Texas Municipal Retirement System Actuarial Valuation Report as of December 31, 2017

Transcription

1 Texas Municipal Retirement System Actuarial Valuation Report as of December 31, 2017 May 24-25, 2018 Brad Stewart Mark Randall Joe Newton Copyright 2017 GRS All rights reserved.

2 Today s Agenda Summary of System-wide Results & Experience Benefit changes Asset Performance Liabilities with Projections Funded Status with Projections Amortization policy example Contribution Requirements with Projections Sustainability Checklist Summary 2

3 Summary of System-wide Results $ amounts in millions Dec 31, 2015 Valuation Dec 31, 2016 Valuation Dec 31, 2017 Valuation Actuarial Accrued Liability (AAL) $28,379 $29,963 $31,812 Actuarial Value of Assets 24,348 25,844 27,814 Unfunded Actuarial Accrued Liability (UAAL) $4,031 $4,119 $3,998 Funded Ratio 85.8% 86.3% 87.4% Average Funding Period (Years) Full Contribution Rates: Straight Average 9.02% 9.07% 8.89% Payroll Weighted Average 13.24% 13.27% 13.09% Normal Cost % 8.41% 8.41% 8.43% Prior Service % 4.83% 4.86% 4.66% 3

4 Aggregate BAF Valuation ($ in millions) Reconciliation of Unfunded Actuarial Accrued Liability ( UAAL ) Change in UAAL Impact on Funded Ratio Impact on Full Rate BOY $4, % 13.27% Interest (6.75%) Amortization Payments Asset Performance Benefit Changes 280 (305) 0.7% -0.06% (93) 0.3% -0.12% % 0.06% Assumption/Method Changes Contributions different than Actuarially Determined (22) 0.1% -0.01% Liability (Gains)/Losses EOY (13) 0.1% -0.05% $3, % 13.09% 4

5 Non-Investment Experience Actual CPI of 2.11% was less than the 2.50% assumption, so liability for repeating COLAs was less than expected System-wide, created a Liability Gain of about $20 million 2016 CPI of 2.07% resulted in a system-wide gain of about $20 million 2015 CPI of 0.73% resulted in a system-wide gain of about $110 million Valuation uses 3-year smoothing on salaries The salary experience in aggregate was higher than expected (6.4% vs 5.0%), but this line item will vary based on who received what increase and if the City had USC System-wide, created a liability loss of about $70 million For active employees: Average age is unchanged from last year at 43.2 years Average service is 10.6 years and is unchanged from last year 5

6 Summary of Benefit Changes Total Changes 54 cities made changes that impacted the total retirement rate since the last valuation Increases in Benefits 49 (45,45) Decreases in Benefits 5 (2,3) Number of cities changing matching ratio, deposit rate, and/or eligibilities 30 (27,28) Numbers in parentheses are the values for 2016 and 2015, respectively 6

7 Summary of Benefit Changes (cont) USC Changes Ad Hoc USC New Repeating USC Rescind/Decrease Repeating USC COLA Changes Ad Hoc COLA Adopted/Increased Repeating COLA Rescind/Decrease Repeating COLA

8 Yields based on Market Value of Assets 20.0% 15.0% 10.0% 6.75% assumption* 5.0% 0.0% -5.0% Market -1.3% 10.0% 9.0% 2.3% 9.9% 9.7% 5.7% 0.1% 6.7% 13.8% ~ 6.5% average compound return (on market value) over last 10 years 8

9 $ in Billions Market and Actuarial Values of Assets $30 $25 $20 $15 $10 $5 $ Market $14.7 $14.6 $16.3 $18.0 $18.6 $20.5 $22.5 $23.7 $23.7 $25.2 $28.6 Actuarial $14.2 $15.1 $16.3 $17.0 $18.3 $19.8 $21.3 $22.9 $24.3 $25.8 $27.8 AVA is currently 97.2% of MVA, was 102.4% last year AVA was Book Value prior to

10 Actuarial Value of Assets (Smoothed) vs. Actuarial Accrued Liability (AAL) $35.0 $30.0 $25.0 $20.0 $15.0 $10.0 $20.4 $21.5 $19.3 $14.2 $15.1 $16.3 $20.5 $21.5 $17.0 $18.3 $22.7 $19.8 $25.3 $21.3 $26.6 $22.9 $28.4 $30.0 $24.3 $25.8 $31.8 $27.8 $5.0 $ Assets Liability Liabilities for previous years reflect the previous structure before 2010, PUC cost method before 2013, and 7.00% discount rate before

11 Relative Size of UAAL to AAL $35.0 $30.0 $25.0 $20.0 $19.3 $20.4 $21.5 $20.5 $21.5 $22.7 $25.3 $26.6 $28.4 $30.0 $31.8 $15.0 $10.0 $5.0 $5.1 $5.2 $5.2 $3.5 $3.2 $2.9 $4.0 $3.7 $4.1 $4.1 $4.0 $ UAAL Liability 11

12 Relative Size of UAAL to Payroll $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $ % 114% 108% 73% 78% 66% 70% 71% 70% 58% 65% UAAL Payroll UAAL/Payroll 300% 250% 200% 150% 100% 50% 0% 12

13 Funded Ratio Percentages 90.0% 82.9% 85.1% 87.2% 84.1% 85.8% 85.8% 86.3% 87.4% 80.0% 70.0% 73.7% 74.4% 75.8% 60.0%

14 Funded Ratio Percentages: Compared to Peers 90.0% 80.0% 86.3% 85.2% 73.7% 74.4% 80.0% 75.8% 82.9% 77.1% 85.1% 76.0% 87.2% 73.5% 84.1% 71.8% 85.8% 85.8% 86.3% 73.7% 73.7% 72.1% 87.4% 70.0% 60.0% * * * Funded Ratio Average Funded Ratio for NASRA Fund Survey Restructure in 2010, Change to EAN in 2013, 6.75% Discount Rate in Fund Survey Not Yet Available 14

15 Funded Ratio Percentages: Normalized to Current Assumptions and Benefits 90.0% 80.0% 70.0% 76.2% 75.9% 76.4% 73.7% 74.4% 75.8% 82.9% 76.5% 85.1% 78.4% 87.2% 80.3% 84.1% 82.9% 85.8% 85.8% 86.3% 84.7% 85.6% 86.2% 87.4% 87.4% 60.0% * * * Funded Ratio Funded Ratio based on Current Benefits and Assumptions/Methods * Restructure in 2010, Change to EAN in 2013, 6.75% Discount Rate in

16 Projected Funded Ratio (Longer Term) 100.0% 90.0% 80.0% 70.0% 60.0% Valuation 2016 Valuation Assumes all assumptions are met in future years, including earning 6.75% on the current smoothed value of assets 16

17 Projected Funded Ratio: System-wide 160% 140% 120% 100% 25% probability of being 100% funded in 2023 (9.4% per year) Median expectation of 94.6% funded ratio in % 60% 40% 20% 25% probability of being less than 80% funded in 2027 (4.2% per year) Funding policy will hold funded ratio in this region in lower performance scenarios (~5% per year) 0% Median Expectation Assumes ADEC met each year 25 th -75 th percentile of expectation Assumes continuation of current amortization policy & payroll grows at 3.00% per year Investment returns are only variable in the stochastic process Returns and probabilities based on results of 2015 experience and asset allocation studies 17

18 Distribution of Funded Ratio Percentages 140% % % of units are fully funded! 100% % 60% 40% 20% 60.7% % % 66% 68.2% 68.4% 69.5% 70.5% th percentile Funded Ratio: 10% improvement over last 10 years Number of Units with less than 80% Funded Ratio 0% th percentile 75 th percentile 50 th percentile 25 th percentile 5 th percentile The percentile represents the proportion of employers below the point. For example, the 75 th percentile is 99%, meaning that 75% of cities have a funded ratio less than 99%. Conversely, 25% of the cities have a funded ratio of 99% or greater. 18

19 Amortization Layer Exhibit (Sample City) Source Original Balance Remaining Balance as of December 31, 2017 Payment FY2018 Payment FY2019 Payment FY2020 Years Remaining 2013 Valuation (Fresh Start) $ 25,099,074 $ 24,887,934 $ 1,831,551 $ 1,886,498 $ 1,943, Experience (1,320,133) (1,307,100) (96,192) (99,078) (102,050) Experience 475, ,214 27,834 28,669 29, Actuarial Changes (138,287) (136,985) (10,081) (10,383) (10,695) Experience 1,484,334 1,490,344 93,877 96,693 99, Experience (355,659) (355,659) (26,174) $ (26,959) $ (27,768) 19 Unfunded Actuarial Accrued Liability $ 25,063,748 $ 1,820,815 $ 1,875,440 $ 1,931,703 Projected Payroll $ 27,941,147 $ 28,779,381 $ 29,642,763 Amortization Payment as a Percent of Payroll 6.52% 6.52% 6.52% 19

20 Total System vs Individual City 14.00% Projected Contribution Rate 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% An individual City will likely have a substantial cliff when the original PUC base is fully amortized The System is made up of multiple units, with varying remaining amortization periods, thus the aggregate contribution rate should be more of a gradual decline System City Projected from current smoothed assets 20

21 Number of Cities Distribution of Single Equivalent Amortization Periods Remaining average period in years 0 would be overfunded 21

22 Number of Cities Distribution of Single Equivalent Amortization Periods Remaining average period in years 0 would be overfunded 22

23 Amount of Current UAAL Distribution of Single Equivalent Amortization Periods: Weighted by UAAL $800 $700 $600 $500 $400 $300 $200 $100 $ $ in millions Remaining average period in years 0 would be overfunded 23

24 Historical Dollar Weighted Contribution Rates for TMRS 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 14.2% 14.5% 13.5% 11.9% 12.2% 12.5% 12.9% 12.9% 13.0% 12.8% 12.6% 13.0% 13.2% 13.1% Contribution Rate Single Equiv Period (Years) Contributions represent aggregate phase in minimums 24

25 Distribution of Full Retirement Rate 25% 20% 15% 10% 5% 0% th percentile 75 th percentile 50 th percentile 25 th percentile 5 th percentile The percentile represents the proportion of employers below the point. For example, the 75 th percentile is 13.30%, meaning that 75% of cities have a rate less than 13.30%. 25

26 Distribution of Changes: By City Total Changes in Full Retirement Rate 40% 35% 30% 25% 20% 15% 10% 5% 0% 178 Cities had decrease of 0.50% or more 41 Cities had increase of 0.50% or more Rounded to nearest 0.25% change in rate 26

27 Distribution of Changes: Payroll Weighted Total Changes in Full Retirement Rate 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Rounded to nearest 0.25% change in rate 27

28 Impact of Strong Performance on Projected Contribution Rates Example City 20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% From 2016 From 2017 Projected from current market assets 28

29 Impact from Illustrated Adverse Experience in % 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Example City From 2016 From , 3.6% in , 0.8% in 18 A 3.6% return in 2018 would offset current deferred excess and hold rates mostly steady throughout the period A 0.8% return in 2018 would more than push the trajectory back towards last year s projections 29

30 Impact from Longer Term Adverse Experience Example City 25.00% 21.38% 20.00% 15.00% 16.67% 18.08% 10.00% 5.00% 0.00% From , 6% per year therafter 2017, 5% per year therafter 30

31 Phase-In As of the prior valuation, 113 TMRS cities were eligible to pay a phase-in rate due to changes in 2013 and 2015 The remaining base is phased in by 0.50% per year and further decreased by experience gains, if any. 17 cities have a phase-in rate this year Lower than last year s expected 36 due to experience gains Expected Runoff: 9 cities with a phase-in in 2018 valuation (0% of overall payroll) 4 cities with a phase-in in 2019 valuation (0% of overall payroll) 2 cities with a phase-in in 2020 valuation (0% of overall payroll) We continue to recommend cities contribute their full rate 31

32 Sustainability Checklist The following is a list of metrics that can be used to assess the sustainability of a pension plan. This can be used to gain a larger picture of sources of risk on a pension plan Please note the aggregate results are much more meaningful than the impact of any one item. Also, it is unnecessary to achieve a 5 star result on each item to be considered sustainable. In fact, that type of result may suggest too much conservatism 32

33 Sustainability Checklist Answer Stars Do you have a legally required contribution amount based on accepted actuarial practices? Yes ***** Does the contribution amount automatically adjust if certain minimums are not met? Yes ***** Has the sponsor demonstrated a 10-year history of meeting the required contribution? Yes **** (>90%, Phase In) Is your funded ratio higher than it was 10 years ago? Yes ***** Based on current practices and assumptions, is your UAAL expected to be lower 10 years from now? Yes ***** What is the amortization period for the current UAAL based on the required contribution? 18.8 ***** (<20, positive amortization) What is the amortization period for new losses? 25 ***** (<25) What is the sum of your amortization period and asset smoothing period? 35 *** (<35) What is the amortization period for benefit enhancements? 25/15 ** 1/2 (20 years or less for retirees (ad hoc)/25 years or less for active (repeating)) What is the likelihood of meeting or exceeding the assumed return assumption over the next 20 years based on actuarial analysis? 45-50% ** (Between Arithmetic and Geometric Mean) Does the Board regularly review actuarial assumptions? Yes ***** (at least every 4 years) What is the assumed rate of payroll growth for amortization purposes? 3.00% ***** (Equal to the wage inflation assumption with a stable active population and supported by historical 10-year average of past payroll growth, and adjustments if population declining) What is the annual percent change in active population last 10 years? ~1.00% ***** (>0.5%) Are any of the liabilities contingent on future experience? Yes/No *** (COLA is CPI based, benefits can be discretionally adjusted prospectively) What is your current active to retiree ratio? 1.8 ***** (1.7 or higher) What is your longer term active to retiree ratio? ** What is your short intermediate term negative cash flow as a % of assets? <1.0% ***** (<3.0%) What is your longer term negative cash flow as a % of assets? ~3.0% ***** (<3.0%) 33

34 Sustainability Checklist TMRS grades out very well on the checklist Required actuarial contributions Closed amortization periods in the year range Reasonable payroll growth assumptions Manageable short and long term cash flow needs Benefit that automatically adjusts to changing mortality patterns Items to pay attention to Capital market expectations continue to contract, continues to become more difficult to generate safe/passive earnings Longer term liability (or asset) to payroll ratios will increase contribution rate volatility Amortization periods for benefit enhancements are slightly longer than optimal 34

35 In Summary Overall System-wide health continues to improve Overall funded levels continue to improve Contributions rates have remained relatively stable With no changes in assumptions, the expectation is for an increasing funded ratio over the next few valuations and continued stability in the contribution rates, System-wide 35