Transcript Arizona State Retirement System

Arizona State
Retirement System
Arizona State Retirement
System
Government Finance Officers
Association of Arizona
August 12, 2011
Estimates are utilized
Arizona State
Retirement System
ASRS Statistics
(June 30, 2010)
 Total membership approximately 525,000
 Appropriated FY2011 Budget $24.7 million
 Not a State General Fund Budget
 Annual distributions $2.3 billion
 Annual contributions $1.7 billion
 Employee pays 50% of all costs
 Average annual retirement benefit: $19,840
 Average years of service of retiree: 19.5
 Average age of retiree: 69.4 years
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Arizona State
Retirement System
ASRS Provided
Programs
1. Defined Benefit Pension Plan
2. Health Insurance Program & Supplement
3. Hybrid Retirement Plan “System”
4. Long Term Disability Program
5. Supplemental Savings Plans
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Arizona State
Retirement System
Forms of Retirement
Plan
 What is a “Defined Benefit” (DB) Retirement Plan?
 A form of retirement plan where retirement benefits can be
determined ahead of time and is based upon a known formula.
Social Security, Military Pensions and the ASRS are examples
of Defined Benefit retirement plans.
 What is a “Defined Contribution” (DC) Retirement
Plan?
 A form of retirement plan where the retirement benefits are
not known ahead of time and are based upon contributions
made, investment returns realized, and expenses paid.
401(k)s and IRAs are examples of Defined Contribution
retirement plans.
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Arizona State
Retirement System
DB Plan & DC Plan Comparison
Defined Benefit
Defined Contribution
+ Guaranteed lifetime benefit
+ Less complex
+ Predictability of future retirement benefit
+ More portable
+ Greater retirement equity
+ Less Expensive per benefit level
+/- Individualized
investment decision
making
+/- All risk held by
employee
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Arizona State
Retirement System
Why are Large DBs
Typically Less Expensive?
 DB typically results in lower cost per level of
retirement benefit because:
 DB typically has higher rates of return
 Professional asset allocation
 Greater time horizon and risk tolerance
 Greater diversification
 DB participants need not plan for outliving assets
 Therefore less savings required
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Arizona State
Retirement System
Funding Models
 Pre-Funding
 Build up investment portfolio equal to accrued liabilities
 Pay-As-You-Go
 Build up investment portfolio only as a liquidity buffer
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Arizona State
Retirement System
Valuation Methods
 Measuring Assets:
 Minor differences in “marked-to-market” methods
 Private investments
 Illiquid public investments
 International investments
 Significant differences in “smoothing” methods
 Length of period of smoothing
 Allowable spread between “smoothed” value and “marked-tomarket” value.
 Measuring Liabilities:
 Minor differences in demographic assumptions
 Modest differences in valuation methodologies
 Significant differences in discounting methodologies
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Arizona State
Retirement System
Public Fund Survey:
Plan Funded Statuses
Source: NASRA - Public Fund Survey: Summary of Findings for FY 2009
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Arizona State
Retirement System
Reasons for Recent
Changes in Funded
Status
 Low investment returns during FYs 2001-03 and FYs
2008-09
 Change from EAN to PUC (1989)
 Low contribution rates during 1990s+
 Benefit improvements prior to 2002
 Certain expensive and ineffective plan design
features (most remedied)
 Improving life expectancies of retirees
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Arizona State
Retirement System
Issues Past & Present
Key Plan Design Features Causing Contribution Rates to
Increase
 DB Plan Membership Decreases
 Return to Work Contributions
Not a Plan Design Feature
Remedy in Process Since 2008/09
 Remedies Applied
 Service Purchase Inequities:
 Refund Accruals:
 Early Retirement Incentives:
 Miscellaneous:
 Modified Deferred Retirement Option:
 Increasing Longevity:
 Salary Spiking:
 Refund Amounts:
Remedies
Remedies
Remedies
Remedies
Remedies
Remedies
Remedies
Remedies
2004
2004
2004
2004+
2006
2006, 2010
2009, 2010
2010
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Arizona State
Retirement System
Distribution of ASRS Pensions
as of June 30, 2010
Average Years
of Service
36.7
37.3
34.9
33.8
33.8
Average Pension
$19,840.10
33.5
32.3
28.5
15.1
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Arizona State
Retirement System
ASRS Investment Asset
Allocation
Investment Category
Policy Target
Policy Range
26%
16-36%
40%
30-50%
18%
8-28%
Private Equity
7%
5-9%
Real Estate
6%
4-8%
Inflation Linked Assets
3%
0-10%
U.S. Fixed Income
Core
High Yield
24%
2%
U.S. Equity
Large Cap
28%
Mid Cap
6%
Small Cap
6%
International Equity
Developed Large Cap
13%
Developed Small Cap
2%
Emerging Markets
3%
Commodities 3%
0-5%
TIPS
0-5%
0%
Risk Parity
0%
0-5%
Absolute Return
0%
0-5%
Opportunistic
0%
0-10%
10%
8-12%
GTAA* (Included in allocation above)
Green: Denotes asset classes typically absent from DC investment options.
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Arizona State
Retirement System
Investment Returns
(June 30, 2010)
Annualized Rates of Return
ASRS Total
Fund
FYTD
(12/31/2010)*
1 Year
3 Year
5 Year
10 Year
Inception
(7/1/1975)
Net of
Investment
Fees
17.7%
14.9%
-4.7%
2.3%
2.4%
9.6%
Gross of
Investment
Fees
18.0%
15.3%
-4.5%
2.5%
2.4%
9.7%
* Estimates
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Defined Benefit Pension Plan
Funded Status Projections
(June 30, 2010)
Arizona State
Retirement System
Actuarial Value*
90%
80%
70%
60%
50%
40%
30%
20%
10%
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25
FY26
FY27
FY28
FY29
FY30
FY31
FY32
FY33
FY34
FY35
FY36
FY37
FY38
FY39
FY40
FY41
0%
Based on June 30, 2010 Projections with constant 8% Investment Return and 0% Population Growth
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* Excludes potential PBIs
Arizona State
Retirement System
Health Insurance Plan
Funded Status Projections
(June 30, 2010)
Actuarial Value
90%
80%
70%
60%
50%
40%
30%
20%
10%
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25
FY26
FY27
FY28
FY29
FY30
FY31
FY32
FY33
FY34
FY35
FY36
FY37
FY38
FY39
FY40
FY41
0%
Based on June 30, 2010 Projections with constant 8% Investment Return and 0% Population Growth 18
Arizona State
Retirement System
Defined Benefit Pension Plan
Funded Status Projections
(June 30, 2010)
Market Value of Assets*
90%
80%
70%
60%
50%
40%
30%
20%
10%
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25
FY26
FY27
FY28
FY29
FY30
FY31
FY32
FY33
FY34
FY35
FY36
FY37
FY38
FY39
FY40
FY41
0%
Based on June 30, 2010 Projections with constant 8% Investment Return and 0% Population Growth
* Excludes potential PBIs
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Health Insurance Plan
Funded Status Projections
(June 30, 2010)
Arizona State
Retirement System
Market Value of Assets
90%
80%
70%
60%
50%
40%
30%
20%
10%
FY41
FY40
FY39
FY38
FY37
FY36
FY35
FY34
FY33
FY32
FY31
FY30
FY29
FY28
FY27
FY26
FY25
FY24
FY23
FY22
FY21
FY20
FY19
FY18
FY17
FY16
FY15
FY14
FY13
FY12
0%
Based on June 30, 2010 Projections with constant 8% Investment Return and 0% Population Growth
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Arizona State
Retirement System
HBS Funding

As of June 30, 2009 Arizona was:

Better funded than any other state in the nation for health care benefits, at 69 percent.

ASRS Actuarial Funded Status was 87.1%.

ASRS Actuarial Funded Status was 84.2% on June 30, 2010.

1 of 2 states with greater than 50% OPEB funding (Arizona, Oregon)
 4 states: 25% - 50% funded (Alaska, Ohio, North Dakota, Wisconsin)
 3 states: 10% - 24% funded (Kentucky, Colorado, Utah)
 39 states: 5% funded or less
 1 state not reported (Nebraska)

1 of 5 states that contributed their entire actuarially required OPEB contribution for 2009

Just over 5% of OPEB liability is funded nationwide
Source: PEW Center on the States (2011). The Widening Gap: The Great Recession’s Impact on State Pension
and Retiree Health Care Costs.


As of June 30, 2006 AZ was:

1 of 6 states on track to fully fund OPEBs in the next 30 years

1 of 3 states with greater than 50% OPEB funding
 5 states 11-41% funded
 4 states 1-10% funded
 33 states 0% funded
 (5 states not reported)
Only 3% of OPEB liability is funded nationwide
Source: PEW Center on the States (2007). Promises with a Price: Public Sector Retirement Benefits.
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Arizona State
Retirement System

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




Significant 2011
Legislative Outcomes
Return to Work Alternate Contribution Rate
Normal Retirement Age for New Hires (July 1, 2011)
27-week Waiting Period for New State Employees
Contribution Rate Split
Felony Forfeitures
Service Purchase Program Limitations
Defined Contribution and Retirement Study
Committee
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Arizona State
Retirement System
Reference Material
 $50 Billion Tidal Wave: How Unfunded Pensions Could Overwhelm Arizona Taxpayers,
Briggs, Andrew G., Goldwater Institute, 2010
 A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans ,
National Institute on Retirement Security, 2008
 A Comparative Analysis of Defined Benefit and Defined Contribution Retirement Plans
with Arizona References, Matson, Paul and Dobel, Suzanne, 2006,
www.azasrs.gov/web/pdf/DefinedBen_DefinedComp_WhitePaper.pdf
 Arizona Public Pensions Underreport Funding Shortfalls, Riggs, Andrew, Goldwater
Institute, 2010
 Look Before You Leap: The Unintended Consequences of Pension Freezes, Boivie, Ilana
and Almeida, Beth, National Institute on Retirement Security, 2008
 Myths and Misperceptions of Defined Benefit and Defined Contribution Plans, NASRA
White Paper, 2002 updated 2005
 Profitable Prudence: The Case for Public Employer Defined Benefit Plans, Anderson G.
and Brainard, K., Pension Research Council, Wharton School, 2004
 Public Plan DB/DC Choices , Olleman, Mark, Milliman, PERiScope Publication, 2009
 The Crisis in Local Government Pensions in the United States, Novy-Marx, Robert and
Rauh, Joshua, 2010
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