has 12 months to convert from the DB Plan to the DCR Plan. At the end of this period, the employer may consent to an additional 12-month period for those eligible employees to whom the initial period of conversion was not available. • Adds a definition of “membership service” for purposes of clarifying what service credit is eligible for conversion.
What does all of this mean to Employers? • HB 475—A technical clean-up bill for SB 141. Provisions that affect employers. (continued) • Adds language to clarify that the employer match required under the conversion option is subject to Internal Revenue Code contribution limits. • Changes the employer contribution from an individual employer contribution amount to a uniform employer contribution amount for participants of the HRA Plan.
What does all of this mean to Employers? • HB 475—A technical clean-up bill for SB 141. Provisions that affect employers. (continued) • Adds a funding source in statute to pay for the monthly pension that may be elected by a disabled peace officer or firefighter upon eligibility for normal retirement. • Adds termination provisions related to the DCR Plan.
Retiree Rehire Program The following guidelines apply to employment of retired members of the PERS under HB 161 effective July 1, 2005. • Requirements Prior to Hiring a Retired Worker • Employer adopts a policy permitting the employment of retirees and files a resolution adopted by their governing body with the Division of Retirement and Benefits (Division). • The policy must describe the recruitment difficulties and reasons for the shortage. • The employer is also required to develop a knowledge transfer plan.
Retiree Rehire Program (continued) • Hiring a Retiree Under the ProgramThe hire of a retiree must meet the following criteria: • The employer has a valid policy and resolution on file with the Division that is effective before the date of hire. • Only retired members retired with a normal benefit are eligible. • The retired member has been terminated from all employment with the employer for a minimum of thirty days.
Retiree Rehire Program (continued) • Hiring ProcessThe PERS employer must certify that: • A competitive recruitment was conducted for a minimum of thirty days. • The recruitment resulted in fewer than five qualified, eligible, and available applicants, including the retired member. • A rehired retiree employed in a full-time position has been enrolled in the health plan offered to all other full-time employees of the employer. • Reemployment Period • Retirees who reemployed under HB 242 before November 3, 2004, may continue under the program until December 31, 2006. • Retirees reemployed on or after July 1, 2005: The period of reemployment is defined as the period between rehire, under the waiver, until July 1, 2009.
Retiree Rehire Program (continued) • Health Insurance • A retiree who reemploys under this program in a full-time position will not receive retiree medical insurance if the employer provides active medical insurance to its full-time employees. • Contributions • Employer will made contributions to the system based on a past service calculation. • Current Enrollment • As of January 2006, there are 17 PERS employers participating in HB 161 with 25 PERS waivers on file.
Division Contact Information PO Box 110203Juneau, AK 99811-0203(907) 465-4460(800) 821-2251www.state.ak.us/drb www.state.ak.us/drb Presented By:Alaska Division of Retirement and Benefits