Transcript Arizona State Retirement System
Arizona State
Arizona State Retirement System
League of Arizona Cities and Towns
A Requested Presentation on Pension Plan Concepts, Data, and Information Paul Matson, Director September 12, 2014 Estimates may be utilized
Arizona State
Table of Contents
Retirement System 1.
2.
3.
4.
5.
6.
7.
8.
9.
Introduction & Presentation Approach The Retirement Plan Concept ‘DB’ & ‘DC’ – Description & Analysis Pension Fund ‘Lines of Business’ Pension Math Pension Levers (What ‘Really’ Counts) Pension ‘Financial’ Performance Metrics Conceptual Model for Decision Analysis Background Information
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Introduction & Presentation Approach
Retirement System
Presentation Requested by the League
Presenter to Differentiate Between:
Facts ‘Generally’ Accepted Statements Opinions
Presentation can be Interactive at ‘Your’ Discretion
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The Retirement Plan Concept
Retirement System
Simply put, a retirement plan is typically put in place in order to achieve some combination of the following:
Recruit employees Motivate employees Retain employees Provide for employees retirement Allocate benefits between today and tomorrow Other 4
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‘DB’ & ‘DC’ Description & Analysis
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Forms of Retirement Plans
Retirement System
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, PSPRS, 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. 457s, 403(b)s, 401(k)s and IRAs are examples of Defined Contribution retirement plans.
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Attributes of Retirement Plans
Defined Benefit Plans Generally Defined Contribution Plans Generally
Known retirement benefit Guaranteed lifetime retirement benefits Investment decisions made by Trustees Greater retirement equity Less expensive per benefit level More complex Less portable Variable cost sharing ASRS: 50% EE, 50% ER Variable risk sharing ASRS: 50% EE, 50% ER
Unknown retirement benefit Variable lifetime retirement benefit* Key investment decisions made by employees Less retirement equity More expensive per benefit level Less complex More portable Variable cost sharing Typically 100% risk with EE *May annuitize at retirement
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DB Plan & DC Plan Comparison
Retirement System Typical Defined Benefit Pro/Con Typical Defined Contribution
+ Guaranteed lifetime benefit + Predictability of future retirement benefit +/- Individualized investment decision making +/- All risk held by employee + Greater retirement equity + Less expensive per benefit level* + Less complex + More portable * “Our entire approach to DC has been to try to replicate DB features within DC plans ,” said Fontaine. Trends in DC, Evolution of Retirement Planning, www.pionline.com
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Why are Large DBs Typically Less Expensive?
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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 9
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Pension Fund ‘Lines of Business’
Retirement System 1. Plan Design 2. Investment Management 3. Organizational Management 4. Customer Service
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Pension Fund Math
(Font size below is reflective of relative magnitude) Retirement System
– + + – = + EE Contributions + ER Contributions
Investment Returns
Investment Expenses Organizational Costs
Pensions to be Paid
Refunds
Ceteris Paribus, Management Objectives:
Desire RED to be as small as possible
Desire GREEN to be large as possible
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Pension Levers (What ‘Really’ Counts)
Retirement System Big Levers:
1. Pension Plan Design a.
‘Multiplier’ (retirement benefit generosity) b.
Years of Service Required (to retire at full benefit) c.
d.
e.
f.
Retirement Ages Allowed (to retire at full benefit) Salary Levels (of working employees) Post Retirement Increases (COLA’s) Abnormal End-of-Career Salary Increases (Spiking) g.
h.
Early Retirement Incentives Other 2. Net Investment Returns within Risk Tolerance Framework a) Long-Term Investment Markets (limited control by pension plans) b) Risk / Return Framework accepted by pension plans 12
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1a.
1b.
1c.
1d.
Pension ‘Financial’ Performance Metrics:
‘Balance Sheet’ Metrics
Actuarial Funded Status Un-smoothed Funded Status Liquidation (‘Market Value of Liabilities’) Funded Status Prospective Trends of Funded Status’s 13
Arizona State Retirement System
Pension ‘Financial’ Performance Metrics:
‘Investment’ Metrics
2a.
2b.
2c.
Investment Rates of Return – Relative to Actuarial Assumed Return Investment Rates of Return – Absolute Investment Rate of Return – Relative to Peers 14
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Pension ‘Financial’ Performance Metrics:
‘Cost’ Metrics
3a.
3b.
3c.
Contribution Rate Levels Contribution Rate History Contribution Rate Trajectory 15
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Conceptual Model for Decision Analysis
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Arizona State Retirement System 1 st Determine Objectives of Retirement Plan
Cost Analysis Determine Cost Affordability Risk Incidence Allocation Determine Appropriate and Acceptable Cost (Risk) Sharing Role of Retirement Plan in Employee Benefits Package Determine Optimal Flexibility and Value Characteristics
2 nd Determine Optimal Operational Retirement Model
Design Retirement Plan Consistent with the Three Objectives Above Determine Most Cost and Fee Effective Delivery Model 17
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Determine Optimal Operational Retirement Model
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Operational Retirement Model
Objectives Delivery Model
A Design for benefit cost affordability H Maximize Investment Rate of Return
Inputs 1) Employer Contribution Rate 2) Employee Contribution Rate
B Design risk allocation G Minimize cost per benefit
Outputs 1) Retirement Benefits Objective = Minimize Input (Ceteris Paribus)
C Design for best fit within employee benefits D Minimize contributions required E Minimize administrative costs F Minimize investment costs
Objective = Maximize Output (Ceteris Paribus) Typical Models A. Defined Contribution B. Defined Benefit C. Hybrid 18
Arizona State Retirement System
Background Information
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ASRS Average Salary & Average Benefit
Retirement System $50 000 $42 879 $44 198 $44 115 $43 365 $43 475 $40 901 $43 182 $40 000 $35 145 $36 052 $36 429 $37 853 $38 185 $31 116 $32 045 $33 237 $29 420 $30 000 $30 224 $20 702 $20 855 $20 917 $20 991 $20 984 $19 773 $20 357 $20 567 $20 973 $20 000 $18 181 $18 570 $19 595 $19 587 $14 532 $18,787 $19 005 $19 158 $19 353 $19 427 $19 526 $19 566 $11 340 $16 812 $17 837$18 097 $10 000 $11 784 $12 288 $13 502 $16 452 $1 729 $1 758 $1 664 $1 676 $1 570 $1 562 $1 544 $1 502 $1 490 $1 465 $1 418 $0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 $1 386 Average Annual Salary Average HIB Supplement Average Annual Pension Pension + HIB Supplement
2.4% average increase in average annual salary since 1997, (0.7%) between 2012 and 2013 3.5% average increase in average annual pension benefit since 1997, 0.1% between 2012 and 2013 Excludes System 22
Arizona State
Market and Actuarial Values of Assets
Retirement System $Billions $35.0
$30.0
$25.0
$20.0
$15.0
$27.639
$27.852
$28.360
$28.823
$29.231
$30.230
$16.398
$21.836
$23.188
$22.855
$23.623
$23.517
$23.643
$23.836
$24.852
$26.477
$23.641
$25.296
$18.761
$21.127
$21.873
$18.595
$20.749
$21.900
$20.403
$16.168
$18.117
$14.169
$23.142
$28.033
$27.569
$31.435
$30.299
$10.0
$5.0
$0.0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Actuarial Market
4.2% average increase in market value since 1997 4.9% average increase in actuarial value since 1997 Actuarial assets are 103.7% of market. Actuarial assets exceed market assets by $1.1 billion.
Includes System for 2010 - 2013 23
Arizona State
Funded Ratio [401(a) and 401(h)]
Retirement System 150%
142,2%
140% 130% 120% 110% 100% 90%
81,2% 86,9%
80%
132,4% 135,4% 132,1% 120,7% 115,9%116,2% 123,6% 121,1% 111,4% 125,3% 118,6% 113,2% 117,7% 108,3% 107,7% 108,2%109,1% 111,8% 109,5% 109,0% 114,4% 120,4% 116,4% 107,9% 112,8% 104,6% 96,8% 77,3% 82,3% 74,5% 80,1% 91,2% 85,3% 83,7% 82,8% 82,2% 79,4% 76,7% 78,4% 79,6% 86,4% 74,7%
70%
67,6% 72,4% 72,7%
60%
57,1% 61,6%
50%
75.8% 75,7% 75,9% 72.7% 69,0% 73,2%
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 Based on Market Assets Based on Actuarial Assets
Includes System for 2010 - 2013 24
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Summary of ASRS Plan Results
Retirement System Total Contribution Rate
Employee Contribution Rate Employer Contribution Rate
401(a) June 30, 2012 401(h) Total 21.95% 0.60% 22.55%
11.30% 10.70% 0.00% 0.60% 11.30% 11.30%
401(a) June 30, 2013 401(h) Total 22.37% 0.54% 22.91%
11.46% 0.00% 11.46% 10.92% 0.54% 11.46% Funded Ratio – AVA Funded Ratio – MVA 75.29% 68.66% 85.32% 77.72% 75.66% 69.00% 75.44% 72.72% 89.21% 85.80% 75.94% 73.19% 25
Arizona State Retirement System
Projected Contribution Rates
Assumes future investment returns of 8.0% on Market Value of Assets and excludes potential future PBIs.
27% 25% 23% 21% 19% 17% 15% 13% 11% 9% 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044
Fiscal Year Beginning July 1
No Growth - Current Amortization No Growth - Alternate Amortization 2.5% Growth - Current Amortization 2.5% Growth - Alternate Amortization 2.5% Decline - Current Amortization 2.5% Decline - Alternate Amortization 26
Arizona State
Projected Funded Status - AVA
Assumes future investment returns of 8.0% on Market Value of Assets and excludes potential future PBIs.
Retirement System
104% 100% 96% 92% 88% 84% 80% 76% 72% 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Fiscal Year Beginning July 1
No Growth - Current Amortization No Growth - Alternate Amortization 2.5% Growth - Current Amortization 2.5% Decline - Current Amortization 2.5% Growth - Alternate Amortization 2.5% Decline - Alternate Amortization 2041 2043 27
Arizona State
Projected Funded Status - MVA
Assumes future investment returns of 8.0% on Market Value of Assets and excludes potential future PBIs.
Retirement System
104% 100% 96% 92% 88% 84% 80% 76% 72% 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Fiscal Year Beginning July 1
No Growth - Current Amortization No Growth - Alternate Amortization 2.5% Growth - Current Amortization 2.5% Decline - Current Amortization 2.5% Growth - Alternate Amortization 2.5% Decline - Alternate Amortization 2041 2043 28
Arizona State
ASRS Investment Asset Allocation
Retirement System Investment Category
Large Cap Mid Cap Small Cap US Equity Developed Large Cap Developed Small Cap Emerging Non-US Equity
Private Equity Opportunistic Equity Total Equity
Core High Yield US Fixed Income Emerging Market Debt
Opportunistic Debt Private Debt Total Fixed Income Commodities Real Estate Infrastructure Farmland and Timber Opportunistic Inflation Linked Total Inflation Linked Assets TOTAL Policy Target
23% 5% 5% 33% 14% 3% 6% 23% 7% 0%
63%
13% 5% 18% 4% 0% 3%
25%
4% 8% 0% 0% 0%
12% 100% Policy Range
(26 - 38%) (16 - 28%) (5 - 9%) (0 - 3%)
(53 - 70%)
(8 - 28%) (0 - 10%)
(15 - 35%)
(1 - 7%) (6 - 10%) (0 - 3%) (0 - 3%) (0 - 3%)
(8 - 16%) Global Tactical Asset Allocation (GTAA)
10% (5 - 15%) Note: Aggregate Opportunistic asset classes not to exceed 10%
Green:
Denotes asset classes typically absent from DC investment options. 29
Arizona State Retirement System
ASRS Rate of Return
Total Fund Performance as of June 30, 2014
1 Yr 3 Yrs 5 Yrs 10 Yrs Total Fund (Gross)
19.3
11.4
14.8
7.8
ITD
10.2
Inception Date
Jul-75 30