Transcript Certification Sample 4 - Texas Municipal Retirement

Charting a Future Course
2007 Annual Training Seminar
2007, Texas Municipal Retirement System.
Public Pensions Today
 Generational change – Baby Boomers
 Private vs. public sector retirements
 Funding and legal issues
 Media focus on plans –
San Diego, Fort Worth,
etc.
Fiduciary Duty
 Plan trustees and administrators are required by
law to protect the soundness of the plan
 The Texas Constitution requires assets to be held in
trust for the benefit of members
 Trustees act solely and
exclusively in the
interest of members
and beneficiaries
TMRS – 60 Years of Security
 TMRS basics –
 System created by law in 1947 to provide secure
retirement for municipal employees
 TMRS plans are “hybrid” plans (Defined
Contribution plans with some Defined Benefit
characteristics)
 At year-end 2006, we had 821cities in System,
each with its own customized agency plan
 80% of members are in plans that provide
annually repeating USC and COLAs
TMRS – 60 Years of Security
 Sound funding
 Plan costs amortized over 25 years
 Contributions cover Normal Cost
 System as a whole is
82.1% funded
 Annual actuarial valuations
 Detailed examination of
assumptions every 5 years
 Long history of cities making
required contributions
TMRS Investments
 TMRS has historically
invested in long-term bonds
 Investment objective is to
preserve principal and earn
interest at or above the
statutory rate of 5%
 Investment policy has
valued low volatility
TMRS Investments
 Focus of TMRS investment
policy has been on
providing at least an annual
5% interest credit for
members
 Proper emphasis should be
on providing a reasonable
benefit at a reasonable cost
to employers
TMRS Investments
 Will employers tolerate
some short-term
volatility in contribution
rates in exchange for
higher investment
returns and lower rates
in the long run?
Some City Concerns
 Workforce growth slowing
 Retiree-to-active ratios
increasing
 Rising liabilities
 Rising contribution rates
 Funded ratios decreasing
 Annuity Increases funded
only one year at a time
 Some employers accruing
costs they are not fully
aware of
Why Are Costs Going Up?
 Ratio of retirees to active members is rising
 Lower investment earnings
 Rise in long-term interest rates reduces the market
value of the current portfolio
 Annually repeating Updated Service Credit (USC) and
Annuity Increases (COLAs)
 Slower turnover (affects withdrawal)
 Slower payroll growth
 Aging workforce, even at new-hire level
 Current actuarial method does not fully reflect
liabilities arising from annually repeating COLAs
Updated Service Credit (USC) and
Annuity Increases
 What is USC, and how does it affect the city’s rate?
 Defined Benefit-like feature
 Updates member’s benefit to match current salary and
plan design
 Cities can choose between annually repeating and
ad hoc increases
 Current actuarial method does not distinguish
between ad hoc and annually repeating increases
 Number of cities adopting annually repeating
increases has risen over the years
Meeting City Concerns
 Strategic initiative begun in 2006
 Examining funding methods and
long-term liabilities
 Analyzing assets and investments
Possible TMRS Changes
 Change actuarial funding
method
 Adopt closed amortization
period
 Change the investment
policy and strategy
Why Make Changes?
 Provide a reasonable retirement
benefit at a reasonable cost to
employers, funded in a sound
manner
 Provide better long-range rate
forecasts for budget purposes
 Improve funded ratios over time
 Adapt to a different
economic and demographic
environment
Why Make Changes? (cont.)
 Reflect widespread adoptions
of annually repeating increases
 Improve employer awareness
of costs associated with
annually repeating COLAs
BOTTOM LINE:
Assure that TMRS remains on sound footing
Legislation
 Possible for 2009
 May be needed to help
improve investment returns
and help improve plan’s
funding
1) Actuarial Funding Method
 Current method is Unit
Credit (UC) actuarial cost
method
 Potential change is to
Projected Unit Credit
(PUC) method
1) Actuarial Funding Method (cont.)
 WHY - provides a better method of fully recognizing
future liabilities
 Results
 For cities with annually repeating USC and Annuity
Increases, the city’s rate will increase, possibly
significantly, under the Projected Unit Credit method. This
requires higher contributions to amortize liabilities and
assure that promised benefits will be soundly funded
 Cities without repeating USC/Annuity Increases will see
little if any rate increase under Projected Unit Credit
change alone
1) Actuarial Funding Method (cont.)
Comparison of UC and PUC
Unit Credit
 Accrue costs as benefits
are earned
 Actuarial Liability = PV of
accrued benefits based
on past service and
contributions.
 Normal Cost = PV of
benefits to be earned this
year
Projected Unit Credit:
Costs based on allocated benefit
 Accrue costs as benefits
“earned”, but level out effect of
future pay increases (and future
repeating USC and annuity
updates)
 Actuarial Liability = PV of accrued
benefits based on past service
and projected pay.
 Normal Cost = PV of benefits to
be earned this year based on
projected pay.
1) Actuarial Funding Method (cont.)
Normal Cost as a Percentage of Pay
Unit
Credit
Cost
%
Projected
Unit Credit
25
35
45
Age
55
65
1) Actuarial Funding Method (cont.)
Actuarial Accrued Liability
Liability
Projected
Unit Credit
Unit
Credit
25
35
45
Age
55
65
2) Amortization Changes
 Current amortization period is 25-year “open”
period
 Potential change is to 25-year
“closed” period
2) Amortization Changes (cont.)
 WHY – fund a larger share of liabilities each
year and improve funded ratio over time
 Results – higher contributions
for most cities, but faster
annual improvement in
funding ratios
Actuarial Second Opinion
 Reported to TMRS Board in
September
 Concurred in recommendations
 Recommended Projected Unit
Credit for all cities
 Suggested a five-year
implementation schedule
3) Investment Strategy Changes
 TMRS’ investment strategy – 100% in fixed
income investments – served the System well
for many years.
3) Investment Strategy Changes, (cont.)
 Interest credits to member and city accounts were high
through the 90’s but have declined in recent years.
TMRS’ stated policy was to focus on income instead of the
more common performance measurement of total return.
Interest Credits and Returns
35.00%
30.00%
25.00%
20.00%
15.00%
Total Rate of Return
10.00%
Income Rate of Return
Interest Credit Rates
5.00%
0.00%
1989
1991
1993
1995
1997
1999
2001
2003
2005
-5.00%
-10.00%
-15.00%
 In practice, interest allocations were higher than
income.
 Lesson learned: It’s hard to stay an income
investor when total returns are rich!
Investment Strategy in the Future
 Staying the course is always an
option, but not a desirable
option.
What Happens if TMRS Stays
Entirely in Bonds?
 Staying 100% in bonds may be a no-win situation.
 New money and proceeds from mature bonds
reinvest below 5% – in a 3.5% bond environment,
income will decline.
 If interest rates rise, the market value of the
portfolio falls, and there may be pressure to
change investment policy anyway.
If we do not change our investment strategy, the yield on our
investment strategy is likely to decline below 5% in 10 years.
-- Assuming a 3.5% long bond rate, as projected by advisors
What Happens if We Do Not Change
Our Investment Policy?
 With annual returns below
5%, TMRS could be forced to
reduce future interest credits
below 5% and reduce future
annuities accordingly.
 Members’ benefits and city
contribution rates both
suffer.
Stocks and Bonds Performance
Historical Performance: Stocks vs Bonds
3500
3000
Return (%)
2500
2000
1500
1000
500
0
Jan-26
Jan-36
Jan-46
S&P 500
Jan-56
U.S. LT Corp
Jan-66
U.S. LT Gvt
U.S. IT Gvt
Jan-76
U.S. 30 Day Tbill
Jan-86
U.S. Inflation
Jan-96
Jan-06
Stocks and Bonds Performance
 Historically, equities have out-performed bonds.
 State pension portfolios have – on average – a
67.7% equity allocation.
Historical Performance: Stocks vs. Bonds
Last 1 Year
(annual) Return
Last 5 Years
(annual) Return
Jan 1926 - July
2007 (annual)
Cumulative
S&P 500 TR
16.13%
11.81%
10.39%
318,841%
U.S. LT Corp TR
4.59%
6.18%
5.82%
9,990%
U.S. LT Gvt TR
6.81%
6.01%
5.40%
7,178%
U.S. IT Gvt TR
6.03%
3.53%
5.28%
6,561%
U.S. 30 Day TBill TR
5.07%
2.71%
3.73%
1,885%
U.S. Inflation
2.80%
3.04%
3.06%
1,067%
As of Jul 2007:
Source: Ibbotson Associates
Planning for Change
 Any changes will be carefully weighed to
minimize risk
 New Investment Consultant
 Asset / Liability study
 Investment policy amendments
 Asset allocation
What’s Next?
 Changes will be phased in gradually and thoroughly
evaluated
 Stay tuned to TMRS communications (e-bulletins,
Web updates, and city mailings)
 Understand the funding
of your plan to help
you consider
future actions
Actuarial Experience Study
 At least every five years, TMRS’ actuary examines
assumptions
 Mortality rates and interest assumptions were part
of study
 Study was reported to
Board in September
 Changes will be reflected
in 2008 Actuarial Valuation
TMRS Staff Actuary
 TMRS is adding a staff actuarial position to help
cities chart their future course
 Actuary will increase
resources for city support
TMRS Advisory Committee
 New charter
 Open membership
requirements
 Generate interest in
serving
 Give Committee a defined
mission
 Give TMRS stakeholders a
voice
 Increase transparency
Timeline for Change
E-Bulletins sent to cities every 2-3 weeks
August 2007 – First letter sent to cities
 Funding history
 Valuation progress
September – Letter to cities with sample data
September TMRS Board meeting – Board heard
results of 5-year actuarial experience study and
second opinion
September – E-Bulletin with results of Board
meeting
Timeline for Change (cont.)
October TMRS Annual Training Seminar –
“Focus on Funding”
October 2007 – Detailed projections sent to each
city
December TMRS Board meeting – Decisions made
on future direction
and options
December 2007 – Letter
sent to cities about
Board decisions
Information Mailings
 September mailing showed effects on a sample city,
with and without USC and Annuity Increases
 Graphs are included for the sample city. The graphs
show the effects on the city’s rate, funded ratio, and
UAAL over time, if the TMRS Board decides to
change to:
 Projected Unit Credit actuarial funding method
 Closed, 25-year amortization period
Information Mailings (cont.)
2007
2012
2017
2022
Example graphs
for City X
Unfunded Actuarial Liability ($millions)
Total Contribution Rate (%)
2027
2032
2007
2012
2017
2022
2027
2032
Funded Ratio (%)
No Future Updated Service
Credit and Annuity Increases,
with Closed Amortization
Full Recognition of Repeating
2007
2012
2017
2022
2027
2032
Updated Service Credit and
Annuity Increases with Closed
Amortization
 7% deposit
rate
 2 to 1 City
Match
 Full annually
repeating USC
and Annuity
Increase
 5-year vesting
 20 years, any
age retirement
Continuing Communication
 TMRS E-Bulletin for cities
 “Breaking News” on Website
 Toll-free number: 800-924-8677
 City visits from members of the
Travel Team
 Annual Seminar, “Focus on Funding”
 Active TMRS Advisory Committee
 Local funding workshops in 2008
 New publication coming soon: TMRS FACTS
for City Officials
2008 and Beyond
 Cities can make additional
contributions beginning in
2008
 Other changes – from
Board decisions and 2007
legislation – will be phased
in gradually
2008 and Beyond (cont.)
 Contribution rates will not change in 2008
 Option to pay additional city contributions above
recommended rate
 Board will set reasonable timeframe for phasing in
new options
Questions & Answers
HOW TO CONTACT TMRS:
Toll-free: 800-924-8677
Web: www.TMRS.com
E-mail: [email protected]