Status Update. Donna M. Mueller, CEO IOWA PUBLIC EMPLOYEES RETIREMENT SYSTEM

Transcription

1 Status Update Donna M. Mueller, CEO IOWA PUBLIC EMPLOYEES RETIREMENT SYSTEM Presented July 25, 2017

2 IPERS History 101 Established in 1953, to: Attract and retain a quality workforce Provide secure retirement with lifetime benefit payments 2

3 Core Elements of Public Plans Mandatory participation Pooled investment risk Pooled longevity risk Employer/employee cost-sharing Lifetime annuity Benefit adequacy Commitment to fully fund the plan 3

4 How Does It Work? Pooled risk investments & demographics Contributions from active members and employers are paid in. The IPERS Trust Fund Lifetime retirement benefits, disability benefits, death benefits, and refunds are paid out. The IPERS Trust Fund must be used for the exclusive benefit of members and their beneficiaries. 4

5 The Funding Equation The key to secure funding for any pension system is managing to this equation. 5

6 Common Contributors to UAL The Reason Foundation IPERS Experience Intentional Underfunding Poor Management and Bad Decisions Overgenerous Benefit The Great Recession Yes, contributions for Regular members were intentionally underfunded for over 10 years. No, IPERS uses sound, actuarial assumptions; is transparent, and notified plan sponsor early. Yes, benefit enhancements were enacted for Regular members without funding. No, not applicable to IPERS. No cost-of-living adjustment in plan design. Yes, unavoidable. No one was protected from the recession. 6

7 IPERS Shortfall $5.6 billion UAL resulted from: Over a decade of insufficient contributions Two recessions 2001 and 2009 Updated mortality tables 7

8 Case Study Within IPERS 8

9 Investment Performance History Annualized Returns 1-Year 2.15% 10-Year 6.31% 20-Year 7.85% 30-Year 8.64% For periods ending June 30, 2016 *Actuarial Assumed Investment Return % % % 9

10 Regular Membership 16% 14% 12% 10% 8% 6% 4% 2% 0% Historical Contribution Rates Fiscal Year Employee Rate Employer Rate Actuarial Contribution Rate 10

11 Pension Reform in 2010 Shared Risk Plan Applied to Active Members Contribution Rates Changed from statutory static rate to actuarially determined rate shared by employees and employers Benefit Formula Salary averaged over 5 years; down from 3 Early Retirement Reduction Increased from 3 percent per year to 6 percent reduction per year Vesting Changed from age 55 to age 65; and from 4 years of service to 7 years of service 11

12 Funding Discipline Established Contribution Rate Funding Policy Moved from 30-year open to a 30-year closed amortization Annual gains or losses amortized over layered 20-year closed periods Contribution rates set based on actuarially-determined rate No rate reduction until 95 percent funded and rate is 50 basis points greater than actuarial rate, then can be lowered 50 basis points No offset against normal cost until three consecutive years of 110 percent funded Prepares for the next downturn 12

13 Purpose of Experience Study Provides basis for analyzing existing assumptions and developing recommended changes Actuary s role is to make recommendations for each assumption As fiduciaries, the Board is responsible for the selection of actuarial assumptions Board can adopt all, none, or some of actuary s recommendations Assumptions do not affect the true cost of the plan which is the actual benefit payments paid from the trust 13

14 Actuarial Standards of Practice Issued by the Actuarial Standards Board Binding on credentialed actuaries Assumptions must be appropriate for their intended use Must not give undue weight to recent experience Best estimate is required not overly aggressive or conservative IPERS is an ongoing retirement system with a long time horizon (50+ years), so assumptions must reflect this 14

15 Economic Assumptions The Building Block Method Investment Return Individual Salary Increases Wage Inflation Real Rate of Return Merit Scale Productivity Productivity Inflation Inflation Inflation Note: inflation assumption and productivity must be consistent in all assumptions. 15

16 IPERS Updated Assumptions Inflation assumption lowered from 3.0 percent to 2.6 percent Balance recent experience, historical patterns, future expectations Investment return assumption lowered from 7.50 percent to 7.0 percent Reflects lower inflation assumption Reflects IPERS portfolio allocation Reflects the middle of expected returns Wage growth assumption lowered from 4.0 percent to 3.25 percent Used to project future member pay for benefit amounts Used to project future payroll for funding amounts 16

17 Considerations in Setting Assumptions Periodic incremental changes Regular experience studies provide opportunity to adjust Can move part way now and more later if justified Balance allocation of costs to generations Too optimistic shifts current costs to future Too pessimistic shifts future costs to present Since members pay 40%-50% of cost, this is important 17

18 Reason s Definition of Success The Reason Foundation Says Make full pension payments and pay down debt ASAP. IPERS Stop deferring payment or using unrealistic investment return assumptions to artificially lower contribution rates. Allow workers to accrue benefits that are portable and devoid of perverse incentives, and protect taxpayers from unnecessary cost risks. Make benefits competitive, increase contributions, set realistic retirement ages, implement anti-spiking rules. Depoliticize management of pension funds and increase transparency and accountability. 18

19 Contact Us The purpose of this presentation is to provide an update on IPERS. For additional information, feel free to contact us or visit our website at Phone: Toll-free: