1 Actuarial Equivalency Factor Rule Accrued Benefit Policy Discussion January 14, 2003

2 Historical Summary: In August 2002, the PERS Board elected to modify its AEF Rule to:  implement 2001 AEF’s as of January 1, 2004  include a “look-back” calculation feature

3 Explanation of “Look-back” Concept The application of the new AEFs could result in members receiving lower monthly payments than they would have received just prior to the date of the AEF change.

4 Rule Benefit Impact (Pre-1999 AEF’s vs AEFs) (Money Match) Age at RetirementMonthly Payment Difference Percentage 55(3.8%) 56(4.5%) 57(5.2%) 58(5.8%) 59(6.5%) 60(7.0%) 61(7.7%) 62(8.4%) 63(8.9%) 64(9.6%) 65(10.2%)

5 Explanation of “Look-back” Concept Assumption: Future benefit payments of unretired members will climb back up after the initial decline caused by the change in AEF because of added contributions, earnings credited, salary increases, service time, etc. (Look-back period) Board’s Policy: To protect against members receiving less than their “accrued benefit” as of rule change, the Board approved a “look-back” calculation feature. Outstanding Issue: Board did not define the components of the “accrued benefit” that is to be the basis of the “look- back” calculation (i.e, account balance, salary, service time, and other components that can vary between the rule change date and the member’s actual retirement date.)

6 Accrued Benefit Components Constants already determined by Board: Draft rule does not allow post change contributions in “look-back” calculation. Draft rule assumes the member’s age is established as of retirement date for both retirement calculation and “look-back”.

7 Accrued Benefit Components

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9 Accrued Benefit Examples Accrued Benefit Example #1: –Frozen components as of rule change date Account balance –No post change earnings Average Salary –Salary increases after change do not count Sick leave –As of change date

10 Accrued Benefit Examples (cont.) Accrued Benefit Example #2: –Allow components to change through date of retirement Account balance –Earnings through retirement Average Salary –Entire work history considered Sick leave –As of retirement date

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12 Accrued Benefit Component Financial Impact (Based on 2001 AEF’s) Example #1Example #2 UAL Reduction$1,460 Million$442 Million Est. Rate Reduction2.00 % of Payroll0.80% of Payroll Est. Decrease in ER Contributions (Annual) $134 Million$53 Million