OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM 277 EAST TOWN STREET, COLUMBUS, OH PERS (7377)

Transcription

1 OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM 277 EAST TOWN STREET, COLUMBUS, OH PERS (7377) MEMORANDUM DATE: August 9, 2004 TO: FROM: OPERS Retirement Board Members Karen Carraher, Director-Finance Dan Drake, Director-Benefits RE: V. Discussion Items: C. Review Pension Actuarial Valuation Summary 2003 Purpose This report is presented to provide the Board with a summary of the preliminary results of the actuarial valuation for the year ending December 31, Background Section of the Ohio Revised Code requires that the Board annually have the actuary prepare an actuarial valuation of the pension assets, liabilities, and funding requirements of the system. The Board is required to submit the complete report to the Ohio Retirement Study Council and the standing committees of the House of Representatives and the Senate with primary responsibility for retirement legislation by September 1, Issues The summary report is based on the preliminary results of the December 31, 2003 actuarial valuation performed by the System s actuary, Gabriel, Roeder, Smith & Company. This is the first valuation following the implementation of the Combined and Member Directed Plans. The preliminary results also include an analysis of the results of the proposed contribution rate increase currently being considered in conjunction with the HCPP. Next Steps -- Based on Board input, the actuarial valuation will be finalized and distributed to the Ohio Retirement Study Council and other appropriate personnel.

2 Ohio Public Employees Retirement System Results of the December 31, 2003 Actuarial Valuation Board Summary August 18, 2004 Gabriel, Roeder, Smith & Company

3 Special Features of December 31, 2003 Valuation First valuation following implementation of Combined and Member Directed Plans. Major revisions to OPERS data reporting were necessary to provide actuarial data. 1

4 Plan Summary Traditional Plan 2.2 % of FAS times 30 years plus 2.5% times excess years. Plus Retiree Health Plan Combined Plan 1.0% of FAS times 30 years plus 1.25% times excess years. Plus value of Member Directed Account Plus Retiree Health Plan Member Directed Plan Value of Member Directed Account Plus Value of Employer Match account Plus Retiree Medical Account 2

5 Funding Objectives Intergenerational equity with respect to plan costs Stable or increasing ratio of Assets to Liabilities Stable pattern of contribution rates 3

6 Funding Method Separate Contribution Rates are developed for State, Local, Law But within State, Local, Law there is a single contribution rate that does not depend directly on which plan members have selected (Traditional, Combined, Member Directed). For example, all Local Governments will pay the same contribution rate, regardless of the specific plan selections made by their employees. 4

7 Funding Method Continued A separate calculation is required to determine portion of the employer contribution that is actually allocated to each plan. This calculation has not yet been made. For example, the State Division portion of the Traditional Plan could be allocated 13.4%, while the Combined Plan might be allocated 13.0% of payroll, provided that the average/total is 13.31% of payroll. Special Rules apply to Member Directed Plan contributions, to mitigate any negative financial impact of the Member Directed Plan on the Traditional Plan. 5

8 What s Needed to Meet Objectives? Reasonable forecasts of resources and obligations (i.e., good assumptions) Level % of payroll funding method Funding discipline Sound investment program 6

9 Variables Affecting Valuation Results Actuarial Assumptions Asset Valuation Method Benefits Contribution Rates 7

10 Actuarial Assumptions Set by the Board in connection with a study covering Assumed long term rate of investment return is 8%. Assumed long term rate of payroll growth is 4%, based upon a constant population. 8

11 Asset Valuation Method Market value is not used directly in valuation. Smoothed value is used to provide stability to results in volatile markets. 4-year smoothing of investment gains and losses above/below 8%. Corridor prevents smoothed assets from deviating from market value by more than 12%. 9

12 Benefits and Contribution Rates Most benefits are statutory, and can only be changed via the legislative process. The Board has the authority to set the interest rate to be credited for purposes of refunds of employee contributions and Money Purchase Minimum benefits in the Traditional Plan. The Board determines the allocation of employer contributions between Pension and Health Benefits. 10

13 Benefits and Contribution Rates The Board has statutory authority to raise the employee contribution rate to 10% and the employer rate to 14% for State and Local Government. The Board has the authority to raise the Law Enforcement employer rate to 18.1%). The effect of changes to contribution rates and their allocation between pension and health are shown later. 11

14 Preliminary Valuation Results The preliminary results are based upon the present assumptions, corridor, benefits, and contribution rates: 8% investment return 4% payroll growth 12% market value corridor 1% future interest credits on refunds and MP minimum benefits 13.31%, 13.55%, and 16.70% employer contribution rates, for State, Local, and Law respectively. 8.5% employee contribution rate for State and Local Government employees and 9% / 10.1% for Law Enforcement. 12

15 Retirement System Totals ($ Millions) Defined Benefit Active Members Annual Retired Lives Annual Division Number Payroll Number Allowances State 108,249 $ 4,079 51,390 $ 927 Local 237,082 6,702 91,080 1,267 Law 8, , Totals 353,584 $ 11, ,263 $ 2,265 13

16 Active Members by Division and Plan 12/31/2003 Member Division Traditional Combined Directed Total State 107, , ,345 Local 234,477 2,605 2, ,644 Law 8, ,253 Total 350,022 3,562 3, ,242 Prior year 365, ,424 Change (15,402) 3,562 3,658 (8,182) 14

17 Funding Value of Defined Benefit Assets as of 12/31/2003* $Millions A. Funding Value Beginning of Year $53,745 B. Market Value End of Year 59,055 C. Market Value Beginning of Year 47,986 D. Non-Investment/Administrative Net Cash Flow (735) E. Investment Return E1. Market Total:B-C-D 11,804 E2. Assumed Rate of Return 8.0% E3. Assumed Amount of Return 4,270 E4. Amount Subject to Phase In: E1-E3 7,534 F. Phased-In Recognition of Investment Return F1. Current year: 0.25xE4 1,883 F2. First Prior Year (1,919) F3. Second Prior Year - F4. Third Prior Year - F5. Total Recognized Investment Gain (Loss) (36) G. Funding Value End of Year G1. Preliminary Funding Value End of Year: A+D+E3+F5 57,243 G2. Upper Corridor Limit: 112% x B 66,142 G3. Lower Corridor Limit: 88% x B 51,968 G4. Funding Value End of Year 57,243 *Excluding Member Directed and Combined Plan member contributions. 15

18 Funding Value of Assets ($ Millions) Funding Value (FV) End of Year $53,745 $57,243 $ $ $ Market Value (MV) End of Year 47,986 59,055 Difference between MV and FV $ (5,759) 1,812 $ (36) $ (36) $1,883 Ratio of FV to MV 112% 97% The difference between Market and Funding Value of assets is phased in over three future years by the asset valuation method. The phase in pattern defers essentially all of the unrecognized gains to The main report suggests that the Board consider as an alternative, phasing in the unrecognized gain at the rate of 1/3 rd or $604 Million per year. 16

19 Historical Changes in Assets Comparison of Asset Values $70,000 $60,000 $50,000 $ Millions $40,000 $30,000 $20,000 $10,000 $ Year Market Funding 17

20 Results of 12/31/2003 Actuarial Valuations Traditional and Combined Plans Defined Benefit Active Members Pension Amortization Years Annual Portion of for Unfunded Pension Payroll Employer Accrued Liabilities Division Number ($Millions) Rate This Year Prior Year State 108,249 $ 4, % Local 237,082 6, % Law 8, % Totals 353,584 $ 11, The statutory 30 year funding requirement is based upon the total amortization period, rather than the period for each Division separately. 18

21 Schedule of Defined Benefit Funding Progress ($ millions) Unfunded Actuarial Actuarial UAAL as a Accrued Pension Accrued Ratio of Active % of Active Valuation Liabilities Valuation Liabilities Assets Member Member Year (AAL) Assets (UAAL) to AAL Payroll Payroll 1990 $20,125 $16,245 $3, % $ 6, % ,027 18,108 3, % 6, % ,961 20,364 3, % 6, % ,506 23,063 3, % 7, % ,260 25,066 3, % 7, % 1995* 30,224 27,651 2, % 7, % ,631 30,534 2, % 8, % ,971 33,846 1, % 8, % ,714 38,360 (646) 102 % 9,017 0 % ,070 43, % 9,477 0 % ,347 46,844 (497) 101 % 10,192 0 % 2001* 47,492 48,748 (1,256) 103 % 10,782 0 % ,872 43,706 7, % 11, % 2003# 54,774 46,746 8, % 11, % * Revised actuarial assumptions. # Includes Combined Plan. 19

22 Discussion Preliminary results indicate that the present pension contribution rate is not quite sufficient to amortize unfunded liabilities over a 30-year period. Although disappointing in light of the 2003 investment results, the result is better than expected considering the large difference between FV and MV at the beginning of the year. If things work according to plan, two years from now the amortization period would be 30 years. The next slide shows alternate results based upon contribution rate increases being considered by the Board in connection with the HCPP. 20

23 Valuation Results Based on Present and Alternate Pension Contribution Rates Present UAAL Alternate* UAAL Division Member Employer Years Member Employer Years State 8.50% 9.31% % 8.50% 35 Local 8.50% 9.55% % 8.50% 25 Law 10.10% 12.70% % 12.60% 43 Total * Ultimate rates. Schedule on next page shows year by year rates. 21

24 Employer Contribution Rate Increases Considered in Connection with HCPP Division Current Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 State 13.31% 13.54% 13.71% 14.00% 14.00% 14.00% 14.00% Local 13.55% 13.70% 13.85% 14.00% 14.00% 14.00% 14.00% Law 16.70% 16.93% 17.17% 17.40% 17.63% 17.87% 18.10% Health 4.00% 4.50% 5.00% 5.50% 5.50% 5.50% 5.50% 22

25 Employee Contribution Rate Increases Considered in Connection with HCPP Division Current Year 1 Year 2 Year 3 State 8.50% 9.00% 9.50% 10.00% Local 8.50% 9.00% 9.50% 10.00% Law 10.10% 10.10% 10.10% 10.10% 23

26 Alternate Results Discussion Relatively small contribution rate adjustments can reduce the amortization period for pension liabilities this year below 30 years. But, even with the proposed contribution rate adjustments, the Health Care Preservation Plan will continue to need attention. 24