Firemen’s Annuity & Benefit Fund of Chicago October 4th and 5th, 2019 Firemen’s Annuity & Benefit Fund of Chicago Pension Funding Seminar Brady O’Connell, CFA, CAIA Senior Vice President

C+ I = B + E Pension Math Contributions (employee and employer) plus Investment returns equals Benefits plus Expenses

C + I: U.S. Public Pension Sources of Revenue, 1989 - 2018 Source: Complied by NASRA based on U.S. Census Bureau data Investment earning are by far the largest contributor for all public funds in terms of dollars available to pay pension benefits. BUT…gains from investments cannot be made if contributions are not made.

FABF Funded Status Plan Assets Compared to Plan Projected Benefit Payments (Actuarial Liabilities) Funded status is very low. Unfunded liability is over $5 billion. Investment returns need to be more than 5 times the growth of liabilities—just to keep up. The historic lack of employer contributions has severely limited the Fund’s ability to generate investment earnings. Source: GRS

FABF Investment Results Strong Investment Returns Measured Against Target and Peers The Fund fully participated in the rebound following the Global Financial Crisis (time periods ending 6/30/19). FABF Investment Return Range of returns earned by other public pension plans of a similar size (10th-90th percentiles) Source: Callan, Northern Trust

Investment Advice to FABF Asset Allocation Strategy Current investment strategy seeks: Strong returns Improved diversification Liquidity to meet benefit payments Key assumptions in setting this strategy: Expected contributions, projected benefits, expected return on assets. FABF financial health highly dependent on City contributions. If anticipated “ARC funding” changes, the Board will need to reconsider this investment approach.

City Contribution Projections City contribution increases $126 million when shifting from ramp to “ARC” Will result in Fund moving to a position where positive net cash flows into the Fund are expected.

Major Points The path to sound long-term funding for the FABF is through steady and increasing employer contributions over a long period of time. This is necessary to make up for historic funding levels far below what was necessary for financial health. Investment strategy alone is unlikely to solve the underfunding. Investment results have been strong the past decade. Investment performance will be critical in providing time for the higher employer contribution rates to kick in. Net cash outflows, while presenting near-term challenges, do not preclude illiquid investments over the long term (which produce higher investment returns). The Fund’s ability to make certain investments has not yet been compromised by funded status.