1. 1 Interpreting Actuarial Information Fritzie Archuleta, ASA MAAA Senior Pension Actuary, CalPERS February 21, 2013

2. 2 Interpreting Actuarial Information Overview The big picture: understanding pension terminology Setting the employer contribution rate What do you mean I’m pooled? You assumed what? New report features Current and Future Events

3. 3 The Big Picture Understanding Pension Terminology

4. 4 Interpreting Actuarial Information How are pension plans funded? CalPERS public agency plans are pre-funded Plan assets come from three different sources (ER contributions, EE contributions, investment returns)

5. 5 Interpreting Actuarial Information How are pension plans funded? Most of the benefits are paid through investment earnings CalPERS funding method is designed to collect contributions as a level percent of payroll over the members working career

6. 6 Present value of benefits (PVB) Includes all service that has been earned or will be earned The number is only as accurate as our assumptions are Best estimate for one point in time “Total dollars needed today to fully fund the pension plan for current members in the plan” Interpreting Actuarial Information

7. 7 Normal cost (NC) Factors that determine the normal cost – Plan provisions – Demographic assumptions – Economic assumptions “Annual premium cost associated with one year of service accrual” Interpreting Actuarial Information

8. 8 Accrued liability (AL) Desired level of assets to have on hand Plan is fully funded if assets exceed the accrued liability “The value of benefits earned to date by members currently in the plan” Interpreting Actuarial Information

9. 9 Putting the terminology together Present Value of Benefits Accrued Liability Future NC Contributions Interpreting Actuarial Information

10. 10 Market value of assets (MVA) “Market price that pension assets could be sold for” Actuarial value of assets (AVA) “Adjusted value of assets used to set your annual contribution rate” Interpreting Actuarial Information

11. 11 Market value vs. actuarial value of assets Why use an actuarial value of assets? Using MVA would result in volatile employer rates Interpreting Actuarial Information

12. 12 Interpreting Actuarial Information Investment Volatility – Expected vs Assumed

13. 13 Market value vs. actuarial value of assets Assets along with the annual cash flows are credited with assumed interest of 7.5 percent AVA = AVA + (MVA-AVA)/15 Final AVA must be within 20 percent of MVA How are actuarial value of assets determined? Interpreting Actuarial Information

14. 14 Unfunded actuarial liability (UAL) This year pooled plans saw their individual numbers as well as their pool numbers The difference between actuarial value of assets and accrued liabilities Interpreting Actuarial Information

15. 15 Putting the terminology together Actuarial Value of Assets Unfunded Liability Future NC Contributions Present Value of Benefits Accrued Liability Future NC Contributions Interpreting Actuarial Information

16. 16 Setting the Employer Contribution Rate

17. 17 Components of every rate Pays for a year of benefit accrual 1. The normal cost or annual premium 2. The amortization bases payment Pays for deficit or surplus accrued over the years Every employer rate is made up of two parts: Interpreting Actuarial Information

18. 18 Normal cost or annual premium The normal cost or annual premium pays for service earned in the upcoming year Annual cost determined as a percent of payroll Our funding method is designed to keep this percent fairly level from year to year Interpreting Actuarial Information

19. 19 What events affect the normal cost percent? Assumption changes Contract amendments Fluctuation of aggregate entry age of actives in your plan Interpreting Actuarial Information

20. 20 Amortization bases payment We compare AL of the plan to assets on hand If liability is greater, plan needs to contribute more If assets are greater, plan can contribute less Goal is to get to 100 percent The amortization bases payment gets your plan back to 100 percent funded How do we come up with the amortization bases payment? Interpreting Actuarial Information

21. 21 A “scale” model of your pension plan Salary Retirements Amendments Death Disability Investment Return Benefit Payouts Contributions Inflation LiabilitiesAssets Interpreting Actuarial Information

22. 22 The scale never lies… Fully funded Underfunded Overfunded Scales are level no need to add weight to either side Add weight to the asset side via increased contributions Add weight to the asset side via investment returns May reduce weight on the liability side through amendments May reduce weight on asset side via lowered contributions Add weight to liability side via through improved benefits Interpreting Actuarial Information

23. 23 Amortization bases payment All gains and losses Increase in liability due to plan amendment Assumption/methodology changes “Fresh start” Most plans today are underfunded Each piece of the UL/Surplus is attributed to a source Interpreting Actuarial Information

24. 24 Amortization bases payment (continued) They buy a house for fair market value Each year the property value goes up or down (gain/loss) They take out an equity loan to pay for college (assumption change) They may take out an equity loan to remodel (benefit change) They refinance to consolidate to one bill (fresh start) Imagine a homeowners journey through life… Interpreting Actuarial Information

25. 25 Amortization bases payment Amounts for Fiscal 2013/2014 Reason for Base Date Established Amortization Period Balance 6/30/11 Expected Payment 2011/2012 Balance 6/30/12 Expected Payment 2012/2013 Balance 6/30/13 Scheduled Payment for 2013–2014 Payment As Percentage of Payroll (GAIN)/LOSS06/30/0830$24,470,884$1,469,501$24,841,996$1,491,786$25,218,737$1,514,4104.494% PAYMENT (GAIN)/LOSS06/30/1030$(152,243)$(898,465)$768,589$(120,790)$953,538$57,2610.170% BENEFIT CHANGE06/30/0312$12,214,307$1,177,534$11,938,604$1,215,804$11,601,808$1,255,3183.725% ASSUMPTION CHANGE06/30/0919$8,596,703$63,563$9,196,967$694,658$9,188,658$717,2342.128% SPECIAL (GAIN)/LOSS06/30/0929$(8,971,028)$0$(9,666,283)$(580,470)$(9,812,876)$(599,335)(1.779%) SPECIAL (GAIN)/LOSS06/30/1030$12,377,573$0$13,336,835$0$14,370,440$862,9592.561% TOTAL$48,536,196$1,812,133$50,416,708$2,700,988$51,520,305$3,807,84711.299% These bases can be found on page 13 of your report (non-pooled) and on page 13 of section 2 (pooled) Interpreting Actuarial Information

26. 26 Interpreting Actuarial Information Employer contribution rate Your CalPERS Employer Contribution Rate Normal Cost Dollars needed + Amortization Bases Payment on Unfunded Liability Expected Payroll of Active Employees = ÷ The bottom line: annual payment by employer is the sum of the normal cost plus or minus the amount needed to bring the assets back in line with the accrued liability

27. 27 Now the picture is complete Actuarial Value of Assets Unfunded Liability Future NC Contributions Present Value of Benefits Accrued Liability Future NC Contributions Actuarial Value of Assets Unfunded Liability Future Contributions CY Normal Cost CY Amortization Interpreting Actuarial Information

28. 28 How does this look in my non-pooled report? 28 This can be found on page 5 of your report. Pre-Payment must be received before the first payroll of the new fiscal year and after June 30. Plan’s total normal cost Required Employer Contribution Fiscal Year 2012/2013 2013/2014 Required Employer Contributions 1. Contribution in Projected Dollars a) Total Normal Cost$686,231$731,940 b) Employee Contribution 1 $363,197$373,874 c) Employer Normal Cost [(1a) – (1b)] 323,034 358,066 d) Unfunded Contribution$ 13,535 $ 34,297 e) Total Employer Contribution [(1c) + (1d)] 336,569 392,363 f ) Employee Cost Sharing$ $0 g) Net Employer Contribution [(1e) – (1f)] 392,363 Annual Lump Sum Prepayment Option 2 [(1g) / 1.075^.5] 324,239 378,428 2. Contribution as a Percentage of Payroll a) Total Normal Cost 12.746% 13.197% b) Employee Contribution 1 6.746% 6.741% c) Employer Normal Cost [(2a) – (2b)] 6.000% 6.456% d) Unfunded Rate 0.251% 0.618% e) Total Employer Rate [(2c) + (2d)] 6.251% 7.074% f ) Employee Cost Sharing 0.000% g) Net Employer Contribution Rate [(2e) – (2f)] 7.074% Interpreting Actuarial Information

29. 29 What do You Mean I’m Pooled?

30. 30 Pooling Normal cost – Employers within a pool have the same net normal cost – Surcharges account for additional optional benefits Amortization base (UL/surplus) – Experience gains and losses, assumption changes shared by all in the pool since June 2003 “Sharing the risk” Interpreting Actuarial Information

31. 31 Interpreting Actuarial Information Pooling (continued) Normal cost rate components –Net employer normal cost –Optional benefit surcharges –Normal cost phase-out Amortization bases rate components –Risk pool’s amortization bases –Agency’s side fund 31

32. 32 How does this look in my pooled report? 32 * Payment must be received before the first payroll of the new fiscal year and after June 30. Required Employer Contributions Plan’s total normal cost is the sum of the highlighted amounts and employee contributions Fiscal Year 2012/2013 2013/2014 Employer Contribution Required (in Projected Dollars) Risk Pool’s Net Employer Normal Cost$3,061$3,057 Risk Pool’s Payment on Amortization Bases 556 661 Surcharge for Class 1 Benefits None 0 0 Phase out of Normal Cost Difference 0 0 Amortization of Side Fund 2,909 2,994 Total Employer Contribution$6,740$6,909 Employee Cost Sharing xxx Net Employer Contribution xxx Annual Lump Sum Prepayment Option*$6,493$6,664 Projected Payroll for the Contribution Fiscal Year$46,102$45,011 Employer Contribution Required (Percentage of Payroll) Risk Pool’s Net Employer Normal Cost 6.640% 6.792% Risk Pool’s Payment on Amortization Bases 1.206% 1.469% Surcharge for Class 1 Benefits None 0.000% Phase out of Normal Cost Difference 0.000% Amortization of Side Fund 6.310% 6.652% Total Employer Contribution 14.621% 15.351% Employee Cost Sharing 0.000% Net Employer Contribution 14.621% 15.351% Interpreting Actuarial Information

33. 33 Pooling Represents the remaining balance of your UL or surplus from entry to the pool – Behaves like a mortgage account – Currently charges 7.5 percent – Payments are on a set amortization schedule – Agency has control over the balance – Retroactive benefit enhancements, golden handshakes, and additional payments are events that can increase or decrease the side fund balance Side fund Interpreting Actuarial Information

34. 34 Interpreting Actuarial Information Pooling For pooled plans side fund rate is usually most volatile –Payment is predictable, increasing at 3.00 percent each year –Payroll is expected to increase at same rate as payments –Volatility ensues if payroll does not increase at 3.00 percent 34

35. 35 Interpreting Actuarial Information Pooling Year# ActivitiesPayrollSF Pmt*SF Rate** 14$200,000$20,00010.00% 24206,00020,60010.00% 33160,00021,21813.26% 43160,00021,85513.66% 52120,00022,51118.76% 68460,00023,1864.61% * Note side fund payment increases by exactly 3.00 percent each year ** SF rate = SF Pmt divided by payroll Side fund Volatility - Example

36. 36 How does this look in my pooled report? Pooled side fund 36 Employer Side Fund Reconciliation June 30, 2010June 30, 2011 Side Fund as of valuation date*$(18,203)$(16,781) Adjustments 0 0 Side Fund Payment 2,729 2,818 Side Fund one year later$(16,781)$(15,156) Adjustments 0 0 Side Fund Payment 2,818 2,909 Side Fund two years later$(15,156)$(13,277) Amortization Period 6 5 Side Fund Payment during last year$2,909$2,994 Plan’s side fund balance as of 6/30/2013 Interpreting Actuarial Information

37. 37 You Assumed What?

38. 38 Actuarial assumptions Actuaries must make predictions about your employees to calculate a cost for their benefits Several key assumptions used – Investment return, 7.5 percent – Salary increases – Retirement rates – Life expectancy “Predictions developed by actuaries on what will happen to your plan in the future Interpreting Actuarial Information

39. 39 Actuarial assumptions Actual cost = benefits paid + administrative expenses Assumptions DO determine the expected costs of a plan Assumptions DO NOT determine the actual cost of a plan Where do discrepancies come from? Investment returns differ from 7.5 percent Salary increases, retirement rates are different from what we expect Discrepancies result in gains or losses for the plan Interpreting Actuarial Information

40. 40 Interpreting Actuarial Information 2011 assumption changes The actuarial office does an experience study every few years to keep assumptions current Early this year, CalPERS board adopted a change to the price inflation assumption What assumptions were changed as a consequence? –The assumed investment return was lowered from 7.75 percent to 7.5 percent –The overall payroll growth was lowered from 3.25 percent to 3.00 percent

41. 41 2011 assumption changes How did the change in assumptions impact my rate? – Expect increases of 1-2 percent for miscellaneous plans and 2-3 percent increases in safety plans – CalPERS Board will allow employers to “phase in” the increase to the rate over the next two years – Agencies should watch for GASB compliance Interpreting Actuarial Information

42. 42 New Report Features

43. 43 Risk analysis This is appendix D for non-pooled plans and Appendix E of Section 2 for pooled plans – Volatility ratios – how sensitive is your plan to real life experience – Rate projections – a range of what you can expect given various market returns – Discount rate sensitivity – what your rate look like if the discount rate were changed Interpreting Actuarial Information

44. 44 Termination liabilities What would it cost for my agency to terminate? – Agencies now have some idea – Agencies still need to request a pre termination valuation to initiate the process Interpreting Actuarial Information

45. 45 Current and Future Events

46. 46 Interpreting Actuarial Information Pension Reform (Key Provisions) Mandates benefit formulas for new members Eliminates one-year final average compensation Benefit enhancements are only prospective (for most available benefit enhancements) Eliminates air-time purchases New members pay half the “cost” of the plan 46

47. 47 Interpreting Actuarial Information Pension Reform (Timing) Expect to see pension reform data starting June 30, 2013 valuation Savings will only be realized as your employees turn over Average “cost” for the 2.7%@55 is 21% (fire) and 24% (police) Average “cost” for the 2%@62 is 12.5% (miscellaneous) 47

48. 48 Interpreting Actuarial Information GASB 68 Requirements GASB 68 replaces GASB 27 Employers will need special GASB valuations done around the same time your 6/30/2013 valuations are done Employers will need to pay for valuations to be done Alan Milligan is speaking in detail about this topic tomorrow

49. 49 Interpreting Actuarial Information In The Future… Smoothing Method –Would affect rates as early as 2014-15 Assumptions –Both demographic and economic –Would affect rates as early as 2015-16 Alan Milligan is speaking in detail about these topics tomorrow 49

50. 50 Interpreting Actuarial Information Questions?