1. March 9, 2006www.psers.state.pa.us1 PSERS An Update on the State of the Fund, the Employer Contribution Rate and Pending Legislation

2. March 9, 2006www.psers.state.pa.us2 Agenda State of the Fund Investment Update Actuarial Process Funded Status The Employer Contribution Rate Pending Legislation Current Issues Questions New Pension Administration System (NPAS) Update

3. March 9, 2006www.psers.state.pa.us3

4. March 9, 2006www.psers.state.pa.us4

5. March 9, 2006www.psers.state.pa.us5 Audited Market Value of the Fund as of June 30, 2005: $52.7 billion

6. March 9, 2006www.psers.state.pa.us6 Unaudited Market Value of the Fund as of December 31, 2005: $54.8 billion

7. March 9, 2006www.psers.state.pa.us7 Unaudited Market Value of the Fund as of March 3, 2006: $56.7 billion

8. Market Value % of Target Policy Asset Class (in millions) Total Allocation Ranges Domestic Equity$ 22,830.1 41.7%40.0% 37.0% - 43.0% International Equity12,354.322.5%20.0% 17.0% - 23.0% Private Equity 3,629.1 6.6% Private Debt 1,035.4 1.9% Venture Capital 498.5 0.9% Subtotal Alt. Investments 5,163.0 9.4% 11.0% 8.0% - 14.0% Real Estate 3,283.3 6.0%7.0% 5.0% - 9.0% Total Equity 43,630.7 79.6% 78.0% 75.0% - 81.0% Domestic Fixed Income7,929.2 14.5% Global Fixed Income 1,689.9 3.1% Cash & Cash Equivalents * 1,555.7 2.8% Total Fixed Income 11,174.8 20.4% 22.0% 19.0% - 25.0% TOTAL FUND$ 54,805.5100.0%100.0% * - includes Cash, Cash Equivalents, and net asset value accounting adjustments PSERS’ Investment Market Values as of December 31, 2005 (Unaudited)

9. PSERS’ Net Pension Assets (in billions)

10. PSERS’ Annualized Performance (Net of Fees) As of December 31, 2005 Asset ClassQuarter Fiscal Year to Date* 1 Year3 Years5 Years Equities U.S. Issues2.03%6.22%6.25%16.53%3.46% International5.1618.3919.0326.137.53 Fixed Income U.S. Issues0.510.473.176.297.21 Global-1.22-1.20-3.966.657.42 Real Estate8.4216.2029.6223.5016.31 Private Equity/Venture Capital/ Private Debt 8.5211.0827.2719.234.80 TOTAL ASSETS3.39%8.58%11.45%17.01%6.50% *PSERS’ Fiscal Year ends on June 30

12. PSERS’ Portfolio Distribution as of December 31, 2005 (Unaudited)

13. March 9, 2006www.psers.state.pa.us13 Actuarial Process

14. March 9, 2006www.psers.state.pa.us14 Actuarial Valuation Although the annual actuarial valuation to determine PSERS’ employer contribution rate is fairly complex, its goal is relatively simple, i.e. to ensure that PSERS has sufficient funds to meet all benefit and expense requirements of the plan

15. 15 Actuarial Valuation The actuarial valuation ensures adequate funding of the pension plan by determining: The liabilities of the Fund, based on: Membership data Benefits provisions Certain actuarial assumptions Actual experience The assets of the Fund, based on: Market value of the assets Actuarial value of the assets Certain actuarial assumptions Actual experience The funding sources make up any “shortfall” between the assets and liabilities

16. March 9, 2006www.psers.state.pa.us16 Plan Funding PSERS funding sources Known Variable - Employer Contribution Rate (4.23% for FY 2004-2005) (4.69% for FY 2005-2006) (6.46% for FY 2006-2007) Generally split between the Commonwealth and School Employers Unknown Variable - Investment Earnings (Assumed Rate of return 8.5%) Fixed - Employee Contribution Rate (5.25%/6.25%/6.50%/7.50%)

17. PSERS’ Sources of Funding Ten Year History (1996 to 2005) Investment Earnings 78% $37.6 Billion Employee Contributions 12% $6.0 Billion Employer Contributions 10% $4.7 Billion

18. PSERS’ Sources of Funding Twenty Five Year History (1981 to 2005) Investment Earnings 68% $57.5 Billion Employee Contributions 12% $10.3 Billion Employer Contributions 20% $17.1 Billion

19. March 9, 2006www.psers.state.pa.us19 Experience Study An experience study reviews and compares actual demographic and actuarial experience with the Fund’s actuarial assumptions An experience study is conducted every five years An experience study was completed in 2005

20. March 9, 2006www.psers.state.pa.us20 Experience Study As a result slight revisions were made to the Fund’s demographic and actuarial assumptions and were reflected in the employer contribution rate Examples: Salary growth rate was decreased from 6.25% to 6.00% Updated postretirement mortality tables Modified disability, death in service, and non- vested withdrawal rates to reflect experience Decreased assumed inflation from 3.5% to 3.25% Increased assumed real rate of return on assets from 5% to 5.25%

21. March 9, 2006www.psers.state.pa.us21 Actuarial Assumptions Demographic Service retirement Disability Death in active service Withdrawal Death after retirement Economic Rate of return on assets Salary increase

22. March 9, 2006www.psers.state.pa.us22 Actuarial Assumptions Economic Rate of return on assets8½% Active member salary increases4¼% to 12% 6% average Components of active member salary increases Inflation3.25% Real wage growth1.00% Career scale1.75% 6.00%

23. March 9, 2006www.psers.state.pa.us23 Funded Status

24. PSERS’ Funded Ratio: 1991 – 2005 (in millions)

25. PSERS’ Funded Ratio: 1991 - 2005

26. Accrued Liability and Actuarial Assets - 1986 - 2005

27. March 9, 2006www.psers.state.pa.us27

28. March 9, 2006www.psers.state.pa.us28 The Rate On December 9, 2005, the Retirement Board certified the employer contribution rate for FY 2006-2007 The rate for FY 2006-2007 is 6.46% (0.74% for premium assistance and 5.72% for the pension rate) The pension rate of 5.72% is 0.90% below the employer normal cost of 6.62% The “employer normal cost” is the annual cost of the benefits earned by the members of the System payable by the employers In other words, if PSERS met all of its actuarial assumptions, the annual employer contribution rate would be 6.62% plus the premium assistance rate

29. March 9, 2006www.psers.state.pa.us29 Valuation Date:June 2004June 2005 Rate Components (FY 2005/2006)(FY 2006/2007) Employer Contribution Rate Normal Cost Rate 14.77% 13.83% Member Rate (Average) (7.16%) (7.21%) Employer Normal Cost Rate 7.61% 6.62% Unfunded Accrued Liability Rate (4.28)%(0.95)% Preliminary Pension Rate3.33% 5.72% Pension Rate Floor4.00% N/A Health Insurance Rate.69%.74% Final Pension Rate4.00% 5.72% Final Total Rate4.69% 6.46%

30. March 9, 2006www.psers.state.pa.us30 Total Contribution Rate

31. MemberTotal FiscalNormalAccruedHealth CareTotalContribution Contribution YearCostLiabilityContributionEmployer(Average)Rate 89/90 8.44 11.24 19.68 5.53 25.21 90/91 8.28 10.9 19.18 5.69 24.87 91/928.006.40.5014.905.4620.36 92/937.905.84.5014.245.4819.72 93/947.345.58.2513.175.5118.68 94/956.434.18.4511.065.5516.61 95/966.434.67.6211.725.5917.31 96/976.443.56.6010.605.6216.22 97/986.442.17.158.765.6514.41 98/996.33 (.44).156.045.6911.73 99/006.40(2.04).254.615.7210.33 00/016.29(4.65).301.945.777.71 01/025.63(6.05)1.091.095.806.89 02/03 7.20 (10.03).97 1.15 * 7.10 8.25 03/04 7.25 (4.27).79 3.77 7.08 10.85 04/057.48(7.10).234.23**7.1211.35 05/06 7.16 (4.28).69 4.69** 7.16 11.85 06/076.62(0.95).746.467.2113.67 Detailed Total Contribution Rate *1% floor & 1.15% cap per Act 38 **4% floor per Act 40

32. March 9, 2006www.psers.state.pa.us32

33. March 9, 2006www.psers.state.pa.us33 Act 38 and the Rate Act 2002-38, in addition to granting a phased COLA, required PSERS to use a five-year smoothing methodology for recognizing investment gains and losses, instead of PSERS’ former (Pre-Act 38) three- year smoothing methodology Pre-Act 38, the selection of the smoothing methodology was within the Retirement Board’s discretion Once recognized, the gains or losses, at the time of Act 38, were to be amortized over 10 years at level dollars The 10 year amortization schedule for gains and losses was subsequently modified by Act 2003-40 Act 38 also provided for an employer contribution rate floor of 1%, exclusive of the premium assistance rate

34. March 9, 2006www.psers.state.pa.us34 Act 38 and the Rate One purpose of the smoothing methodology is to reduce the volatility of the employer contribution rate The longer the smoothing period the greater the smoothing effect The subsequent amortization of the recognized gains and losses further mitigates the volatility of the employer contribution rate

35. March 9, 2006www.psers.state.pa.us35 Act 38 and the Rate Act 38 also provided a transition rule for implementing the new five-year smoothing methodology Essentially PSERS was directed to immediately recognize the investment gains and losses still unrecognized for actuarial purposes under the former smoothing methodology for FY 98-99 and FY 99-2000 The impact of this immediate recognition was to be reflected in calculating the employer contribution rate for Fiscal Year 2002-2003 The resulting reduction in the rate was attributable to the fact that there were no unrecognized losses for FY 98-99 and FY 99-2000, only gains, whose recognition was accelerated, plus the fact that the losses from FY 2000-2001 were to be recognized over 5 years not 3 years

36. March 9, 2006www.psers.state.pa.us36

37. March 9, 2006www.psers.state.pa.us37 Act 40 and the Rate Enacted December 10, 2003 Increased the statutory minimum employer rate floor from 1.00% to 4.00% plus premium assistance rate, for the PSERS’ employer contribution rate beginning July 2004 Also beginning in July 2004, Act 2003-40 changed the amortization period for the increased liabilities of Act 9 of 2001, for the outstanding balances of the net actuarial losses incurred in FY 2000/2001 and FY 2001/2002, and for the future gains and losses experienced in all future years from 10-year level dollars to 30-year level dollars

38. March 9, 2006www.psers.state.pa.us38 Act 40 and the Rate Act 40 retained the current 10-year level dollar amortization period for all pre-Act 9 of 2001 unfunded liabilities, the Act 38 of 2002 asset valuation method change, and for future benefit changes and COLAS The net impact of Act 40 was to reduce the employer contribution rate for FY 2004-2005 from the projected rate of 9.69% (including premium assistance) to 4.23% (including premium assistance) If the rate floor was not in place, the employer contribution rate would have been.61% (including premium assistance)

39. March 9, 2006www.psers.state.pa.us39 Pre Act 2003-40 June 30, 2003 Valuation Rate Projection

40. March 9, 2006www.psers.state.pa.us40 Post Act 2003-40 June 30, 2003 Valuation Rate Projection

41. Post Act 40 June 30, 2004 Valuation June 30, 2003 valuation

42. March 9, 2006www.psers.state.pa.us42

43. 43 The Future?

44. March 9, 2006www.psers.state.pa.us44 Legislative Process

45. 45 Legislation: PSERS’ Role Assists in drafting legislation Assists in editing legislation Provides cost estimates Example: Act 2002-38 Occasionally “lobbies” for legislation: Prudent person investment authority Amendments to retain qualified plan status under the Internal Revenue Code Protection of investment information under the Right-to-Know Law These occasional efforts are at the direction of the PSERB

46. March 9, 2006www.psers.state.pa.us46 Legislation: Adopted during 2005-2006 session House Resolution 299 was adopted by the House of Representatives on June 29, 2005 The proposal directed the Legislative Budget and Finance Committee (LB&FC) to perform a comprehensive study involving a fiscal analysis, actuarial analysis, and policy analysis of various alternative proposals set forth in House Bill 130 and House Bill 131 HB 130 proposes a “30 & Out” early retirement incentive window, and a “rule of 80” retirement benefit HB 131 proposes the institution of a permanent, automatic, annual COLA The report has not yet been finalized and its release is expected during March 2006

47. March 9, 2006www.psers.state.pa.us47 Legislation: Enacted during 2005-2006 session Act 5 of 2006- Governor Rendell signed into law on February 2, 2006 Act 5 provides an exemption for retirees from the continuing education requirements of Act 48 of 1999 Retired teachers are now permitted to be employed for a total of 180 days, during which time they would be exempt from the continuing education requirements and maintain active teacher’s certification A large number of bills have been introduced that impact PSERS (COLAS, 30 and Out, etc.) You can track the progress of a bill via the Internet by accessing the Session Information section of the Pennsylvania General Assembly website at: http://www.legis.state.pa.us/cfdocs/legis/home/session.cfm http://www.legis.state.pa.us/cfdocs/legis/home/session.cfm

48. March 9, 2006www.psers.state.pa.us48 Current Issues

49. March 9, 2006www.psers.state.pa.us49 Current Issues Rising employer contribution rate Impact of Act 2001-9 (1/3) Impact of investment performance - 2001- 2003 (2/3) Impact of Act 2003-40 - balloon payment in FY 2012/2013 Relationship with annuitants Right-to-Know-Law (RTKL) dispute with PASR Increased public scrutiny/transparency Board Education Policy DB vs. DC debate Commonwealth Foundation Report

50. March 9, 2006www.psers.state.pa.us50

51. March 9, 2006www.psers.state.pa.us51 Update on New Pension Administration System (NPAS)

52. March 9, 2006www.psers.state.pa.us52 NPAS Update Recap of the first 20 months of operation Status of Member Statements of Account Status of Employer Statements of Account Planned Improvements Employer Statement of Accounts Employer Reporting Questions and Answers