P 3 Actuaries you can understand 1 Review of Economic Assumptions November 8, 2006 P

P 3 Actuaries you can understand 2 Syllabus Assumptions –Economic Model –Inflation and Investment Return Expectations Other 37 Act Systems Recommendations

P 3 Actuaries you can understand 3 Assumptions Best guess of what will happen in the future

P 3 Actuaries you can understand 4 Economic Assumptions Describe impact on money Inflation Salary Increases Return on Investments Cost-of-Living Adjustments

P 3 Actuaries you can understand 5 Demographic Assumptions Describe member movement from one category to another Termination Disability Retirement Death

P 3 Actuaries you can understand 6 Economic Assumption Model Inflation Merit & Longevity Real Investment Return COLA (limited to 3% ) Salary Increase Investment Return Across the Board

P 3 Actuaries you can understand 7 Annual Inflation Rate

P 3 Actuaries you can understand 8 Average Inflation Rate

P 3 Actuaries you can understand 9 Inflation Spike:

P 3 Actuaries you can understand 10 Average Inflation after Removing Spike

P 3 Actuaries you can understand 11 Inflation Assumptions in 37 Act Systems

P 3 Actuaries you can understand 12 Average Inflation Assumptions in 37 Act Systems

P 3 Actuaries you can understand 13 Inflation Assumption Current4.00% Reasonable Range3.00% % Recommendation: 4.00%

P 3 Actuaries you can understand 14 Investment Return Inflation Real Investment Return

P 3 Actuaries you can understand 15 Real Investment Return Over 90% of Real Investment Return due to asset allocation

P 3 Actuaries you can understand 16 FCERA Allocation Targets Stocks – Domestic38% Stocks – International18% Bonds – Global3% Bonds – Core (and cash)30% Private Markets11%

P 3 Actuaries you can understand 17 Average Annual Real Returns by Asset Class (1/1/1926-6/30/2006) Large Company Stocks7.2% Small Company Stocks9.5% Long-term Corporate Bonds2.7% Long-term Government Bonds2.3% Intermediate-term Government Bonds2.2% US Treasury Bills0.6% Ibbotson Associates, Inc.

P 3 Actuaries you can understand 18 Real Investment Return in 37 Act Systems

P 3 Actuaries you can understand 19 Average Real Investment Assumption

P 3 Actuaries you can understand 20 Real Investment Return Current4.16% Reasonable Range 3.50% % Recommendation4.16%

P 3 Actuaries you can understand 21 Nominal Investment Return in 37 Act Systems

P 3 Actuaries you can understand 22 Average Nominal Investment Return in 37 Act Systems

P 3 Actuaries you can understand 23 Nominal Investment Return Current8.16% Reasonable Range7.50% % Recommendation: 8.16% (8.00% compounded semi-annually)

P 3 Actuaries you can understand 24 Questions