Title: Understanding Pension Actuarial Reports

TUESDAY MAY 23, 2017 3:35-4:50PM Title: Understanding Pension Actuarial Reports MODERATOR SPEAKERS Mark Nannini Chief Financial Officer, Illinois Municipal Retirement Fund Paul Angelo Senior Vice President & Actuary, Segal Consulting Mark Whelan Chief Financial Officer, Kentucky Teachers Retirement System #GFOA2017

GFOA Annual Conference Understanding Pension Actuarial Reports Denver, Colorado May 23, 2017 Paul Angelo, FSA Segal Consulting, San Francisco Copyright 2013 by The Segal Group, Inc. All rights reserved. 5486869v2

Session Outline Follows GFOA Best Practices: The Role of the Actuarial Valuation Report in Plan Funding (Feb. 2013) Enhancing Reliability of Actuarial Valuations for Pension Plans (Sept. 2014) Reviewing and Understanding the Valuation Report Key Items to Consider: what goes in and what comes out Funding vs Financial Reporting (GASB) Different types of actuarial reports Special Considerations for OPEB Plans Enhancing Reliability of Actuarial Valuations Using the Actuarial Report to Make Appropriate Decisions Under GASB, two types of reporting for multiple employer plan Agent multiple employer plans Cost sharing multiple employer plans Panel Discussion Kentucky, Illinois 3

4 What Goes Into an Actuarial Valuation Member Data Financial Data Actuarial Valuation Plan Provisions Actuarial Assumptions Funding Policies %

Underlying All Actuarial Issues: C + I = B + E Contributions + Investment Income equals Benefit Payments + Expenses Actuarial valuation determines the current or measured cost, not the ultimate cost Assumptions and funding methods affect only the timing of costs (unless earnings or benefits are affected!) 5

Key Items to Consider in the Valuation Report Actuarially Determined Contribution (ADC) Formerly known as ARC annual required contribution Normal Cost plus payment towards unfunded liability (UAAL) Based on plan s actuarial funding policy Actuarial Cost Method (never changes) Asset Smoothing Method (rarely changes) UAAL* Amortization policy reviewed occasionally GFOA Best Practice (Sept. 2016): Core Elements of a Funding Policy Also see Conference of Consulting Actuaries Public Plans Committee Funding Policies and Practices White Paper, October 2014 Not all plans are funded based on an ADC Fixed rate plans have contribution rate set by some governing body» Such plans may or may not calculate an ADC Also wide range of other funding practices Governance issue: GFOA recommends funding based on full ADC 6

Key Items to Consider in the Valuation Report Liabilities, Assets and Funded Ratio Actuarial Accrued Liability (AAL): Cost allocated to service to date (includes entire value of benefits for retirees) Actuarial Value of assets (AVA): smoothed value based on market value (adjusted for short term volatility) Unfunded Actuarial Accrued Liability (UAAL) = AAL = AVA Value of contributions required in addition to future Normal Costs Funded Ratio = AVA/AAL is another measure of funded status Should also consider market value funded ratio = MVA/AAL Actuarial Assumptions assign a value to the benefits promised Economic assumptions including the expected investment return Demographic assumptions including mortality/longevity Based on best information available, supported by discussion and analysis, consistent with Actuarial Standards of Practice (ASOPs) GFOA recommends an experience analysis at least every 5 years 7

Key Items to Consider in the Valuation Report Historical Information -- Multi-year information on: AAL, AVA, funded ratio, UAAL as percentage of payroll ADC and amounts actually contributed Actuarial Comments disclosures required by ASOPs: Purpose of report, and cautions against uses other than intended Comments on risk and uncertainty With more to come under proposed new ASOP on risk assessments Comments on any prescribed assumptions that are unreasonable or conflict with ASOPs Information Needed to Prepare Financial Reports GASB 67 reports for plan financial statements (GASB 74 for OPEB) GASB 68 reports for employer financial statements (GASB 75 for OPEB) Other information including projections, scenario testing (varying experience) and sensitivity testing (varying assumptions) 8

Plan Funding versus Financial Reporting Under GASB 25 (plans) and GASB 27 (employers) pension expense was closely linked to plan funding GASB s expense was the ARC : annual required contribution Under GASB 67 and 68, pension expense is separated from funding Very short amortization periods make pension expense too volatile to be a practical basis for funding See Moody s March 2017 Sector In-Depth GASB Pension Accounting Can Skew Debt Service Coverage Also GASB s Net Pension Liability is like UAAL but on MVA, not AVA However, net impact on employer s balance sheet does reflect five year asset smoothing Through Deferred Inflows and Outflows 9

Discount rate: funding vs. financial reporting GASB discount rate is based on projected benefits and assets, including projected contributions to fund current members benefits For projected benefits that are covered by projected assets Discount using long-term expected rate of return on assets (like funding) For projected benefits that are not covered by projected assets (i.e., after the cross-over date ) Discount using yield on 20-year AA/Aa tax-exempt municipal bond index Solve for a single rate that gives the same total present value of benefits This blended rate is NOT simply based on current funded ratio! For pension plans with ADC funding, cross-over dates are rare So GASB discount rate equals expected return on assets (like funding) However, many OPEB plans are not funded at ADC levels Cross-over dates mean lower discount rates and higher liabilities Not yet clear how this will compare to GASB 43/45 values, since GASB 43/45 already used a (different) blended discount rate for OPEB 10

Enhancing Reliability of Actuarial Valuations for Pension Plans Provide accurate and up to date information to the actuary Census data Changes to plan provisions and administrative procedures Engage actuary to perform additional services To validate assumptions or To help with risk management strategies and future trends forecasting Actuarial Gain/Loss Analysis (done each year) Actuarial Experience Study (every 3 to 5 years) Actuarial Projections Under alternative actual outcomes (scenario testing) Under alternative actuarial assumptions (sensitivity analysis) Asset/Liability Study focus on asset allocation Analysis of proposed benefit changes 11

DISCUSSION 12

Teachers Retirement System of the State of Kentucky Understanding Actuarial Reports for Cost-Sharing Multiple- Employer Pension Plans Presented by Mark E. Whelan, CPA Chief Financial Officer May 23, 2017 1

Cost-sharing, defined benefit, multipleemployer plan What is TRS? Provides, pension, health, life, disability & survivor benefits Kentucky teachers do not participate in Social Security

Field of Membership 95 percent of TRS members are employed by a nonuniversity employer 5 percent are employed by a university 173 school districts 17 Department of Education agencies KCTCS Five regional universities

TRS Membership Not Eligible to Retire Eligible to Retire Total Contributing Accounts Full-time 47,637 10,726 58,363 Part-time 13,570 2,789 16,359 Total Contributing Accounts 61,407 13,515 74,722 Non-Contributing Accounts Inactive 27,217 2,218 29,435 Total Contributing & Non-contributing accounts 88,424 15,733 104,157 Retirees and other annuitants 52,012 Total Accounts 156,169 Less: return-to-work & currentyear retirees 9,581 Net Members and Annuitants 146,588 16

Members Salaries Help Pay for Benefits 12.855% of Salary 9.105% PENSION 3.75% RETIREE HEALTH CARE Non-university members 17

State Contributions Help Pay for Benefits 13.105% of Salaries 12.325% PENSION 0.78% RETIREE HEALTH & LIFE INS Non-university members Also pays cost of prior benefit improvements 18

TRS Pension Plan Recap of TRS Actuarial Status Dollars in millions Assets Liabilities Unfunded Percent PENSION $ 17,496.9 $ 32,028.2 $ 14,531.3 54.6% GASB 67 $ 16,812.8 $ 47,736.9 $ 30,924.1 35.2% Assets Liabilities Unfunded Percent MEDICAL $ 795.1 $ 3,634.1 $ 2,839.0 21.9% As of June 30, 2016 19

TRS Benefits Protect At-Risk Population Most teachers are not in Social Security, and, in almost all cases, can t receive Social Security survivor benefits from a spouse because of federal law. Member Recipients NUMBER PERCENT Females 34,210 71% Males 13,684 29% Total 47,894 100% 54% of member recipients under 85 are single 94% of member recipients 85 and above are single 20

TRS Pension Plan Actuarial Assumptions Valuation date...................... June 30, 2016 Actuarial cost method............... Entry Age Amortization method............... Level percent of pay, closed Remaining amortization period...... Asset valuation method.............. 28.1 years 5-year smoothed market Investment rate of return............ 7.5% Projected salary increases........... 3.5% to 7.3% Cost-of-living adjustment............. 1.5% 21

TRS Pension Plan Schedule of Funding Progress UAAL as a Actuarial Actuarial Unfunded % of Actuarial Valuation Value of Assets Accrued Liability (AAL) AAL (UAAL) Funded Ratio Covered Payroll Covered Payroll Date ( a ) ( b ) ( b - a ) ( a / b ) ( c ) ( ( b - a ) / c ) 6/30/2011* $14,908,138 $25,968,693 $ 11,060,554 57.4% $3,451,756 320.4% 6/30/2012 14,691,371 26,973,853 12,282,483 54.5 3,479,567 353.0 6/30/2013 14,962,758 28,817,232 13,854,474 51.9 3,480,066 398.1 6/30/2014** 16,174,199 30,184,404 14,010,205 53.6 3,486,327 401.9 6/30/2015 17,219,520 31,149,962 13,930,442 55.3 3,515,113 396.3 6/30/2016** 17,496,894 32,028,227 14,531,333 54.6 3,537,226 410.8 * Reflects change in assumptions and methods Dollars in thousands **Reflects change in assumptions 22

TRS Pension Plan Schedule of Employer Contributions FY Ending June 30 Actuarially Determined Employer Contributions Actual Employer Contributions Percentage Contributed 2011 $ 678,741,428 $ 1,037,935,993* 153% 2012 757,822,190 557,339,552 74 2013 802,984,644 568,233,446 71 2014 823,446,156 563,326,249 68 2015 913,653,854 559,579,290 61 2016 999,270,174 565,454,590 57 * Includes Pension Obligation Bond proceeds of $465,384,165 Dollars in thousands 23

TRS Pension Plan Increase in Actuarially Determined Employer Contribution Rate Valuation Date Fiscal Year Increase/ (Decrease) Cumulative Increase Amount June 30, 2004 June 30, 2007 0.11% 0.11% $ 3,174,600 June 30, 2005 June 30, 2008 1.21 1.32 38,965,900 June 30, 2006 June 30, 2009 0.56 1.88 60,499,800 June 30, 2007 June 30, 2010 0.58 2.46 82,331,200 June 30, 2008 June 30, 2011 1.13 3.59 121,457,000 June 30, 2009 June 30, 2012 2.22 5.81 208,649,000 June 30, 2010 June 30, 2013 1.46 7.27 260,980,000 June 30, 2011 June 30, 2014 0.75 8.02 299,420,000 June 30, 2012 June 30, 2015 2.40 10.42 386,400,000 June 30, 2013 June 30, 2016 2.55 12.97 487,400,000 June 30, 2014 June 30, 2017 0.83 13.80 520,372,000 June 30, 2015 June 30, 2018 (0.31) 13.49 512,883,000 June 30, 2016 June 30, 2019 1.12 14.61 553,597,000 24

TRS Pension Plan GASB 67 Actuarially Determined Contribution not being received results in a crossover date in 2039. Municipal Bond Index Rate 3.01% Single Equivalent Interest Rate 4.20% State provided 94% of ADC for the 2016-2018 biennium If state formally adopts a funding plan or provides history of contributing ADC, then crossover date will be pushed out beyond amortization period. As of June 30, 2016 25

TRS Medical Insurance Plan Cost-sharing, multiple employer defined benefit Pays approximately $24 million monthly in benefits Plan is 21.9% funded Plan is actuarial sound

TRS Medical Insurance Plan Recap of TRS Actuarial Status Dollars in millions Assets Liabilities Unfunded Percent PENSION $ 17,496.9 $ 32,028.2 $ 14,531.3 54.6% GASB 67 $ 16,812.8 $ 47,736.9 $ 30,924.1 35.2% Assets Liabilities Unfunded Percent MEDICAL $ 795.1 $ 3,634.1 $ 2,839.0 21.9% As of June 30, 2016 27

Funding of TRS Medical Insurance Plan MEMBERS 3.75% of salary UNDER-65 RETIREES Medicare Part D DISTRICTS 3% of salaries STATE 0.75% of salaries STATE insurance for retirees under 65 Non-university members 28

Actuarial Accrued Liability $9 $8 $7 $6 Billions of Dollars 5.9 6.4 8.3 Actuarial Accrued Liability after passing Shared Responsibility Legislation and other cost-saving measures $5 $4 $3 3.2 3.1 3.3 3.1 2.7 2.9 2.8 $2 $1 $0 06/30/07 06/30/08 06/30/09 06/30/10 06/30/11 06/30/12 06/30/13 06/30/14 06/30/15 06/30/16

TRS Medical Insurance Plan Actuarial Assumptions Valuation date...................... June 30, 2016 Actuarial cost method............... Entry Age Amortization method............... Level percent of pay, open Remaining amortization period...... Asset valuation method.............. Investment rate of return............ 8% 30 years 5-year smoothed market Medical Trend Assumption Pre-Medicare Medicare Fiscal year June 30, 2017 7.75% 5.75% Fiscal year June 30, 2018 7.00% 5.50% Ultimate trend rate 5.00% 5.00% Year of ultimate trend rate 2023 2020 30

TRS Medical Insurance Plan Schedule of Funding Progress Actuarial Valuation Date Actuarial Value of Assets ( a ) Actuarial Accrued Liability (AAL) ( b ) Unfunded AAL (UAAL) ( b - a ) Funded Ratio ( a / b ) Covered Payroll ( c ) UAAL as a Percentage of Covered Payroll ( ( b - a ) / c ) 6/30/2011 1 294,819 3,423,149 3,128,330 8.6 3,451,756 90.6 6/30/2012 338,746 3,594,540 3,255,794 9.4 3,479,567 93.6 6/30/2013 412,185 3,521,073 3,108,888 11.7 3,480,066 89.3 6/30/2014 508,913 3,194,689 2,685,776 15.9 3,486,327 77.0 6/30/2015 637,839 3,525,584 2,887,745 18.1 3,515,113 82.2 6/30/2016 1 795,055 3,634,073 2,839,018 21.9 3,537,226 80.3 1 Reflects change in decrement and participation assumptions. Dollars in thousands 31

TRS MEDICAL INSURANCE Funded Status 21.9% 18.1% 15.9% 11.7% 7.5% 8.6% 9.4% 3.0% 2.4% 2.9% 3.5% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

TRS Medical Insurance Plan Schedule of Employer Contributions Annual Required Contribution (ARC) Actual Employer Contribution Percentage of ARC Contributed Fiscal Year Ending RDS Contribution Total Contribution Date ( a ) ( b ) ( c ) ( b ) + ( c ) [(b) + (c)] / (a) 6/30/2011 477,723,070 188,453,929 280,585 188,734,514 39.5 6/30/2012 470,217,067 177,450,206 297,639 177,747,845 37.8 6/30/2013 186,725,823 166,611,420 0 166,611,420 89.2 6/30/2014 159,583,400 162,568,395 0 162,568,395 101.9 6/30/2015 106,606,132 168,084,353 0 168,084,353 157.7 6/30/2016 97,982,580 221,966,705 0 221,966,705 226.5 33

Teachers Retirement System of the State of Kentucky Our Members Come First! 800-618-1687 502-848-8500 https://trs.ky.gov Protecting & Preserving Teachers Retirement Benefits 34

2017 GFOA Conference Understanding Pension Actuarial Reports Agent Multiple Plan May 23, 2017 Mark F. Nannini - Chief Financial Officer

Proud Legacy, Bright Future In 2016, IMRF celebrated its 75th anniversary. The Illinois Municipal Retirement Fund began in 1941 with just five employers and a U.S Treasury Bond valued at $5,000. Today, nearly 3,000 units of government participate in IMRF, and our investment portfolio is valued at $36.5 billion. Our teams attribute our longevity and achievements to the great partnerships we ve developed across the state of Illinois. We re proud to serve our neighbors who serve all of us. 36

IMRF s Board of Trustees Sue Stanish, President Executive Trustee Naperville Park District Natalie Copper, Vice President Employee Trustee Evanston School District 65 David Miller, Secretary Executive Trustee North Shore Water Reclamation District Gwen Henry Executive Trustee DuPage County Tom Kuehne Executive Trustee Village of Arlington Heights Sharon U. Thompson Annuitant Trustee (Formerly) Lee County Trudy Williams Employee Trustee Fulton County State s Attorney s Office Alex Wallace, Jr. Employee Trustee Oswego Community Unit School District 308 37

IMRF Board of Trustees Board of Trustees Oversees administration Hires Executive Director Approves benefit payments, budget Sets asset allocation Hires and fires investment managers Sets actuarial assumptions Acts as court to hear appeals from workers Policing authority Intercept funds due to employer from State Comptroller Intercept real estate taxes due to employer from County Treasurer Go to Circuit Court for collection No appointed or ex-officio trustees 38

What is IMRF? 47 th largest pension in the U.S. 2 nd largest in the state $36.5 billion in assets Best funded statewide system 89.3% funded on a market basis 88.7% funded on an actuarial basis Second largest public pension system in Illinois 39

How Does IMRF fund pensions? Regular Employees: 4.5% (fixed by Statute) Employers (Variable changes annually) Assets and liabilities determined on December 31 st Actuaries calculate a new employer contribution rate Average Employer Contribution Rate to decrease From 11.72% of payroll in 2016 to 11.22% in 2017 and slightly up in 2018, 11.84%. Tier 2 reform reducing costs to taxpayers Discussion on Tier 3, stay tuned! 40

IMRF Structure IMRF is the administrator of an agent multi-employer public employee retirement system: Provides retirement, death, and disability benefits. Neither funded nor managed by the State of Illinois. Each employer funds its own employees retirement benefits. 2,987 - Different Employers 3,315 - Plans 175,019 - Participating Members 123,206 - Benefit Recipients 410,829 - Grand Total (inactive and active members) 41

IMRF Structure An independent actuary calculates each employer contribution rate every year: Shown as a percent of participating payroll. GASB 82. 42

IMRF Structure Three sources of revenue, fund IMRF retirement benefits: 1) Investment Earnings 2) Employer Contributions 3) Member Contributions

IMRF Structure IMRF retirement benefits are paid under a defined benefit plan with fixed member contributions. Both are established by state law. 44

IMRF Structure IMRF retirement benefits are based on the Illinois Pension code. As mentioned in the prior slide: State Pension Code imposes authority to collect delinquent contributions through the State Comptroller. and Allows eventual collection through the court of law. 45

Calculating Pension Costs The Defined Benefit Cost Equation: B = Benefits (Fixed) E = Expenses (Variable) EC = Employee Contributions (Fixed) ER = Employer Contributions (Variable) I = Investment Income (Variable*) *7.5% is assumed 46

Calculating Pension Costs The actuary compares IMRF s actual experience to our assumptions every three years. Actuarial Assumptions are a formal set of estimates of what will happen to IMRF members: Death Refunds Single/Widowed Longevity The actuary recommends any necessary changes in the assumptions to the IMRF Board of Trustees. 47

Calculating Pension Costs The actuary uses eight principle assumptions to determine rates: 1) Investment Return 2) Retirement Age 3) Marital Status (Upon retirement) 4) Mortality of Active (Non-retired) Members 5) Mortality of Retired Members 6) Disability 7) Separation/Refunds 8) Payroll Increases 48

Calculating Pension Costs Two important pieces of information the actuary must know about each employer: 1) The The employer s Employer s asset IMRF balance. Assets. 2) The Amortization 2) The amortization period Period for the for the unfunded liability. Unfunded Liability. Both have a significant effect on the employer rate. 49

Calculating Pension Costs 1) The Employer s IMRF Assets: Each employer has a reserve account with IMRF, used to pay retirement benefits for employees. Items that increase or decrease the reserve account: Employer retirement contributions. Interest credited or charged. Adjustments. Residual investment income or loss. Employer s share of the cost of an annuitant s pension. 50

Calculating Pension Costs 2) The Amortization Period for the Unfunded Liability: The Unfunded Liability is the estimated cost of retirement benefits earned to date that have not been funded. Many IMRF employers have an unfunded liability due to several reasons such as past service adjustments and additional factors. A portion of the unfunded liability (determined by the employer s structure) must be paid each year. For most employers, the unfunded liability is amortized over a 26-year closed period beginning in 2017, then declining yearly. Employers without taxing authority (participating instrumentalities) amortize their unfunded liability over a 10-year open period. 51

Methodology for Distributing Costs After the actuary estimates the cost of future benefits, a closed-period amortization period is used to determine future rates to pay the estimated cost. The possibilities are infinite. Examples include: Contribute the whole amount when a member joins. Contribute what s needed in the five years between ages 50 and 55. The actuarial profession has developed several widely accepted methodologies. 52

Methodology for Distributing Costs IMRF uses a method called Entry Age Normal to manage pension costs: Entry Age Normal is the method IMRF uses to calculate employer retirement rates. The cost of each individual s pension is allocated on a level percent of payroll between entry age (the time employment starts) and the assumed retirement date. The cost includes expected future service and salary increases. The goal is to spread the cost over the career of the member as a level percentage of payroll. 53

The Five Parts of the Employer Rate Your Employer Contribution Rate consists of five parts: Each part is calculated separately and used for specific purposes designated by state law. Normal Retirement Contributions Death Benefit Contributions (Active Members) Disability Benefit Contributions Supplemental Retirement Contributions ( 13th Payment) Unfunded Liability Contributions 54

The Five Parts of the Employer Rate Normal Retirement Contributions (also known as normal cost ) is the percent of payroll needed to fund the year s portion of the expected total cost of future pension benefits for the average IMRF member. The actuary uses the Entry Age Normal method to distribute the expected future cost over the member s career as a percent of payroll. That is the normal cost. Each participating employer pays a normal cost rate based on the weighted average of its Tier 1 and Tier 2 projected wages. For 2016, the average normal cost is: 6.61% for Regular employers 11.63% for SLEP employers 16.85% for ECO employers 55

The Five Parts of the Employer Rate Death Benefit Contributions fund the death benefit paid when IMRF members die in service. The contributions from all employers are pooled to pay the death benefit. The rates are calculated separately for each employer based on the average age of its employees. The average death benefit contribution rate for 2017 is 0.12% of participating payroll. 56

The Five Parts of the Employer Rate Disability Benefit Contributions are used to pay IMRF disability benefits. Only employer contributions are used to pay disability benefits. Disability benefit contributions are pooled. All employers pay the same rate. The disability benefit contribution rate for 2017 is 0.07% of participating payroll. 57

The Five Parts of the Employer Rate Supplemental Retirement Contributions are used to pay the additional 13th Payment every year in July. The supplemental retirement rate is set by state statute and is 0.62% of participating payroll. 58

The Five Parts of the Employer Rate Unfunded Liability Contributions are used to eliminate any difference between your employer s IMRF assets and its projected liabilities. The actuary calculates the projected cost, or the present value, of the expected retirement benefit for each IMRF member. Current and projected member contributions and interest are then subtracted. Current and projected employer contributions and interest are then subtracted. The remainder is the employer s unfunded liability. 59

The Five Parts of the Employer Rate Unfunded Liability Contributions The unfunded liability is calculated for each employer as follows: 60

The Five Parts of the Employer Rate Why Does The Unfunded Liability Fluctuate? The most important reasons: Investment returns Pension spiking Past service adjustments Changes in actuarial assumptions Benefit improvements granted after a member joins IMRF Demographic disparity from averages 61

The Five Parts of the Employer Rate Why Does The Unfunded Liability Fluctuate? THE ACTUARY compares the future cost estimates to IMRF s actual experience every three years, as part of a Triennial Experience Study. IMRF S BOARD reviews the changes and assumptions to match experience. THE CHANGES can result in additional unfunded costs, adding to the unfunded liability. 62

The Five Parts of the Employer Rate Influences on Unfunded Liability Contributions: The employer s demographics compared to the demographics of IMRF can have a significant effect on the unfunded liability. To the extent that employees differ from the average IMRF member, an employer s unfunded liability will vary to make up the difference. The actuary assumes payroll increases will be 3.5% per year. More or less than the actuarial assumption impacts the unfunded liability. Investment earnings less than or greater than 7.5% will effect the unfunded liability. 63

Questions? 64