INTRADEPARTMENTAL CORRESPONDENCE

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1 Date: May 22, 2014 To: _,Vtirement Board Members CTY OF LOS ANGELES DEPARTMENT OF WATER AND POWER NTRADEPARTMENTAL CORRESPONDENCE From: ' ~ary C. Higgins, nterim Retirement Plan Manager Subject: Board Agenda tem 9: Discussion of Request for nformation for Actuarial Consulting Services; and Possible Action (May 28, 2014, Regular Retirement Board Meeting) Remmendation That the Board of Administration (Retirement Board) of the Water and Power Employees' Retirement Plan (Plan) interview the three finalist respondents to the Plan's Request for nformation (RF) for Comprehensive Actuarial Consulting Services. Background At its regular meeting on May 7, 2008, the Retirement Board approved a three-year ntract with Segal Consulting (then The Segal Company) beginning July 25, 2008 through July 24, Segal was rehired after a Request for Proposal (RFP) process in which the original firm selected. failed to perform and was terminated. On April 27, 2011, the Retirement Board approved an additional three-year extension of Segal's ntract through July 24, The Retirement Board directed staff to nduct a mpetitive process for the next ntract period. On March 20, 2014, staff sent an RF for actuarial nsulting services to actuarial firms currently under ntract with members of the California Association of Public Retirement Systems (CALAPRS). n addition, the RF was posted on the Plan's website. The RF sought two types of responses: mprehensive actuarial services and actuarial audit services. The actuarial audit services would be nsidered by the Retirement Board only if the incumbent actuarial nsultant ntinues as the Plan's actuary. t is nsidered a best practice to regularly audit the mprehensive actuarial services of an incumbent. Staff will return to the Board with a remmendation regarding the actuarial audit services at a later date, if necessary. Five firms responded to the RF as of the April 25, 2014, deadline. Three of the five firms responded to the primary engagement to serve as the Plan's Actuary: Cheiron; Gabriel, Roeder, Smith & Company (GRS); and Segal Consulting. Bartel Associates, LLC (Bartel), indicated it uld perform the full actuarial services, but preferred to be nsidered for the actuarial audit. Staff evaluated the responses to the RF based on: qualifications and experience of the firm and assigned personnel; understanding and ability to address the Plan's unique needs; st and value; and positive ntracting history. The evaluation determined all three respondent nsulting firms are capable of performing the required services. A summary of the RF responses is attached for the Board's review. 9.1

2 Exceptions to the RF Requirements Two of the three finalists are requesting exceptions to the RF requirements. Cheiron stated in its response that it is taking exception to the ndemnification provision of the Contract Requirements in Appendix A. Segal has requested exceptions to the provision on ndemnification; nsurance; provision on Disclosure; and the provision on No Waiver of Plan's Legal Rights. Segal noted that the exceptions for the provisions on Disclosure and No Waiver of Plan's Legal Rights are being requested because they appear to relate to investment services that are not part of Segal's services. The ndemnification and nsurance provisions on the actuarial ntracts have historically been negotiated and agreed upon with the DWP Risk Manager during the ntract negotiations. These requests for exceptions are expected to be handled in a similar manner. Responses on Fees Comparison on the fee estimates pose challenges in the analysis of the responses. The attached summary shows the quotes of the three finalists on the fixed sts for the Annual Valuations; Experience study; the GASB 67; and the nsulting and advisory services. Careful analysis of these fee estimates reveal different pricing assumptions used by the three finalists. For example, one firm quoted a fee with the assumption that the formal, written analyses would not be included in the fixed st but at an additional agreed upon fee. Additionally, one firm indicated that the development of new tables, factors, or workbooks, or individual benefit calculations is not part of the fixed st. More information on these fee estimates need to be obtained from the finalists. n addition to the fixed fees, the respondents may also charge for other services that are based on hourly rates. The hourly rates will be provided as part of the interview summary information. These expenses will vary depending on the spe of work. More information on fee estimates for ad hoc work are normally obtained prior to authorizing the work and approved by the Retirement Board. Conclusion Staff remmends that the Board interview the three finalists since each respondent brings in different perspectives, qualifications and experience to best meet the Plan's unique needs and requirements. The following document is attached: Summary of RF Responses for Actuarial Consulting Services MCH/MC:mea 9.2

3 WATER AND POWER EMPLOYEES' RETREMENT, DSABLTY, AND DEATH BENEFT PLAN SUMMARY OF RF RESPONSES FOR ACTUARAL CONSULTNG SERVCES RF Requirements Contact nformation Cheiron, nc Gabriel, Roeder, Smith & Co The Segal Company 7900 East Union Avenue, Suite 6SO Denver, 100 Montgomery Street, Suite 500, San 5757 Wilshire Blvd, Suite 340, LA, CA Colorado Francis, CA ! ~ Lead Actuary & Location Questionnaire Responses Exceptions to RF Requirements Respondent's Background and Organization State Where Firm is Based Year Established Revenues of Business Lines Financial Condition/ Annual Report Litigation Status Ownership Changes David Holland, Los Angeles, CA Leslie Thompson, Denver, CO Paul Angelo, San Francis, CA 1) Requested exceptions to the ndemnification provision, Disclosure provision, and No Waiver of Plan's Legal Rights provision in Appendix A. 2) Stated firm has, in the past, negotiated insurance provisions with DWP Risk manager Stated firm is taking exception to the and anticipates similar resolution going ndemnification provision in Appendix A. No exceptions to the RF Requirements forward. Based in Virginia Based in Michigan Based in New York nrporated in nrporated in Founded in Health- 29%, Retirement- 37%, Communications -4%, Compliance- 1%, nvestment Consulting- 17%, Human Capital Consulting - 5%, Technology Consulting - 2%, 100% is through actuarial nsulting services Pension/OPES- 89%, Health and Welfare- Fiduciary Liability- 3%, Compensation in the areas of pension and heatlh nsulting. 10%, Software Services- 1% Consulting- 1%, Other- 1%. Firm stated it is a private mpany and will Financial statements are not released to the share financial statements if selected as a public but can be examined at their office finalist. Financial statements provided for review. upon request. Neither Cheiron nor any of its officers or principals has been subject to any business litigation No litigation for the past 4 years No Business litigation in the last 4 years. No change of ownership anticipated at this No ownership changes planned or anticipated time. at this time. No ownership changes planned. : Page 1

4 RF Requirements Cheiron, nc Gabriel, Roeder, Smith & Co The Segal Company ' Firm stated national reputation for using Firm stated specialty is in large retirement and Consulting specialties, strengths. Other services offered to clients technology to help clients resolve mplex issues. Firm states that single most differentiating factor is "P-Scan," an interactive modeling tool used in all pension Firm stated specialty is dedication to the public sector. CaiPERS used their valuation software since 1995 and recently used OPEB software. Has "Mag-Yal" software, an health benefit systems. Nationally regnized leader in benefit nsulting services to Systems governed by Boards. Strength is its active participation in development of work and client presentations. "P-Scan" helps clients analyze, understand and evaluate all options. actuarial analysis and projection software. Stated will provide to the Plan for no additional st. emerging actuarial and financial reporting practices. Strength is also in the depth and experience of public sector actuarial staff. Public sector- 249, Multiemployee- 1035, Number of full service actuarial acunts, #of Govtl, #of acunts added in last 5 years More than 300 full service actuarial acunts. 90 of 300 are public employee retirement systems. 190 actuarial acunts have been added in last 5 years. Full service actuarial - 416, Public employee retirement systems- 56, Governmental pension clients- 326, OPEB Denver added 6 new clients in last 5 years. Corporate- 230, Total1,514. Public Employee Ret Systems Number of public sector added in 5 yrs is 30. San Francis added 5 in the last 5 years San Francis Office lost 7 acunts in the last.,. Acunts lost in last 5 years+ explanation Lost 7 acunts in last 5 years. 3 were lost because organization moved to lower fee Lost 15 in past 5 years. 11 were lost in a 5 years including City of Los Angeles due to change in ntract provisions. New ntracts required services requested by LA City to Segal providers standard bid process due to lower fees. have to be sanctioned by LACERS and LAFPP. Personnel Primary personnel responsible for acunt Number of Employees Services Provided Project team includes David Holland (Associate Actuary), Graham Schmidt (Consulting Actuary), Alice Alsberghe (Senior Actuarial Analyst) and Gene Kalwarski (Principal Consulting Actuary) Provided an organizational chart. However, did not explicitly indicate the number of employees Project Team includes Paul Angelo (Principal Project Team includes Leslie Thompson (Lead Actuary), John Monroe (Supervising Actuary), Consultant), Diane Hunt (Co-Consultant), Dave Bergerson (Reviewing Actuary), Anna Dana Woolfrey (Co-Consultant) and Tod Buzueva and Emily Klare (Actuarial Support), Kanaster (Senior Analyst) and Melanie Walker (Compliance Consultant) More than 120 public sector associates Nearly 1,000 employees in US and Canada Page 2

5 Gabriel, Roeder, Smith & Co The Segal Company Provided a representative list of clients served by the San Francis Office mostly from Provided a representative list of clients mostly California including DWP Retirement, DWP, from outside California. Provided one client LACERS, LAFPP, Ventura County Employees from California- San Luis Obispo County Retirement Association, Sacramento County Pension Trust. Employees Retirement System. 1) San Bernardino County Employees' 1) Alaska Retirement Management Board, Retirment Association, 2) State Universities Retirement System of 2) Kern County Employees' Retirement llinois, Association, 3) Denver Employees Retirement Plan, 3) Contra Costa County Employees' 4) San Luis Obispo County Pension Retirement Association Will provide all services required by the RF services. Will only provide the Comprehensive Actuary $310,000 to $330,000 depending on the number of meetings with Stakeholders for the $441,000 GASB 67 Reports $30,000 $24,000 $471,000 $334,000 to $354,000 Page 3 Cheiron, nc Provided a representative list of clients from California and from oustide California. Some California public sector clients are: Alameda- Contra Cost Transit District Employees Retirement Plan, City and County of San Francis Employees Retirement System, City of San Jose Police and Fire Department Retirement Plan, Marin County Employees Retirement System, Merced County Employees Retirement Association. 1) San Diego City Employees' Retirement System, 2) Santa Barbara County Employees' Retirement System, 3) California Public Employees Retirement System Will provide all services requested in the RF $297,500 $78,000 $375,500 RF Requirements List of Clients List References for 3 public pension plans with assets in excess of $100 million whose primary nsultant and principal assistant will be assigned to the Plan acunt Any services in RF that will not be provided Fees 1) Estimated Fixed Costs Over 3-Year Contract Term for Annual Valuations for Retirement, Death, Disability, Experience Study & GASB 67 Reports 2) Estimated Fixed Costs for Consulting and Advisory Services Over 3-Year Contract Term Total of 1 and 2 above C11