South Dakota
Retirement System
Board Consideration of Assumption
Changes
September 5, 2012
Adopted Assumptions
•
At the July Board of Trustees meeting, the following recommended
assumption changes were adopted:
– Mortality: 1995 Buck Table with a 1-year setback for males
– Salary Increases: Reduce salary increase assumption and base on service
– Retirement: Separate reduced/unreduced rates, separate by class
(Teacher/Non-Teacher) and gender, extend 100% assumed retirement age
– Termination: Use rates based on service for 5 years and age thereafter, increase
termination rates in early years, eliminate Judicial termination rates
– Disability: Reduce Class A rates, eliminate Judicial disability rates
– Inflation: Reduce long-term inflation assumption to 3.25%
– Improvement Factor (COLA): Reduce long-term COLA assumption to 2.75%
– Interest on Accumulated Contributions: Reduce long-term assumption to 3.50%
1
Adopted Assumptions
•
In a separate motion, the Board adopted the following investment return
assumption:
– 7.25% for 5 years
– 7.50% after 5 years
2
Cost Impact of Adopted Assumption Changes
Current
Assumptions
Adopted
Assumptions
Normal Cost Rate
11.249%
10.362%
Expenses
0.250%
0.250%
30-Year Amortization
0.978%
2.012%
Total Required Contribution Rate
12.477%
13.624%
As of June 30, 2011
-Change from Current Assumptions
1.147%
Expected Contribution Rate
12.477%
12.477%
Market Value Funded Ratio
102.9%
99.0%
-Change in MVFR
Statutory contributions
less than required
contributions by
1.147% of pay
MVFR decreased 3.9%
(3.9%)
Note: Cost Impact has been estimated based on 2011 valuation results. The
exact impact on future valuations will vary to some degree. To meet the required
contributions, the Present Value of Benefits (PVB) would need to be reduced by
about $141M (1.5% of PVB).
3
Improvement Factor (COLA)
Assumption Recommendation
•
Because the adopted investment return assumption reduces the Market Value Funded Ratio
(MVFR) more than the recommended assumption and reflects a lower future investment return
expectation, we believe the probability of the future Funded Ratio exceeding 100% will decrease
and the probability of the Funded Ratio being between 90% and 99.9% will increase, resulting in a
reduction of the average expected COLA to 2.7% as follows:
MV Funded Ratio Range
Probability of
Being in Range
COLA Limits
Expected Average
Improvement Factor
Less than 80%
5%
2.1%
0.105%
80%-90%
15%
2.1%-2.4%
0.349%
90%-100%
40%
50%
2.1%-2.8%
1.056%
1.320%
Over 100%
40%
30%
3.1%
1.240%
0.930%
2.750%
2.704%
Total
•
The above calculation is not a method change, but recognizes the reduced MVFR and reduced
investment return assumption result in a reduced average annual COLA
•
Buck recommends the adoption of this additional assumption change
NOTE: The COLA assumption does not affect the actual benefit increases paid pursuant
to statute.
4
Cost Impact of Adopted Assumption Changes
with Additional Recommended Change in COLA
Assumption
Current
Assumptions
Adopted
Assumptions and
Long-Term COLA
Assumption = 2.70%
Normal Cost Rate
11.249%
11.291%
Expenses
0.250%
0.250%
30-Year Amortization
0.978%
1.874%
Total Required Contribution Rate
12.477%
13.415%
As of June 30, 2011
-Change from Current Assumptions
0.938%
Expected Contribution Rate
12.477%
12.477%
Market Value Funded Ratio
102.9%
99.5%
-Change in MVFR
Statutory contributions
less than required
contributions by
0.938% of pay
MVFR decreased 3.4%
(3.4%)
Note: Cost Impact has been estimated based on 2011 valuation results. The
exact impact on future valuations will vary to some degree. To meet the required
contributions, the PVB would need to be reduced by about $115M (1.2% of the
PVB).
This situation meets the first condition of SDCL 3-12-122 and can also be referred
to as the System being out of actuarial balance
5
Potential Actions to Maintain Actuarial
Balance
•
To restore actuarial balance, a retirement system can consider:
–
Increasing member or employer contributions
–
Decreasing benefits (Corrective Action)
–
Changing actuarial assumptions or methods
•
Increasing member or employer contributions: there has been a long-standing
understanding with Legislature and Executive Branch to manage SDRS within fixed
statutory contributions
•
Decreasing benefits (Corrective Action): Certain SDRS design features that include
subsidies, inefficiencies, higher costs than anticipated, or above competitive features
will be discussed later today
•
Changing actuarial assumptions or methods:
–
Board has adopted assumptions after comprehensive review
–
Buck recommends one additional change (assumed average annual COLA) resulting directly
from the application of the adopted assumptions
–
Re-initialization of SDRS Funding Method and use of Cushion may be appropriate
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Potential Actions to Maintain Actuarial
Balance – Re-initializing Funding Method
•
The SDRS Funding Method, the Frozen Entry Age Actuarial Cost Method,
originally set the Normal Cost (NC) and Actuarial Accrued Liability (AAL)
based on the Entry Age Cost Method AAL
•
Over time, the Frozen Entry Age Method has allocated a higher percentage
of the future costs of the System to the NC and less to the AAL
•
Re-setting the NC and AAL based on the Entry Age Normal Cost Method
provides a more accurate measure of the expected long-term NC and the
AAL currently based on the present plan terms and adopted assumptions. It
has no impact on the expected future costs of the System; it only
reallocates the future costs between NC and AAL
•
If applied to the June 30, 2011 results, re-initializing would have lowered the
NC rate by 12% and increased the AAL by 2%, which would have reduced
the MVFR by 2%. This could potentially impact the amount of future COLAs
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Cost Impact of Adopted Assumption Changes, Additional
Recommended Change in COLA Assumption and ReInitialization of Funding Method
Current
Assumptions
Adopted
Assumptions, COLA
Assumption = 2.70%
and Re-initialization
Normal Cost Rate
11.249%
9.928%
Expenses
0.250%
0.250%
30-Year Amortization
0.978%
2.453%
Total Required Contribution Rate
12.477%
12.631%
As of June 30, 2011
-Change from Current Assumptions
(0.154%)
Expected Contribution Rate
12.477%
12.477%
Market Value Funded Ratio
102.9%
97.5%
-Change in MVFR
Statutory contributions
less than required
contributions by
0.154% of pay
MVFR decreased 5.4%
(5.4%)
Note: Cost Impact has been estimated based on 2011 valuation results. The
exact impact on future valuations will vary to some degree. To meet the required
contributions, the PVB would need to be reduced by about $45M (0.5% of the
PVB).
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Potential Actions to Maintain Actuarial
Balance
•
The adopted assumptions plus the recommended assumed average annual
COLA change result in SDRS being out of actuarial balance by
approximately $115M (page 5)
•
Potential actions to maintain actuarial balance are:
•
–
Increase member or employer contribution – ruled out based on long term understanding
–
Decrease benefits – eliminate subsidies, etc. and/or take more significant action
–
Change actuarial assumptions/methods. Possibilities include:
•
re-initializing funding method -- results in SDRS being out of actuarial balance by approximately $45M
(page 8)
•
use of some or all of Cushion
More than one option can be taken
9