1. 1 Effective Benefit Management and Allocation of SDRS Resources September 5-6, 2012 South Dakota Retirement System

2. 2 Minimum SDRS Sustainability Equation IncomeOutgo Contributions + Investment Income Benefits + Expenses

3. 3 Ideal SDRS Sustainability Equation Income Outgo Contributions + Investment Income + Cushion Benefits + Expenses

4. 4 Unsustainable Equation Income Outgo Contributions + Investment Income Benefits + Expenses

5. 5 The SDRS Sustainability Equation Contributions + Investment Return = Benefits + Expenses Historically in balance except for 2009-2010; Board recommended corrective actions SDRS has frequently met ideal standard with healthy Cushion Currently, SDRS expected to be slightly out of balance due to: – Board adopted assumption changes – Expected smaller future Investment Return and less Income – Relatively small Cushion – Fixed contributions and commitment to manage SDRS within current resources Review of Benefits one option to restore balance

6. 6 July 1, 2011 Funding Requirements Amortization and Interest 0.98% Expense.25% Normal Cost 11.25% Funding Policy Contribution Rate:12.48% of Pay Total Anticipated Contribution Rate:12.48% of Pay

7. 7 Relative Cost of SDRS Benefits Current Benefit Design and Assumptions

8. 8 First Step in Benefit Review Identify: Subsidies Inequities Inefficiencies Higher costs than anticipated Above/below competitive practices Conflicts with good public policy and/or HR objectives

9. 9 Board Review of the Following Potential Subsidies Special Early Retirement Early Retirement Benefits for: – Married members – Large families – Young spouses Class A/Class B Alternate Formula Retire/rehire Pre-retirement Survivor and Disability Benefits. Subsidies?

10. 10 Board Review of the Following Potential Inequities Higher benefits for married members and large families Class A/Class B Alternate Formula Retire/Rehire Final Average Pay (salary spiking). Benefit Inequities?

11. 11 Board Review of the Following Potential Inefficiencies Pre-retirement Survivor Benefits Pre-retirement Disability Benefits COLA in excess of CPI. Benefit Inefficiencies?

12. 12 Board Review of the Following Potential Areas of Higher Costs than Anticipated Retire/Rehire Final Average Pay Alternate Formula Class A/Class B Lifetime benefits due to improving life expectancy. Higher Costs than Anticipated?

13. 13 Benefits Above/Below Competitive Practices

14. 14 Board Review of the Following Potential Conflicts with Good Public Policy and/or Human Resource Objectives Normal Retirement eligibility Early Retirement incentives COLA that exceeds inflation Total Survivor and Disability Benefits that exceed 100% of pay PRO benefits for non-vested members Alternate Formula. Conflicts with Good Public Policy and/or Human Resource Objectives?

15. 15 Other Issues: Varying Benefits with Funded Status or Economic Measures Why? SDRS costs would automatically reduce in bad times and increase in good times Current examples: – COLA is indexed to Funded Status and partially to CPI – Interest on accumulated contributions indexed to T-Bill rate Possible additional applications – Performance Account for additional benefit improvements – Index retirement age to improved life expectancy – Introduce DC component to SDRS plan design with smaller DB component

16. 16 What Next? Define the amounts needed to maintain actuarial balance Determine what subsidies, inequities, inefficiencies, higher costs, and above competitive practices exist and significance Analyze and prioritize Consider legislative changes for 2013 Legislation