public employees retirement association (pera) 2018 ... · pera 2018 legislative proposals january...

1/17/2018

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Public Employees Retirement Association of Minnesota

Public Employees Retirement Association (PERA) 2018 Overview

for MASBO

Doug Anderson Executive Director February 8, 2018


• Overview

• History

• Future

• GASB Whiplash – A Case Study

Agenda

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General Employees

Retirement Plan

Police & Fire

Retirement Plan

Local Government

Correctional Plan

Receiving Benefits

Deferred Payment Status

Active Members

Total Members

98,201

190,609

152,867

441,677

10,579

2,640

11,522

24,741

1,085

5,557

3,842

10,484

Active to Retiree Ratio 1.6 to 1 1.1 to 1 3.5 to 1

Active Average Age

Active Average Service

Active Average Pay

46

10

$40,600

40

12

$83,400

39

8

$54,300

Retiree Average Age

Retiree Average Benefit

73

$14,500

68

$53,700

66

$9,000

PERA also administers a $54M lump-sum defined benefit plan for 2,600 volunteer firefighters and

a $58M defined contribution plan for 7,700 current and former local elected officials.

PERA Membership as of June 30, 2017

3


General Employees

Retirement Plan

Police & Fire

Retirement Plan

Local Government

Correctional Plan

Employee Contribution Rate

Employer Contribution Rate

State Contribution Rate

Total Contribution Rate

6.5%

7.5%

0.6%

14.6%

10.8%

16.2%

2.5%

29.5%

5.8%

8.8%

0.0%

14.6%

Total Active Payroll $5.9B $913M $198M

Total Contributions

Total Benefit Payments

$0.9B

$1.5B

$277M

$514M

$29M

$13M

Total Assets $20.1B $7.9B $602M

Actual Investment Earnings

Investment Rate of Return

$2.7B

15.1%

$1.1B

15.2%

$78M

15.1%

Police & Fire Members do not participate in Social Security.

PERA Plans FY16 Cash Flow & Investment Returns

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Benefits Contributions Administrative

Costs

Investment

Earnings = + -

Traditional Defined Benefit plans provide a fixed monthly benefit. Contribution requirements will increase if

investment earnings are less than an assumed amount, and will decrease if earnings exceed an assumed

amount.

PERA’s plans could be viewed as not being true traditional defined benefit plans, because they are structured to

try to provide fixed benefits at fixed contribution rates. When assumptions are not met, or when assumptions

are changed, adjustments to benefits and/or contributions are handled through the legislative process, rather than

simply by adjusting contribution rates.

PERA plans are commonly considered to be defined benefit plans. However, they could be classified as a

hybrid plan.

5

Are These Truly Defined Benefit Plans?


Approximate % of Hybrid Participants by State

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States with DC Plans as Mandatory or Optional Primary Plans

7


History

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“The interest earnings upon our

investments have dropped. The

average annual rate of interest we

earned in the beginning amounted to

over 5%...and last year about 3.3%.

4% was the rate on which we based

our estimate. So in this respect we

were too liberal.”

“That those who are receiving annuities

from our fund are living longer than the

American Table of Mortality says they

would…16 of them should have died,

but only 7 of them did die.”

“The adoption by this Association of

the ½ of 1% additional

contribution…would have resulted

in a growth of our surplus”

PERA’s First Newsletter

9


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

P&F EE Rates

P&F EE 30-Year Averages

General EE Rates

General EE 40-Year Averages

Year of Benefit Commencement

The average contribution rate for a 30-

year P&F member will increase from

7.5% in 2005 to 10.3% in 2035.

The average contribution rate for a 40-

year GERF member will increase from

4.0% in 2005 to 6.0% for those retiring

in 2035.

PERA General and P&F Employee Contribution Rate Trend

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General Employees Retirement Plan Police & Fire Retirement Plan

Accrued Benefit 1.7% x Average Salary x Allowable

Service

3.0% x Average Salary x Allowable

Service

Normal Retirement Accrued Benefit at age 66 Accrued Benefit at age 55

Early Retirement Reduced Accrued Benefit at age 55 or later Reduced Accrued Benefit at age 50 or

later

Death

Accrued Benefit reduced for early

commencement and optional form

conversion

50% of average salary;

60% if in line-of-duty

Disability Accrued Benefit without reduction 45% of average salary;

60% if in line-of-duty

Termination Accrued Benefit deferred to early or

normal retirement; refund available

Accrued Benefit deferred to early or

normal retirement; refund available

Postretirement

Adjustments

1% per year until the Plan is 90% funded;

2.5% thereafter (Estimated Trigger Date is

2046)

1% per year until the Plan is 90% funded;

2.5% thereafter (Estimated Trigger Date is

2066)

Key Plan Benefit Provisions (applicable to most employees)

11


The replacement ratio is a tool used to measure benefit adequacy and equals Gross Income After Retirement

Gross Income Before Retirement

57%

64% 64% 64% 64% 64% 64%

71%

85% 85% 85% 85% 85% 85%

0%

20%

40%

60%

80%

100%

1990 2000 2010 2020 2030 2040 2050

GERF 40 Years of Service Replacement Ratio

P&F 30 Years of Service Replacement Ratio


PERA General and P&F Replacement Ratios at Normal Retirement

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Sources: Data prior to 2000 is from Social Security Website. Years 2000 and later are based on PERA GERP plan mortality

assumptions in 2000 and 2015.

19.6

21.4

23.9

25.6

14.3

18.6

20.7

22.4

0

5

10

15

20

25

30

35

1990 2000 2015 2035

Female Male The average post NRA payment period

is expected to increase by about 30%

for females and 56% for males.

Expected Years in Payment Status after Normal Retirement

13


40%

60%

80%

100%

120%

140%

160%

180%

200%

2015 2013 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981

A participant that retired in

1983 has doubled their

purchasing power.


Members retired after 2000 have

retained approximately all of their

purchasing power.

PERA Historical Purchasing Power Protection

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0

10

20

30

40

50

0%

50%

100%

150%

200%

250%

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Pu

rch

asin

g P

ow

er

Pro

tect

ion

% /

C

um

ula

tive

Co

ntr

ibu

tio

ns

%

# o

f P

ay in

Ye

ars

#

of

Pay

o

ut

Yera

s

Historical Retiree Contribution and Benefit Payment Metrics # of Pay in Years

# of Pay out Years

Cohort PPP% @ age 85

Cumulative Contribution %


Actual Returns for Periods Ending June 30, 2017 16

12.4%

5.3%

8.8%

5.4%

6.8%

8.2% 8.3%

15.1%

6.3%

10.2%

6.2%

7.2%

8.6% 8.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1 Yr 3 Yrs 5 Yrs 10 Yrs 20 Yrs 25 Yrs 30 Yrs

Mean Public Fund

MN SBI

Historical Investment Returns

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1. Investment returns have been less than assumed over the past 20 years, negatively

impacting asset growth.

2. Mortality improvements are expected to occur at a greater rate than ever before,

increasing liability estimates.

3. Members have been retiring at later ages.

4. Inflation expectations are forecasted to be lower for many years. This may result in

a lower investment return assumption, which would increase the liability estimate.

5. The plan structure prior to the year 2000 allowed for excess earnings to be used for

postretirement increases that were in excess of inflation.

6. Employee contributions have been steadily increasing.

7. Employer contribution rates have also increased. Also, in the past few years the

expected period needed to reach full funding has been extended.

17

Summary of Historical Events


Future

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SBI Provides the

Asset Allocation

Investment Consultants

provide long-term

capital market

forecasts

PERA’s actuary

recommends a reasonable

range

PERA’s board

recommends an

assumption within the

range

Legislature sets the

assumption

19

45%

15%

18%

20%

2%

SBI Long-Term Policy Target

Domestic

Stocks

International

Stocks

Bonds

Alternative

Assets

Cash

National Investment Assumption Trend

Investment Return Assumption Setting Process

19


Public Pension Fund Investment Return Assumption Trend

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PERA 2018 Legislative Proposals

January 12, 2018


Investment Return and Other Economic Assumptions

2

2

• PERA’s Board reaffirmed its 2017 position to adopt the 7.5% investment

return, 2.5% inflation, and 3.5% total payroll growth assumptions.

• The fund’s actuary, Gabriel Roeder Smith & Co., believes the 8.0% statutory

rate is “outside of the reasonable range for PERA valuations as of July 1,

2017”.*

• PERA has used 7.5% for accounting purposes in its FY16 and FY17 CAFR.

• All results within this presentation are based on a 7.5% investment return.

* GRS letter to PERA dated September 11, 2017

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Police & Fire General Correctional

Full Funding Within 25 Years? Yes Yes Yes

Increased Funding Required? Yes No No

Broad Stakeholder Support? Yes Yes Yes

Member Groups MPPOA

MPFF

AFSCME 5

AFSCME 65

Teamsters 320

PEPSA

MMRA

SEIU*

AFSCME 5

Teamsters 320

LELS

MNPEA

Employer Groups

LMC

AMC

MICA

LMC

AMC

MICA

AMC

MICA

PERA 2018 Legislative Proposals

23

*SEIU was supportive of most changes, including the COLA change, but was not ready to support the early

retirement augmentation change.


PERA 2018 General Employees Plan

Legislative Proposal

1/17/2018

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General Employees Plan – Projected Funding Ratios

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

2016 2021 2026 2031 2036 2041 2046

Black line: PERA Proposal

Orange line: Projection based on 2017 Valuation – No Changes (2045 Trigger Date)

Red line: Projection based on 2016 Valuation – No Changes (2053 Trigger Date)

25

96%

88% 76%

109%


7.5% 6.5%

Employee Contributions

Employer Contributions

6.2% for full or fairly reduced early retirement benefits with 1% annual increases after age 66

0.7% for a future 2.5% COLA

0.1% for 1% annual increases before age 66

0.4% for augmented early retirement benefits

1.0% for disability, death, refunds, and operating expenses

5.6% for improved future benefit security and progress towards full funding

General Employees Plan – Current Contribution Allocation

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Employee options with deferred augmentation:

Age

56

Age

66 Death

PERA Early Retirement Actuarial Equivalence With Deferred Augmentation

Summary of Employee Options

or

$460 / month, increased 1% per year

$1,000 / month, increased 1% per year

Employee options without deferred augmentation:

$332/ month, increased 1% per year

or

Death Age

66

$1,000 / month, increased 1% per year Age

56


Value of $1,000 at Age 66 Reduced for Early Retirement Benefit Commencement

Actuarial

Equivalent

Benefit

Current

Benefit

With New

Mortality

…if Veto

did not

Occur

…and if

Augmentation

is Eliminated

…and if Pre-

66 COLA is

Eliminated

…and if

COLA is

1.25%

Age

55 $332 $460 $485 $506 $365 $391 $397

62 $657 $740 $756 $767 $682 $704 $708

66 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000 $1,000

Ass

um

pti

on

s

Interest 8.0% 8.0% 8.0% 7.5% 7.5% 7.5% 7.5%

COLA % 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.25%

COLA

Start Retirement Retirement Retirement Retirement Retirement Age 66 Age 66

Augment

-ation No

Yes

(3% or

2.5%)

Yes

(3% or

2.5%)

Yes

(3% or

2.5%)

No No No

Mortality RP-2000 RP-2000 RP-2014 RP-2014 RP-2014 RP-2014 RP-2014

General Employees Plan – Actuarial Equivalence Factor Impact

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0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2008 - 2014 FY 2015 FY 2016 FY 2017

4.2%

2.1% 1.8% 1.7%

Average Annual Retirement Rates for 55 to 60 Year Olds

2

9

The above rates represent the percentage of eligible early retirees each year that retire with reduced

early retirement benefits. Actual retirement rates are slightly higher due to inclusion of members

retiring under Rule of 90 with unreduced benefits.


$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75

Current Benefit @ 63


Proposed Benefit @ 62



Proposed Benefit @ 55

General Employees Plan – Impact of Proposed Changes

30

The current and proposed early retirement benefit amounts are equivalent to a $1,000/month benefit payable at age 66. The results

showing the impact of a delayed retirement are based on a member with 30 years of service receiving raises of 2.5%/year.

The current actuarial equivalent

benefit at age 62 is $740. Under

the proposed changes the amount

is $708. Delaying retirement one

year from age 62 to 63 would

more than offset the difference.

The current actuarial equivalent

benefit at age 55 is $460. Under

the proposed changes the amount

is $397. Delaying retirement two

years to age 57 would more than

offset the difference.

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Change 1: Eliminate 2.5% trigger and replace with 50% of CPI increase with 1.0% floor and 1.5 cap (0.1% of pay net savings)

Change 2: Redirect 0.5% of contributions primarily used for augmented early retirement benefits and 1% pre-66 increases towards improved future benefit security and progress towards full funding

7.5% 6.5%

Employee Contributions

Employer Contributions

General Employees Plan – 2018 Legislative Proposal

31


Members

Affected

Current Plan

Provision

2017 Legislature

Proposal

2018 PERA

Proposal

Amortization Period None 2033 2047 2047

Early Retirement

Augmentation

Early

Retirees

3.0% if hired < 7/1/06;

2.5% if hired > 6/30/06 Eliminate Eliminate

Early Retirement

COLAs

Early

Retirees

1% with

2.5% trigger Eliminate Eliminate

Terminated Member

Deferred

Augmentation

Pre 2012

Terminated

Members

1% if termed < 2012;

0% if termed > 2011 Eliminate Eliminate

Interest Rate

on Refunds

Terminated

Members 4% 3% 3%

Postretirement

Increases All

1% with

2.5% trigger

1% with

no trigger

1% floor

50% of CPI

1.5% cap

MSRS Proposal 1% for 5 years,

1.5% thereafter

TRA Proposal

1% for 5 years,

then 5-year phase-in

up to 1.5%

General Employees Plan – 2018 Legislative Proposal

32

Neither the 2017 Legislative Proposal nor the

2018 PERA Proposal includes funding changes.

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GASB Whiplash – A Case Study


34

GASB Reporting for Pension Plans

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TOTAL PENSION LIABILITY (TPL) ($ in millions)

TPL as of July 1, 2015 $8,485

Service Cost 194

Interest 658

Difference between actual &

expected experience

(376)

Assumption changes 2,651

Benefit payments (501)

Net Change in TPL $2,626

TPL as of June 30, 2016 $11,111

FIDUCIARY NET POSITION (FNP) ($ in millions)

FNP as of July 1, 2015 $7,349

Contributions – Employee 95

Contributions – Employer 156

Other (State of MN) 9

Net investment income (9)

Administrative expense (1)


Change in FNP $(251)

FNP as of June 30, 2016 $7,098

35

The GASB funded ratio decreased from 87% to 64% and the GASB unfunded liability

increased from $1.1B to $4.0B in FY16. Approximately $0.5B of this increase was due to

an asset loss from a -0.1% investment return. What caused the other $2.4B unfunded

liability increase?

Police & Fire FY16 GASB Results


TOTAL PENSION LIABILITY (TPL) ($ in millions)

TPL as of July 1, 2016 $11,111

Service Cost 318

Interest 617

Difference between actual &

expected experience

38

Assumption changes (2,300)


Net Change in TPL ($1,842)

TPL as of June 30, 2017 $9,269

FIDUCIARY NET POSITION (FNP) ($ in millions)

FNP as of July 1, 2016 $7,098

Contributions – Employee 102

Contributions – Employer 175

Other (State of MN) 0

Net investment income 1,060

Administrative expense (1)


Change in FNP $821

FNP as of June 30, 2017 $7,919

36

The GASB funded ratio increased from 64% to 85% and the GASB unfunded liability

decreased from $4.0B to $1.3B in FY17. Approximately $1.1B of this decrease was due

to an asset gain from a 15.1% investment return. What caused the other $2.3B unfunded

liability decrease?

Police & Fire FY17 GASB Results

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2015 2016 2017

Total Pension Liability $8,485 $11,111 $9,269

Fiduciary Net Position 7,349 7,098 7,919

Net Pension Liability $1,136 $4,013 $1,350

Proportionate Share 19.42% 19.84% 19.96%

City Net Pension Liability $221 $796 $269

37

GASB Results for City of Minneapolis (in $M, Police & Fire Only)

Moody’s Investor Services

Rating Action: Moody’s affirms Minneapolis, MN’s Aa1 rating: outlook revised to

negative.

“The negative outlook reflects Minneapolis’ elevated and growing unfunded pension

liabilities. Absent state legislative action that materially reduces accumulated unfunded

liabilities, the city’s pension costs and leverage will remain very high.”


$0

$500

$1,000

$1,500

Actual Benefit Payments


Projected benefit payments for current members are determined using demographic assumptions.

Benefit Payments are Projected ($ millions)

38

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$0

$500

$1,000

$1,500

Discounted Benefit Payments


Funding valuations discount all projected benefit payments using the assumed investment return assumption.

Funding: Benefit Payments are Projected and Discounted

39

Effect of

Discounting

at 7.5%


$0

$500

$1,000

$1,500

Funded Benefits

Unfunded Benefits


The GASB crossover date is when current assets, future investment returns, all contributions for current

members and excess contributions for new members are assumed to be depleted. The crossover date is not the

date the plan is expected to run out of assets. New member benefits are presumed to be fully funded.

The GASB Crossover Date

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$0

$500

$1,000

$1,500

Discounted Funded Benefits

Discounted Unfunded Benefits


GASB valuations discount funded projected benefit payments using the assumed investment return assumption

and unfunded benefits using a general obligation bond rate. 41

Funded

Benefits are

discounted at

7.5%

Unfunded

benefits are

discounted at

2.85%

GASB: Benefit Payments are Projected and Discounted


$0

$500

$1,000

$1,500

Discounted Funded Benefits

Discounted Unfunded Benefits


42

Effect of

Discounting

at 7.5%

The FY17 Asset gain extended full funding to all

years. All future benefit payments are now

discounted at 7.5%

Impact of FY17 15.1% Investment Return

The 15.1% FY17 investment return results in full funding of all future benefits. The use of a higher discount

rate will reduce the liability associated with that period by about $2.3B. The liability loss from FY16 will be

reversed.

1/17/2018

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Questions

public employees retirement association (pera) 2018 ... · pera 2018 legislative proposals january...

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