Transcript Planning for Retirement

South Carolina
Retirement Systems
Update
October 2011
SC Budget and Control Board
South Carolina Retirement Systems
1
Plan Governance





SC Budget and Control Board functions as
fiduciaries/trustees of the plan
The Retirement Systems is a division of the SC Budget and
Control Board
Assets are managed by the SC Retirement System
Investment Commission, which was established in 2005 and
immediately began fund diversification to allow for higher
investment returns
Trust pays all expenses of maintaining the plan
Title 9 of the SC Code of Laws governs most plan provisions
2
About the Retirement Systems

Five defined benefit retirement plans








South Carolina Retirement System (SCRS)
Police Officers Retirement System (PORS)
General Assembly Retirement System (GARS)
Judges and Solicitors Retirement System (JSRS)
National Guard Retirement System (NGRS)
One defined contribution retirement plan
More than 458,000 members
Approximately 850 participating employers
3
Who Participates in the Plans
SCRS is largest plan with more than 190,000
active members, 106,000 annuitants, and
157,000 inactive members.
 PORS is second largest plan with more than
26,000 active members, 12,000 annuitants,
and 12,000 inactive members.

Member data as of June 30, 2010, actuarial valuation.
4
Participating Employers

Participating employers include:





State government
Public school districts
Higher education institutions
Local/political subdivisions of government
Quasi-governmental organizations
5
Employer Contribution Sources
Types of Participating Employers as a Percentage of Payroll
Local Subdivision
and other QuasiGovernmental
Employers
26%
Public School
Districts
43%
State
Government and
Higher Education
Institution
Employers
31%
6
Benefit Formulas
• SCRS Benefit Formula
– Years of service
multiplied by average
final compensation
multiplied by 1.82
percent benefit
multiplier
– Example
• (28 years x $50,000) x
1.82% = $25,480 (annual
retirement benefit)
• PORS Benefit Formula
– Years of service
multiplied by average
final compensation
multiplied by 2.14
percent benefit
multiplier
– Example
• (25 years x $50,000) x
2.14% = $26,750 (annual
retirement benefit)
7
Benefit Eligibility
Vesting Period – Member must have five
years of earned service to be eligible to apply
for benefits
 Retirement Age (for unreduced benefits)



SCRS – Age 65 with at least five years of earned
service or at any age with 28 years of service
PORS – Age 55 with at least five years of earned
service or at any age with 25 years of service
8
SCRS and SS Disability
Plans’ Disability Protection
• Occupational disability
– Member may apply for
disability retirement if he
becomes physically or
mentally incapable of
performing the regular duties
of his job and the disability is
likely to be permanent
(occupational disability).
• Must have at least 5 years
of earned service
Social Security Disability
• Total and permanent
disability
– Person must prove that
disability has lasted at least
12 months and prevents them
from performing any
substantial gainful activity
• Must also have enough
work credits to qualify for
payments
9
Cost-of-living adjustments (COLAs)
For both SCRS and PORS members, the plans
award automatic cost-of-living adjustments
(COLAs) based on Consumer Price Index for
Wage Earners and Clerical Workers (CPI-W)
up to 2 percent
 No COLA awarded if CPI-W is negative

10
Actuarial Accrued Liability Calculation
First - Project all future benefit payments due.
Second - Discount the projected benefits to present value.
Finally - Allocate the present value of benefit payments to past and
future service periods. The part attributable to prior service is the
actuarially accrued liability.
11
Actuarial Accrued Liability Calculation
$23 billion (attributable to members already retired)
+$16 billion (attributable to active members)
$39 billion (total actuarial accrued liability)
12
Unfunded Liability – SCRS


Market Value basis – Calculated as total actuarial
accrued liability ($38.774 billion at FYE2010) less
market value of assets ($19.681 billion at FYE2010)
= $19.093 billion
Actuarial Value of Assets Basis – Actuarial accrued
liability ($38.774 billion) – Actuarial value of assets
($25.400 billion) equals $13.4 billion. This number
is the Unfunded Actuarial Accrued liability or
UAAL.
13
Unfunded Liability – PORS


Market Value basis – Calculated as total actuarial
accrued liability ($4.850 billion at FYE2010) less
market value of assets ($2.851 billion at FYE2010)
= $1.999 billion
Actuarial Value of asset basis – Total Actuarial
Accrued Liability ($4.850 billion) less actuarial value
of assets ($3.613 billion) = $1.238 billion. Again,
This is commonly called the UAAL.
14
Funded Ratio
The funded ratio of a pension plan is the:
Actuarial Value of Assets
Actuarial Accrued Liability
15
Funded Ratio of SCRS and PORS
As of the 2010 actuarial valuation the funded
ratio of the SCRS system is: 65.5 percent
 The funded ratio of PORS is 74.5 percent
 It is generally considered that 80 percent is a
healthy funded ratio
 As of 2009, 31 of the 50 statewide plans were
under 80 percent funded

16
Amortization Period
Amortization period is the period of time it
will take to pay down the UAAL
 GASB requires that the amortization period
be 30 years or less
 Without additional contribution increases or
plan changes the SCRS plan will have a 37.6
year amortization period while PORS will be
at 32.8 years as of July 1, 2010 valuations.

17
How the Plans Are Funded

Employee and employer contributions are
significant sources of income to the state’s
retirement plans.
 Employee Contribution: 6.5 percent
 Employer Contributions (FY 2011):
 SCRS - 9.385 percent
 PORS - 11.363 percent

Investment income, however, is the largest
component of our plans’ funding over time.
18
How the Plans Are Funded
Additions to Pension Trust Funds 2010
Dollar Amounts in Thousands
State-appropriated
contributions & other
income
$957
0%
Investment Income
$2,612,663
65%
Employee
contributions
$561,261
14%
Employer
contributions
$818,523
21%
19
Additions to Pension Trust Funds
20
Major Factors in Current Situation
COLAs granted that weren’t adequately
funded
 Investment earnings less than assumed
 Demographic changes
 Benefit enhancements

21
Where We Are Today – SCRS
$22,000
$ in millions
$18,000
$14,000
$10,000
$6,000
$2,000
-$2,000
1999
2000
2001
2002
2003
2004 2005
Fiscal Year
Other
Liability Experience
COLA Benefits
Investment Gains/Losses - Deferred
2006
2007
2008
2009
2010
Assumption Changes
Non-COLA Benefits
Investment Gains/Losses - Recognized
Net Unfunded Liability
22
23
24
SCRS Net Unfunded Liability on a
Market Value Basis
Annual Change in UAAL by Source
Fiscal Year Ended June 30
1999
Non-COLA Benefits
$
COLA Improvements
2000
-
$ 1,810
182
-
2001
$
2002
-
$
2003
-
$
2004
-
353
149
278
$
2005
2006
$
2007
-
$
2008
-
$ 257
-
209
2,632
457
267
$
2009
-
$
2010
-
$
-
2,842
(412)
-
Investment Gain/Loss - Recognized
(130)
(30)
25
215
120
228
107
190
(296)
(63)
854
1,213
Liability Experience
(192)
281
194
115
273
(274)
177
372
287
462
324
(176)
Assumption Changes
(638)
-
-
-
399
690
239
(176)
(48)
(2,663)
-
-
(26)
(6)
(17)
61
65
290
290
161
237
370
Other
Annual Change in UAAL
(50)
$ (828)
(110)
$ 1,951
$ 546
$ 473
$ 1,053
$ 914
$ 3,477
$ 1,133
$ 500
$
739
$ 1,003
$ 1,407
Cumulative Change in UAAL by Source
Fiscal Year Ended June 30
UAAL Beginning Balance June 30, 1998 (MVA)
Non-COLA Benefits
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
$ 1,006
$ 1,006
$ 1,006
$ 1,006
$ 1,006
$ 1,006
$ 1,006
$ 1,006
$ 1,006
$ 1,006
$ 1,006
$ 1,006
-
1,810
1,810
1,810
1,810
1,810
2,067
2,067
2,067
2,067
2,067
2,067
182
182
535
684
962
1,171
3,803
4,260
4,527
7,369
6,957
6,957
Investment Gains/Losses - Recognized
(130)
(160)
(135)
80
200
428
535
725
429
366
1,220
2,433
Liability Experience
(192)
89
283
398
671
397
574
946
1,233
1,695
2,019
1,843
Assumption Changes
(638)
(638)
(638)
(638)
(239)
451
690
514
466
(2,197)
(2,197)
(2,197)
COLA Benefits
Other
(50)
(160)
(186)
(192)
(209)
(148)
(83)
207
497
658
895
1,265
(828)
1,123
1,669
2,142
3,195
4,109
7,586
8,719
9,219
9,958
10,961
12,368
UAAL Ending Balance June 30 (AVA)
178
2,129
2,675
3,148
4,201
5,115
8,592
9,725
10,225
10,964
11,967
13,374
Investment Gains/Losses - Deferred
(519)
(101)
(99)
859
532
13
(78)
160
(871)
1,576
7,459
5,719
UAAL Ending Balance June 30 (MVA)
$ (341)
$ 2,028
$ 2,576
$ 4,007
$ 4,733
$ 5,128
$ 8,514
$ 9,885
$ 9,354
$ 12,540
$ 19,426
$ 19,093
Cumulative Change in UAAL
25
Where We Are Today – PORS
$2,500
$2,000
$ in millions
$1,500
$1,000
$500
$0
-$500
1999
2000
2001
2002
2003
2004
2005
Fiscal Year
Other
Liability Experience
COLA Benefits
Investment Gains/Losses - Deferred
2006
2007
2008
2009
2010
Assumption Changes
Non-COLA Benefits
Investment Gains/Losses - Recognized
Net Unfunded Liability
26
27
28
PORS Net Unfunded Liability on a
Market Value Basis
Annual Change in UAAL by Source
Fiscal Year Ended June 30
1999
Non-COLA Benefits
$
COLA Improvements
$
$
-
2002
-
$
2003
-
32
13
$
2004
-
$
2005
-
27
20
$
2006
-
$
2007
-
$
2008
-
49
57
43
$
2009
-
$
2010
-
$
-
684
-
-
(12)
-
-
29
13
68
15
28
(30)
5
123
167
(1)
41
15
14
(51)
32
(28)
55
31
16
(23)
(45)
4
-
-
-
69
26
-
-
-
(315)
-
-
(8)
(8)
(8)
(5)
(1)
(12)
(5)
(9)
(4)
(4)
26
34
Liability Experience
Assumption Changes
Other
$
2001
-
21
Investment Gain/Loss - Recognized
Annual Change in UAAL
2000
-
4
$
33
$
39
$
51
$
57
$ 134
$
31
$ 131
$
40
$ 386
$ 126
$ 156
Cumulative Change in UAAL by Source
Fiscal Year Ended June 30
UAAL Beginning Balance June 30, 1998 (MVA)
1999
$
2000
49
Non-COLA Benefits
$
2001
49
$
2002
49
$
2003
49
$
2004
49
$
2005
49
$
2006
49
$
2007
49
$
2008
49
$
2009
49
$
2010
49
$
49
-
-
-
-
-
-
-
-
-
-
-
-
21
21
53
66
93
113
162
219
262
946
946
946
(12)
(12)
(12)
17
30
98
113
141
111
116
239
406
(1)
40
55
69
18
50
22
77
108
124
101
56
4
4
4
4
73
99
99
99
99
(216)
(216)
(216)
(8)
(16)
(24)
(29)
(30)
(42)
(47)
(56)
(60)
(64)
(38)
(4)
4
37
76
127
184
318
349
480
520
906
1,032
1,188
UAAL Ending Balance June 30 (AVA)
53
86
125
176
233
367
398
529
569
955
1,081
1,237
Investment Gains/Losses - Deferred
(46)
(1)
0
115
50
(2)
1
39
(85)
225
999
761
85
$ 125
$ 291
$ 283
$ 365
$ 399
$ 568
$ 484
$ 1,180
$ 2,080
$ 1,998
COLA Benefits
Investment Gains/Losses - Recognized
Liability Experience
Assumption Changes
Other
Cumulative Change in UAAL
UAAL Ending Balance June 30 (MVA)
$
7
$
29
Current COLA Legislation

In 2008, the General Assembly enacted legislation
based on the recommendations of the State
Treasurer’s COLA Task Force. The legislation
included:



Increased the assumed rate of investment return to 8 percent from 7.25
percent.
Increased the annual automatic COLA from 1 percent to the increase in the
Consumer Price Index for Wage Earners and Clerical Workers (CPI-W) up to
2 percent.
Restricted ad hoc COLAs beyond the 2 percent based on all of the
conditions listed on the next slide being met.
30
Current Requirements for Ad Hoc COLAs




The amortization period for the prior year’s unfunded liability
is at 25 years or below; and
The estimated funded ratio in the current year, after the
granting of an additional ad hoc COLA, does not decrease; and
The estimated amortization period in the current year, after
granting the additional ad hoc COLA, is still reduced by at least
one year; and
No increase in employer contribution is required to support
the granting of the additional ad hoc COLA.
31
Investment Earnings


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
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Assumed rate of return on investments = 8 percent
FY 2011 = 18.59 percent
FY 2010 = 14.62 percent
FY 2009 = (19.60 percent)
10 year average return = 3.90 percent
20 year average return = 6.42 percent
As of 2010 valuation $5.8 of deferred losses
32
SCRS Ratio of Active Members
to Annuitants
33
SCRS Ratio of Active Members
to Annuitants
250,000
200,000
150,000
100,000
50,000
1999
2000
2001
2002
2003
2004
Active Members
2005
2006
2007
2008
2009
2010
Annuitant Payees
34
SCRS Ratio of Contributions
Made to Benefits Paid
2,250,000
2,000,000
1,750,000
1,500,000
1,250,000
1,000,000
750,000
500,000
250,000
-
1999
2000
2001
2002
2003
Member Contributions
2004
2005
Employer Contributions
2006
2007
2008
2009
2010
Benefits Paid
Note: Contributions for TERI participants, working retirees and ORP participants are included in
contribution amounts
35
Changes in Life Expectancy
36
Possible Ways to Improve Funding
Increase employee contributions
 Increase employer contributions
 Increase investment earnings
 Reduce benefits/plan changes
 Appropriate additional funds

37
Assumed Rate of Return




The assumed rate of return is used to estimate the
future value of assets
But, it is also used as the discount factor to
determine the present value of future benefit
payments
So, any change in the assumed rate of return
materially changes the funding of the plan
Setting the assumed rate is really an exercise of
setting the amount of risk the plan will accept
38
Change in Assumed Rate and COLAs

Should the Budget and Control Board accept the actuary’s
recommended assumption changes and reduce the assumed rate of
return below 8 percent, the current laws providing for 2 percent
automatic COLAs in PORS and SCRS would be automatically repealed
and result in the reversion of the COLA laws in the statute in effect
immediately prior to the passage of Act 311 of 2008. The respective
COLA provisions for SCRS and PORS upon reversion will be as follows:

1) Section 9-1-1810 (SCRS) will provide for a 1 percent automatic COLA with the
possibility of an ad hoc COLA up to the CPI (4 percent cap) if the increase would not
result in extending the amortization period beyond 30 years, and;

2) Section 9-11-310 (PORS) will not provide for an automatic COLA, but for an ad hoc
COLA of up to the increase in the CPI (4 percent cap) as long as the increase does not
require an increase in the employer contribution rate.
39
The Future
 House
and Senate Subcommittees are
conducting meetings concerning the
plans administered by the Retirement
Systems
 Likely that legislation will be proposed to
modify the plans
40
Possible Modifications
Change COLA provisions
 Change retirement eligibility
 Actuarial cost for service purchase
 Longer average final compensation period
 Longer vesting period
 Eliminate TERI/RTW provisions
 Other benefit provision changes

41
Additional Future Issues - GASB
GASB issued two Exposure Drafts (EDs) this
July
 If implemented, these EDs will amend GASB
Statements 25 and 27
 Statement 25 deals with the financial
statements of pension plans
 Statement 27 deals with financial statements
of covered employers

42
GASB EDs
Exposure drafts are generally the last public
documents issued before the final statements
 Comment due on the EDs were originally due
back to the GASB by Sept 30, but were
extended until October 14th

43
Retirement Systems’ Involvement



Retirement Systems commented on the Preliminary
Views Document issued by GASB in 2010
We are one of 25 pension plans and employers that
volunteered to participate in GASB’s Pension Field
Test for the EDs
We have reported the results of our Field Test
experience and have also submitted a comment
letter on the EDs to GASB
44
Current Pension Accounting




The Retirement Systems is a cost-sharing multiple
employer plan
Currently, employers show a pension expense of the
annual required contribution amount on their
financial statements
Current pension liability of the employer is zero
unless they fail to make the required contribution
Actuarially Accrued Liability is reported in notes of
the Retirement Systems’ financial statements
45
What will the EDs change?





Require employers to recognize a portion of the
Unfunded Pension Liability on their balance sheet
Require the pension fund to use market value of
assets in calculating net pension liability
Change the measure of pension expense
Totally disconnect the accounting for pensions from
the funding of pensions
Add additional note disclosures and RSI
46
Reason for Change
GASB decided that the employment exchange
between an employee and the employer
creates a future obligation for retirement
benefits
 To the extent the pension plan has an
unfunded liability GASB has determined this
should be a liability of the employer

47
Unknowns about this Approach

Is it really a liability?


GASB defines liability as a “present obligation to
sacrifice resources that a government has little or
no ability to avoid”
To be recognized in the financial statements it
must also be measureable with sufficient
reliability
48
Whose Liability is it???

SECTION 9-1-1690. Credit of State is not pledged for payments; rights in
case of termination of System or discontinuance of contributions.
All agreements or contracts with members of the System pursuant to any of the
provisions of this chapter shall be deemed solely obligations of the Retirement
System and the full faith and credit of this State and of its departments,
institutions and political subdivisions and of any other employer is not, and shall
not be, pledged or obligated beyond the amounts which may be hereafter
annually appropriated by such employers in the annual appropriations act,
county appropriation acts and other periodic appropriations for the purposes of
this chapter. In case of termination of the System, or in the event of
discontinuance of contributions thereunder, the rights of all members of the
System to benefits accrued to the date of such termination or discontinuance of
contributions, to the extent then funded, are nonforfeitable.
49
How is the liability allocated?

GASB ED 27 paragraph 46

“The
proportion used to calculate the employer’s
share of the collective totals should be a measure
of the employer’s projected long-term
contribution effort to the pension plan as
compared to the total of all projected
contributions of the employer.”

What does this mean?
50
Employer’s Proportionate Share
We are using the current annual covered
payroll of the employer divided by the total
covered payroll of all employers to determine
an allocation percentage
 We then multiply the allocation percentage
by the total net pension liability to determine
the amount of NPL to attribute to that
employer

51
Proportionate Share Example
Employer has covered payroll of $5 million
 Total covered payroll of all SCRS employers
equals $7.8 billion
 ($5m/$7.8b) X $19.1b equals:

$12.2 million net pension liability to be
recognized by employer
52
What does this mean for employers?





Such a large liability may distort the employer’s
financial statements
Most, if not all, will appear insolvent
May be difficult to explain to governing boards and
taxpayers
Will most likely increase audit costs
Extreme volatility will result in both their
proportionate share of NPL and pension expense
53
What it Means to the SC Retirement
Systems




We will need to provide information on
proportionate share of NPL, pension expense, notes
and RSI to each employer
This needs to be done as of each employer’s FYE
This requires us to obtain MV of assets and roll
forward the pension liability for each FYE
Will make the defined benefit plans appear much
more expensive
54
There Is Still Hope




The SC Retirement Systems, as well as numerous
other plans and employers, have commented to
GASB
GASB is holding public hearings this month
It is possible GASB may make changes or delay
implementation
If not, the new standards will be effective for FY
beginning after June 15, 2013
55
Questions?

Contact Info
Travis Turner, CPA, CISA
Deputy Director
South Carolina Retirement Systems
Phone 803-737-7751
email: [email protected]
56
Retirement Systems Overview

Key Terms






Annuitant – person receiving a monthly benefit
Covered Employer – organization that participates in the retirement
plans
Active Member – employee currently working for and making
retirement contributions through a covered employer
Inactive Member – employee for whom regular retirement
contributions have not been received for at least one fiscal year
Employer Contribution Rate – the percentage of payroll that a
covered employer contributes to the retirement plans
Employee Contribution Rate – the percentage of earnable
compensation an employee contributes to his respective retirement
plan
57
Retirement Systems Overview

Key Terms







30-Year Amortization Period – maximum number of years over which a
retirement plan’s unfunded liability may be amortized
Funded Ratio – the ratio of a retirement plan’s assets to liabilities
Unfunded Actuarial Liability – excess of actuarial accrued liability over the
actuarial value of a retirement plan’s assets
Employer Normal Cost – employer's portion of total normal cost of benefits
earned by active members during current fiscal year
COLA – cost-of-living adjustment
Investment Assumption Rate – the rate of investment return a plan expects
to earn in a given year
Smoothing Concept – the spreading over a period of years of a plan’s
investment gains and losses to lessen volatility in rates
58
Disclaimer
THE LANGUAGE USED IN THIS PRESENTATION DOES NOT CREATE ANY
CONTRACTUAL RIGHTS OR ENTITLEMENTS AND DOES NOT CREATE A CONTRACT
BETWEEN THE MEMBER AND THE SOUTH CAROLINA RETIREMENT SYSTEMS. THE
SOUTH CAROLINA RETIREMENT SYSTEMS RESERVES THE RIGHT TO REVISE THE
CONTENT OF THIS PRESENTATION.
This presentation is meant to serve as a guide but does not constitute a binding
representation of the South Carolina Retirement Systems. The statutes governing the
South Carolina Retirement Systems are found in Title 9 of the South Carolina Code of
Laws, and should there be any conflict between this presentation and the statutes or
Retirement Systems’ policies, the statutes and policies will prevail.
Employers covered by the South Carolina Retirement Systems are not agents of
the Retirement Systems.
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