Memorandum DATE: May 30, 2017 TO: Members of the Audit Committee FROM: David James, CPA, Director of Internal Audit SUBJECT: ACTUARIAL AUDIT RFP FINALISTS PRESENTATIONS Recommendation Take appropriate action. Background/Discussion OCERS has completed an evaluation of the six submissions for the actuarial audit RFP. The evaluation was performed by a panel consisting of members of OCERS executive management and Internal Audit. We have asked the two finalists selected to make presentations to the Audit Committee, and we are requesting that the Audit Committee recommend the finalist to the Board for appointment to perform the actuarial audit of OCERS consulting actuary, The Segal Company. Following this memo are the submissions of the two finalists, Milliman and Cheiron. The criteria for evaluation used by the selection panel were: Firm's experience of OCERS business and industry through an appropriate level of industry experience in the audit of pension plan actuaries, with an emphasis for CERL pension systems. Quality of the team proposed to provide services to OCERS. Staff qualifications, such as whether the lead actuary performing the audit possesses the FSA, EA, and MAAA designations for actuarial professionals. Staff experience, such as whether the proposed staff has experience auditing the actuaries of defined benefit pension plans. Information provided by references. Communication skills indicated in the proposal, such as whether the firm identified any potential areas of concern in the audit proposals and described its approach to resolving these issues. Understanding of scope indicated in the proposal. Whether the proposal addresses all requirements in the RFP. The organization, completeness, and quality of the proposal. Overall quality of the presentation. Pricing and value of the proposal. Scoring took into account and was adjusted based on the relative pricing differences of the proposals. The proposed prices were as follows: Aon Milliman CM GRS PWC Cheiron $ 54,900 $ 75,000 $ 55,500 $ 65,000 $ 70,000 $ 75,000 I - Actuarial Audit RFP Finalists Presentations 1 of 3 Audit Committee Meeting 6-9-2017
Memorandum In general, the panel found that all of the applicants were well qualified and experienced actuaries. Final scores by the panellists were as follows: Aon Milliman CM GRS PWC Cheiron Evaluator 1 84.0 93.3 90.7 88.1 89.6 93.3 Evaluator 2 93.0 93.3 97.7 90.1 92.6 93.3 Evaluator 3 79.0 91.3 85.7 91.1 88.6 93.3 Evaluator 4 59.0 93.3 84.7 91.1 89.6 93.3 Evaluator 5 75.0 93.3 77.7 76.1 70.6 92.3 Average 78.0 92.9 87.3 87.3 86.2 93.1 95.0 90.0 85.0 80.0 75.0 70.0 Aon Milliman CM GRS PWC Cheiron The audit is part of OCERS' regular cycle of performing audits of its consulting actuary every five years. Segal has acted as OCERS consulting actuary since 2004. The most recent audit was completed in 2012 by Milliman. The audit will determine the accuracy of the December 31, 2015 valuation performed by Segal. The audit will also assess the actuarial assumptions and funding methodologies used, including a comparison to industry standards. The purpose of the audit is to provide an opinion regarding the reasonableness and accuracy of the actuarial assumptions, actuarial cost methods, valuation results, and contribution rates. The audit will be a full replication parallel valuation audit, including a full re-run of the December 31, 2015 actuarial valuation and a review of detailed output on certain select test lives from the valuation group. The full replication parallel valuation should allow the auditing firm to determine whether: 1. The current valuation system used by Segal is accurately applying the assumptions as stated and is accurately valuing the appropriate benefits; 2. The current valuation system used by Segal is properly allocating the present value of benefits between normal cost and actuarial accrued liability; and I - Actuarial Audit RFP Finalists Presentations 2 of 3 Audit Committee Meeting 6-9-2017
Memorandum 3. The current valuation system used by Segal is adding together liabilities appropriately for each decrement, for each member, and over the entire population so that there is reasonable assurance that no segment of the population is being ignored and no particular liabilities are being omitted. Submitted by: David James, CPA Director of Internal Audit I - Actuarial Audit RFP Finalists Presentations 3 of 3 Audit Committee Meeting 6-9-2017
Actuarial Audit Services Prepared for OCERS Daniel Wade, FSA, EA, MAAA Mark Olleman, FSA, EA, MAAA June 9, 2017
Discussion topics About Milliman Our understanding of OCERS needs Public sector and audit expertise Project approach 2
Who s here today CO-LEAD ACTUARY Daniel Wade, FSA, EA, MAAA Principal & Consulting Actuary Tel: +1 206 504 5695 daniel.wade@milliman.com PEER REVIEW ACTUARY Mark Olleman, FSA, EA, MAAA Principal & Consulting Actuary Tel: +1 206 504 5769 mark.olleman@milliman.com 3
Exceptional service team An encore performance 4
Who we are Fully independent and wholly owned and managed by approximately 400 principals 60 offices worldwide staffed by more than 3,000 employees, including 1,600 qualified actuaries and consultants 9,000 clients in the public and private sectors, including 4,500 pension clients $940 million in firm revenue in 2016 5
Our understanding of OCERS needs The request: Independent audit of work performed by the Consulting Actuary including: Comprehensive audit of the December 31, 2015 actuarial valuation report Full replication, using the same census data, assumptions, methods, asset statements, and benefit plan provisions used by the Consulting Actuary Review of methods, assumptions, and communication The purpose: Express an opinion on the accuracy and reasonableness of the actuarial valuation The approach: Verify results independently, but work cooperatively with staff and Consulting Actuary to resolve material differences (if any) and enhance the actuarial consulting received by the Board 6
Public sector expertise A commitment to retirement systems Serving the pension actuarial needs of the public sector for 70 years and providing actuarial auditing services for approximately 30 years Working with California county retirement systems governed by the 1937 Act - the proposed team having worked with 12 of the 20 systems, either as the retained or audit actuary Keeping consultants and clients up to date with publications such as PERiScope produced by Milliman s Employee Benefit Research Group in Washington, D.C. 7
Public sector expertise Sample client list Ongoing Full Service Clients Year Retained Assets Members California State Teachers' Retirement System 1985 $169.1 billion 896,000 Florida Retirement System 1986 $142 billion 1,031,000 Los Angeles County Employees Retirement Association 1999 $47.8 billion 171,000 Oregon Public Employees Retirement System 2012 $54.4 billion 347,000 Public Employees Retirement System of Idaho 1965 $15.5 billion 140,000 San Mateo County Employees' Retirement Association 2006 $3.5 billion 11,400 Seattle City Employees' Retirement System 1991 $2.3 billion 17,300 State of Washington Dept. of Retirement Systems* 2014 $74.5 billion 523,000 Tacoma Employees' Retirement System 1976 $1.5 billion 5,800 Texas County and District Retirement System 1999 $ 24.4 billion 271,000 * Audit Client with 6-year contract 8
Audit expertise In the past 10 years, Milliman has completed over 40 actuarial audits The proposed service team has been involved with 15 of those audits A few examples: Orange County ERS Santa Barbara County ERS State of Washington Retirement Systems San Diego County ERA Kern County ERA Contra Costa County ERA Stanislaus County ERA Alameda County ERA 9
Project approach Step 1: Background Gather information necessary to perform the audit. Identify areas of concern from staff and Board. Step 2: Data Verify the accuracy and appropriateness of demographic data used in valuations. Step 3: Actuarial Assumptions Confirm that actuarial assumptions are reasonable and appropriate, utilizing the Segal Experience Study report as the primary source. Step 4: Actuarial Calculations Independently reproduce and confirm actuarial valuation results. Step 5: Funding Review funding of OCERS. Step 6: Additional Analysis Review communication in the report and perform additional analysis specific to the OCERS situation. Step 7: Report of Findings Produce written report of audit results and present to the Board. 10
Identifying and reconciling differences Types of differences Objective Data Benefit provisions (including PEPRA) Application of assumptions Actuarial cost method or asset smoothing method Subjective Actuarial judgment Setting of assumptions and methods Reconciliation methods Numerical differences Direct interaction with Consulting Actuary Step-by-step comparison of calculations Discussion of subjective issues Ensure we understand why the Consulting Actuary made its decision Respect opinion of Consulting Actuary Discussion with staff Put differences in perspective 11
Milliman solution OCERS needs Public sector and audit expertise Depth of resources Quality of work Added value Confidence in consulting services Complete and accurate Stable firm, committed to relationships with clients Continuity of consultants Experienced and proactive partner Public sector and audit experts Accessible team Smooth processes Innovative solutions Clear and timely communication 12
Thank you
Orange County Employees Retirement System Proposal to Provide Actuarial Audit Services June 9, 2017 Anne Harper, FSA, EA, MAAA Graham Schmidt, ASA, EA, FCA, MAAA
Topics About Cheiron Our Staff Relevant Experience Key Audit Questions June 9, 2017 1
About Cheiron Formed in 2002 by former Milliman consultants over concerns on liability limitations Employee-owned with nine offices nationwide Highest percentage of fully credentialed actuaries in the industry 100% revenue from actuarial consulting with most clients being public and jointly-trusteed pension and health funds National reputation for being proactive, responsive, and innovative June 9, 2017 2
Our Staff Proposed Personnel Anne Harper Co-Lead Actuary San Diego, CA David Holland Backup Consultant, Audit Team Los Angeles, CA Actuarial Support Administrative Support Graham Schmidt Co-Lead Actuary Oakland, CA Michael Moehle Audit Team Oakland, CA The Co-Lead Actuaries and Audit Team Actuaries have significant experience with 37 Act and other large California systems June 9, 2017 3
About Cheiron Public Sector Experience Statewide Plans: CalPERS CalSTRS Connecticut Delaware Florida Illinois Idaho Kansas Louisiana Maine Maryland Montana New Jersey New York State Teachers Oregon Pennsylvania Rhode Island Texas ERS & TRS Utah Vermont Municipals Washington State Investment Board Washington West Virginia Federal: US Army US Court of Appeals US Tax Court US Department of the Treasury Local Government Plans: Alexandria (VA) Allentown (PA) Arlington County (VA) Baltimore (MD) Chesterfield County Schools (VA) City of Annapolis (MD) City of Hampton (VA) City of Los Angeles (CA) Chattanooga (TN) District of Columbia Fairfax County (VA) Fresno County (CA) Kansas City (MO) Los Angeles (LACERS and LAFPP) Marin County (CA) Merced County (CA) Metropolitan Washington Council of Governments Miami (FL) Milwaukee County (WI) Newport News (VA) Norfolk (VA) Philadelphia (PA) Phoenix (AZ) Saint Louis (MO) San Diego (CA) San Francisco (CA) San José (CA) San Joaquin County (CA) San Luis Obispo (CA) Santa Barbara County (CA) Stanislaus County (CA) Tulare County (CA) Wichita (KS) Wilmington (DE) OPEB: Arkansas Alexandria (VA) Annapolis (MD) Delaware Greater Richmond Transit Company (VA) Hampton (VA) Knoxville Utilities Board (TN) Maine Municipal Employees Health Trust Maine Public Employees Retirement System Health and Life Plans Multnomah County (OR) Norfolk (VA) Newport News (VA) Oakland (CA) Pennsville Township (NJ) Philadelphia (PA) San Francisco (CA) San José (CA) Springfield Area Transit Co. (MA) US Army Community & Family Support Center Vienna (VA) Wilmington (DE) Westchester Medical Center (NY) June 9, 2017 4
Actuarial Audit Experience One of Cheiron s key lines of business Cheiron staff have audited eight 37 Act plans over the last six years Alameda, Fresno, Imperial, Kern, Mendocino, Sacramento, Santa Barbara, Sonoma Other CA audit experience (directed by your team members): CalPERS, CalSTRS, University of California LACERS, LA Police and Fire, LA Water and Power San Luis Obispo Other recent Cheiron audits: District of Columbia Retirement Board Illinois Office of the Auditor General Municipal Employees Retirement System of Michigan Retirement Systems of Alabama Texas State Auditor s Office June 9, 2017 5
Key Questions to Consider for Audit Is actuarial valuation reasonable and accurate? Are the current assumptions and methods reasonable and appropriate? Do the current methods and assumptions achieve the Board s objectives and meet required Actuarial Standards of Practice? Does the valuation report provide usable information on short and long term risks? June 9, 2017 6
Questions Specific to 37 Act Audits Are actual retirement benefits close to those predicted? Accurately reflect terminal pay and service adjustments, reciprocal benefits Are the COLA benefits accurately modelled? Reflect mechanics of CPI adjustments and caps Do the mortality assumptions reflect current recommended actuarial practices and plan experience? Consider generational mortality Benefit-weighting vs. life-weighting Do optional form elections create potentials for gains/losses? Review impact of COLA June 9, 2017 7
Questions Specific to 37 Act Audits Are the employee contribution rates properly calculated? Review methodology for 50% COLA cost-sharing, impact of 30-year exemption Are there policies that may have unexpected consequences on achieving the funding objectives? Review excess earnings and other policies Does the report contain information necessary to understand the dynamics of different rate groups? Projections by Class/Tier Are there data issues that may have been created as a result of a transition in the pension administrative software? June 9, 2017 8
Cheiron (pronounced kī ron), the immortal centaur from Greek mythology, broke away from the pack and was educated by the gods. Cheiron became a mentor to classical Greek heroes, then sacrificed his immortality and was awarded in eternity as the constellation Sagittarius. June 9, 2017 9