State Board of Administration

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Gyles Hubert Phillips
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1 State Board of Administration FRS Pension Plan Performance Review Actuarial Assumptions Estimating Conference October 31, 2018

2 Introduction The Legislature, SBA Trustees, Division of Retirement, and SBA staff, have a history of supporting three critical requirements for pension fund sustainability: Reasonable benefits Prudent investments Responsible funding policy The SBA is responsible for prudent investing to help fund retirement benefits. Approximately $2 out of every $3 in retirement benefits are funded by Pension Plan investments. 2

3 Introduction The Global Financial Crisis that began in 2007 led to marked to market asset value declines, creating an unfunded liability. Funded surplus of 107.1% (+$8.2B) as of July 1, 2008 to a funding deficit of 88.5% (-$15.4B) as of July 1, Funded ratio of 84.3% as of July 1, The Pension Plan produced an investment gain of $132.1B from the bottom of the Global Financial Crisis on March 9, 2009 to June 30, % investment return While paying out $55.3B in benefit payments 3

4 Market Value in Billions FRS Pension Plan Changes in Market Value and Performance From March 9, 2009 Market Low to June 30, 2018 $170.0 $160.0 $150.0 FRS Pension Plan Market Values from March 9, 2009 Market Low to June 30, 2018 Change in NAV Since $ in Billions Beginning NAV $ 83.7 Net Benefit Payments $ (55.3) Investment Gain/(Loss) $ Ending NAV $ $160.4 $140.0 $130.0 $120.0 $110.0 $100.0 Investment Performance: 11.6% Net of Fees Investment Return 0.71% Above Benchmark $90.0 $80.0 $83.7B March 9, 2009 Market Low 4

5 FRS Pension Plan Performance Fiscal Year Summary of Cash Flows Second Quarter Fiscal YTD* Beginning Market Value $160,530,945,101 +/- Net Contributions/(Withdrawals) $(1,665,820,384) Investment Earnings $1,574,234,140 = Ending Market Value $160,439,358,858 Net Change $(91,586,243) $153,573,300,932 $(6,791,728,253) $13,657,786,179 $160,439,358,858 $6,866,057,926 *Period July 2017 June % net of fees return 5

6 FRS Pension Plan Performance FRS Pension Plan Fiscal Year End Returns Since the Global Financial Crisis 22.09% 25.00% 17.40% 20.00% 14.03% 13.12% 13.77% 15.00% 8.98% 10.00% 3.67% 5.00% 0.29% 0.54% * 0.00% -4.42% -1.74% -5.00% % % % *Estimated performance as of October 25, % % 6

7 FRS Pension Plan Long-Term Investment Results Periods Ending 6/30/2018 FRS Total Fund Rolling Returns Through June % 10.00% 9.00% 8.00% 7.00% 6.00% As of June 2018: 10-Yr 6.85% 15-Yr 7.86% 20-Yr 6.34% 25-Yr 8.12% 30-Yr 8.87% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 10-yr 15-yr 20-yr 25-yr 30-yr 7

8 Rate of Return (%) Top Ten Defined Benefit Plans FRS Universe Comparison (TUCS) Periods Ending 6/30/2018 Total FRS Top Ten Median Defined Benefit Plan Universe Year 3-Year 5-Year 10-Year FRS Percentile Ranking year, 3-year, 5-year and 10-year top quartile performance among the top ten U.S. public defined benefit plans. Note: The TUCS Top Ten Universe includes $1,527.0 billion in total assets. The median fund size was $151.2 billion and the average fund size was $152.7 billion. Aon Hewitt Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 8

9 Conclusions The Pension Plan has experienced significant growth since the depth of the Great Financial Crisis. The Pension Plan is a top performer amongst its peers. Expectations that future capital market returns will not be as robust. Increasing fund risk to reach for return is neither wise nor prudent as fiduciaries. Increased funding would help lower the risk of a significant funding shortfall and help close the funding deficit. 9

10 Conclusions Future considerations: Maintain the Pension Fund s position of strength, through low cost, prudent investing and a responsible funding policy. GASB reporting requirements and impact on state and local government financial statements. Rating agencies (Moody s, S&P, and Fitch): Impact on state and local government bond ratings and debt costs. Intergenerational transfer of pension costs to future taxpayers. 10

Lessons Learned From The Pension Crises

Lessons Learned From The Pension Crises February 2, 2012 Gene Kalwarski FSA, MAAA, EA Topics Defined Benefit Pension Plan Crisis What Lessons Have We Learned? What Can Be Done? 1 Defined Benefit Pension