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Montana Public Employees Retirement Association
Experience Study ResultsSix-year Period Ending June 30, 2016
Presented May 11, 2017Todd B. Green ASA, FCA, MAAA
Joseph A. Nichols ASA, EA, FCA, MAAA, MSPA
Best estimate of ultimate costs
Requires use of assumptions to estimate benefit payouts When? How much? How long?
Assumptions should represent the best estimate of future experience
Each assumption should be individually reasonable
2
Actuarial Valuations
Actuarial Assumptions
3
No “correct” assumptions Blend of art and science
Range of acceptable assumptions
More aggressive assumptions are more likely to generate actuarial losses in future years; more conservative assumptions are likely to generate actuarial gains.
Assumptions are long term estimates.
Experience emerges short term
Year-to-year fluctuations expected
Most powerful assumption is the investment return assumption.
Ultimate responsibility for selection of assumptions lies with the Board of Trustees.
Selection of Assumptions
4
Economic Investment ReturnPayroll Growth Rate Inflation
DemographicRetirement RatesMerit Pay IncreasesDisabilityTurnoverMortality
Our Philosophy
5
Do Not Overreact Typically, we do not make significant changes in actuarial
assumptions unless a major event causes changes in expectations.
Anticipate Trends If an identified trend is expected to continue, like improved retiree
mortality experience, then our assumptions should reflect these anticipated trends.
Simplify We identify which factors are significant and eliminate the ones that
will not have a material impact on results.
Assumptions reviewed Price inflation Investment return Wage inflation
Actuarial Standard of Practice (ASOP) No. 27, “Selection of Economic Assumptions for Measuring Pension Obligations” provides guidance to actuaries in selecting economic assumptions for measuring obligations under defined benefit plans.
Economic Assumptions
6
Current assumption: 3.00% Historical data: Annual CPI (U) Increases
Economic AssumptionsPrice Inflation
7
-5%
0%
5%
10%
15%
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Annu
al Ra
te
Calendar Year
Price InflationCPI-U
Annual 30-Year Average Assumed 3.00%
Recommendation: Expected increase in the CPI by the Office of the Chief
Actuary for the Social Security Administration– In the most recent report, the projected average annual
increase in the CPI over the next 75 years was estimated to be 2.60%.
Based on this data we recommend lowering the inflation assumption.
Economic AssumptionsPrice Inflation
8
Price Inflation Assumption
Current 3.00%
Recommended 2.75%
Recent Experience
Economic AssumptionsInvestment Return
9
Market Value Rate of Return
Year Ending
6/30PERS JRS SRS GWPORS HPORS MPORS FURS VFCA
2006 8.98% 8.97% 8.94% 8.61% 9.03% 8.65% 8.66% 8.58%
2007 17.92% 17.94% 17.87% 17.78% 18.07% 17.36% 17.36% 17.52%
2008 (4.91%) (4.83%) (4.86%) (4.87%) (4.83%) (4.86%) (4.80%) (4.65%)
2009 (20.85%) (20.61%) (20.53%) (20.23%) (20.98%) (20.32%) (20.08%) (20.69)%
2010 12.91% 12.82% 12.65% 12.21% 13.04% 12.02% 11.99% 12.30%
2011 21.70% 21.65% 21.57% 21.36% 21.79% 20.72% 20.71% 20.98%
2012 2.27% 2.20% 2.32% 2.31% 2.24% 2.40% 2.42% 1.67%
2013 12.99% 12.72% 12.88% 12.69% 12.88% 12.42% 12.43% 12.01%
2014 17.12% 17.03% 17.08% 16.97% 17.10% 16.53% 16.53% 16.23%
2015 4.60% 4.59% 4.60% 4.58% 4.60% 4.52% 4.52% 4.49%
2016 2.02% 2.06% 2.06% 2.11% 2.04% 2.13% 2.15% 1.84%
Average 6.11% 6.10% 6.11% 6.03% 6.12% 5.86% 5.90% 5.73%
Economic AssumptionsInvestment Return
10
The average assumed rate of return among Public Retirement Systemsis 7.52% according to the February 2017 NASRA Issue Brief:“Public Pension Plan Investment Return Assumptions”
11 9
52
33
19
2 10
10
20
30
40
50
60
Under 7% 7.00% 7.00% -7.50%
7.50% -8.00%
8.00% 8.00% -8.50%
Over 8.5%
Assumed Rate of Return
NASRA Issue Brief: Public Pension Plan Investment Return Assumptions
Number of Retirement Systems
Stochastic projection expected range of real rates of return, net of expenses:
Based on current capital market assumptions and policy target asset allocation
Economic AssumptionsInvestment Return
11
Time Span
In Years
MeanReturn
Standard Deviation
Real Returns by Percentile
5th 25th 50th 75th 95th
1 4.37% 13.04% -15.60% -4.77% 3.56% 12.63% 27.08%5 3.72 5.78 -5.49 -0.25 3.56 7.52 13.49
10 3.64 4.08 -2.93 0.85 3.56 6.35 10.4920 3.60 2.88 -1.07 1.64 3.56 5.53 8.4130 3.59 2.35 -0.23 1.99 3.56 5.16 7.5150 3.58 1.82 0.61 2.34 3.56 4.80 6.61
Stochastic Projection Approach Projection results – 50 years:
Economic AssumptionsInvestment Return
12
Item 25th Percentile 50th Percentile 75th Percentile
Real Rate of Return 2.34% 3.56% 4.80%
Inflation 2.75% 2.75% 2.75%
Net Investment Return 5.09% 6.31% 7.55%
13
Economic AssumptionsInvestment Return
0%
2%
4%
6%
8%
10%
12%
14%
Range of Assumptions by Advisors
Minimum Median Maximum
The table below illustrates a survey of long-term economic assumption prepared by Horizon Actuarial Services.
Recommend reducing the assumed rate of return from 7.75% to 7.65%, which is greater than the 50th
percentile In general, there is an overall pessimism about future
performance regarding financial markets. The average assumed rate of return of large public
retirement systems has been declining. Recommend reviewing the assumed rate of return
assumption on an annual basis
14
Economic AssumptionsInvestment Return
Investment Return Assumption
Current 7.75%
Recommended 7.65%
Current assumption: 4.00%, which is 1.00% above prior price inflation assumption of 3.00%
Social Security Administration data
Economic AssumptionsWage Inflation
15
Historical Experience:
16
Economic AssumptionsWage Inflation
Period Wage Inflation Price Inflation Real Wage Growth
2006-2015 2.5% 1.8% 0.7%
1996-2015 3.3% 2.1% 1.2%
1986-2015 3.6% 2.7% 0.9%
1976-2015 4.4% 3.7% 0.7%
1966-2015 4.8% 4.1% 0.7%
1956-2015 4.6% 3.7% 0.9%
Social Security 75-year projection of national wage growth assumption is 1.2% greater than price inflation.
Recommendation
Economic AssumptionsWage Inflation
17
Wage Inflation AssumptionCurrent 4.00%Recommended 3.50%
Demographic Assumptions
18
Assumptions Reviewed Post-Retirement Mortality Pre-Retirement Mortality Rates of Service Retirement Rates of Disability Retirement Rates of Withdrawal Rates of Salary Increase for Merit and Promotions
Actuarial Standard of Practice (ASOP) No. 35, “Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension Obligations” provides guidance to actuaries in selecting demographic assumptions for measuring obligations under defined benefit plans.
Demographic Assumptions
19
Study compares what actually happened during the study period with what was expected to happen.
Assumption changes are recommended if actual experience differs significantly from expected.
Judgment is required to extrapolate future experience from past experience.
Demographic Assumptions
20
Funds reviewed PERS JRS SRS GWPORS HPORS MPORS FURS VFCA
Results compare actual and expected decrements and present recommended change, if any.
Mortality experience was analyzed for all Systems combined. Experience yielded actual/expected ratios of 94% and 98% respectively
for healthy male and female mortality experience. Mortality table assumption must provide a margin for mortality
improvement which is indicated by an actual expected ratio greater than 100%.
Recommend change in healthy mortality to the RP-2000 Combined Mortality Table to 2020 using the BB projection scale, set back 1 year for males.
Actual expected ratio under proposed assumption is 118% and 113% for males and females respectively.
Active mortality experience is not credible to develop a unique mortality assumption, therefore active mortality follows the same assumption as the healthy post-retirement mortality assumptions.
Demographic Assumptions(Healthy Mortality)
21
Demographic Assumptions(Healthy Male Mortality)
22
23
Demographic Assumptions(Healthy Female Mortality)
Experience yielded actual/expected ratios of 177% and 235% respectively for disabled male and female mortality experience.
Disabled mortality table assumption provides a significant margin for mortality improvement which is indicated by an actual expected ratio greater than 100%.
Ratio greater than 100% indicates that there were more deaths than expected during the experience period.
Recommend no change to the RP-2000 Combined Mortality Table for Males and Females.
Demographic Assumptions(Disabled Mortality)
24
25
Demographic Assumptions(Disabled Male Mortality)
26
Demographic Assumptions(Disabled Female Mortality)
Reduced retirement benefit Retirement experience was investigated separately for
members who had less than 30 years of service and for members who had 30 or more years of service or who were at least age 60 with at least 25 years of service.
Experience yielded actual/expected ratios of 95%. In general, retirements were less than anticipated. Current experience is reasonable, therefore we do not
recommend updating the assumption at this time.
27
PERS Demographic Assumptions(Service Retirements)
PERS Demographic Assumptions(Service Retirements)
28
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 +
Expo
sure
s
Rate
s of R
etire
men
t
LESS THAN 30 YEARS OF SERVICE
Number of Exposures Actual Rates of Retirement Assumed Rates of Retirment
29
PERS Demographic Assumptions(Service Retirements)
0
200
400
600
800
1,000
1,200
1,400
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70
Expo
sure
s
Rate
s of R
etire
men
t
30 YEARS OF SERVICE OR AGE 60 WITH 25 YEARS OF SERVICE
Number of Exposures Actual Rates of Retirement Assumed Rates of Retirement
Experience yielded an actual/expected ratio of 46%. An actual/expected ratio that is less than 100% indicates
that the number of disability retirements over the experience period was less than anticipated.
Disability retirements represent are a small component of the Retirement System’s obligation.
Recommend no change in this assumption
30
PERS Demographic Assumptions(Disability Retirements)
PERS Demographic Assumptions(Disability Retirements)
31
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
0.0%
0.1%
0.1%
0.2%
0.2%
0.3%
0.3%
0.4%
0.4%
<25 25 to 30 30 to 35 35 to 40 40 to 45 45 to 50 50 to 55 55 to 60 60 to 65 >65
Expo
sure
s
Rate
s of D
isab
ility
DISABILITY RATES BY AGE GROUP
Exposures Actual Rate Assumed Rate
Experience yielded actual/expected ratio of 121%. A ratio greater than 100% indicates that there were
more withdrawals than expected. Overall, the assumed rates of withdrawal
underestimated the number withdrawals during the experience period.
Recommend revising assumption to better match experience
PERS Demographic Assumptions(Withdrawal Rates)
32
33
PERS Demographic Assumptions(Withdrawal Rates)
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Expo
sure
s
Rate
s of W
ithdr
awal
WITHDRAWAL RATES BY SERVICE
Exposures Actual Rate Assumed Rate Proposed Rate
Experience yields an actual/expected ratio equal to 98.9%.
A ratio less than 100% indicates that salary increases were less than expected for the investigation period.
We have recommended a decrease in wage inflation, which is a component of salary scale. This will drop expected total salary scale by 0.50%.
In addition, changes to the merit component of the salary scales are recommended at this time.
Actual/expected ratio under recommended salary increase assumption is 99.7%.
PERS Demographic Assumptions(Salary Increase Experience)
34
35
PERS Demographic Assumptions
Years ofService
Individual Merit and Longevity
General Wage
Inflation
Total Salary
Increase*0 – 1 4.8% 3.50% 8.5%1 – 2 3.8% 3.50% 7.4%2 – 3 2.8% 3.50% 6.4%3 – 4 2.0% 3.50% 5.6%4 – 5 1.4% 3.50% 4.9%5 – 6 0.8% 3.50% 4.3%6 – 7 0.4% 3.50% 3.9%
7 & over 0.0% 3.50% 3.5%
* The total salary increase in a given year is determined by the following formula:
(1 + General Wage Inflation) x (1 + Total Salary Increase)
Demographic AssumptionsOther Systems
36
Retirement Plan Assumption ChangesPublic Employees’ Retirement System Long-Term Disability Plan
Non-Disabled Mortality, Withdrawal, Merit Scale
Judges’ Retirement System Non-Disabled Mortality
Sheriffs’ Retirement SystemNon-Disabled Mortality, Withdrawal, Merit Scale
Game Wardens’ and Peace Officers’ Retirement System
Non-Disabled Mortality, Withdrawal, Merit Scale
Highway Patrol Officers’ Retirement System Non-Disabled Mortality, Merit ScaleMunicipal Police Officers’ Retirement System
Non-Disabled Mortality, Withdrawal, Merit Scale
Firefighters’ United Retirement SystemNon-Disabled Mortality, Withdrawal, Merit Scale
Volunteer Firefighters’ Compensation Act Non-Disabled Mortality, Withdrawal
Actuarial Methods
37
Actuarial Cost Method Recommend no change in the Entry Age Normal Cost Method for all plans
Actuarial Smoothing of Assets Recommend no change in 5-year smoothing of market value gains and
losses
Amortization of Unfunded Accrued Liability (UAL) Recommend no change in Level Percent of Payroll Amortization Payment
Method UAL is amortized as one single amount each valuation. Amortization period is “open” and is solved for each valuation. Result depends on UAL and fixed contribution rate.
Actuarial Methods
38
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
$5,000
$5,500
2008 2009 2010 2011 2012 2013 2014 2015 2016
Valu
e of
Ass
ets
Years
Asset SmoothingPERS Assets ($ Millions)
Market Value Actuarial Value
0
50
100
150
200
250
0
200
400
600
800
1,000
1,200
1,400
1,600
1,80020
1620
1720
1820
1920
2020
2120
2220
2320
2420
2520
2620
2720
2820
2920
3020
3120
3220
3320
3420
3520
3620
3720
3820
3920
4020
4120
42
$ M
illio
ns
$ M
illio
ns
Amortization of Unfunded Actuarial Accrued Liability (UAAL)
UAAL Balance - 4.00% Payroll Growth RateUAAL Balance - Level Dollar4.00% Payroll Growth Rate AmortizationLevel Dollar Amortization
39
Actuarial Methods
Payroll Growth Assumption Decrease from 4.00% to 3.50% to be consistent with
wage inflation assumption
Actuarial Methods
40
Actuarial Methods
41
Administrative Expense Load Recommend letting administrative expense load vary from year to year
based on the prior year’s actual administrative expenses for each system
Retirement Plan Before Change After ChangePublic Employees’ Retirement System 0.27% 0.27%Public Employees’ Retirement System Long-Term Disability Plan
0.00% 0.00%
Judges’ Retirement System 0.15% 0.17%
Sheriffs’ Retirement System 0.17% 0.19%Game Wardens’ and Peace Officers’ Retirement System
0.17% 0.17%
Highway Patrol Officers’ Retirement System 0.23% 0.28%
Municipal Police Officers’ Retirement System 0.20% 0.22%
Firefighters’ United Retirement System 0.19% 0.21%
Volunteer Firefighters’ Compensation Act $65,978 $89,298
Impact of Recommendations
42
Impact of Changes on the Unfunded Accrued Liability($ in Thousands)
Retirement Plan Before Changes After Changes ChangePublic Employees’ Retirement System
$1,540,238 $1,884,706 $344,468
Public Employees’ Retirement System Long-Term Disability Plan
473 538 65
Judges’ Retirement System (36,398) (32,796) 3,602
Sheriffs’ Retirement System 62,636 75,730 13,094Game Wardens’ and Peace Officers’ Retirement System
30,452 36,910 6,458
Highway Patrol Officers’ Retirement System
69,457 77,039 7,582
Municipal Police Officers’ Retirement System
161,961 178,090 16,129
Firefighters’ United Retirement System
101,413 118,232 16,819
Volunteer Firefighters’ Compensation Act
8,708 10,846 2,138
Impact of Recommendations
43
Impact of Changes on the Funding Ratio
Retirement Plan Before Changes After Changes ChangePublic Employees’ Retirement System
77.3% 73.6% (3.7%)
Public Employees’ Retirement System Long-Term Disability Plan
86.8% 85.3% (1.5%)
Judges’ Retirement System 166.5% 156.2% (10.3%)
Sheriffs’ Retirement System 83.2% 80.4% (2.8%)Game Wardens’ and Peace Officers’ Retirement System
84.1% 81.3% (2.8%)
Highway Patrol Officers’ Retirement System
65.8% 63.5% (2.3%)
Municipal Police Officers’ Retirement System
68.8% 66.7% (2.1%)
Firefighters’ United Retirement System
78.3% 75.6% (2.7%)
Volunteer Firefighters’ Compensation Act
80.2% 76.5% (3.7%)
Impact of Recommendations
44
Impact of Changes on the Amortization Period
Retirement Plan Before Changes After Changes ChangePublic Employees’ Retirement System
26 35 9
Public Employees’ Retirement System Long-Term Disability Plan
Infinite 15 N/A
Judges’ Retirement System 0 0 No Change
Sheriffs’ Retirement System Infinite Infinite No ChangeGame Wardens’ and Peace Officers’ Retirement System
Infinite Infinite No Change
Highway Patrol Officers’ Retirement System
28 36 8
Municipal Police Officers’ Retirement System
18 20 2
Firefighters’ United Retirement System
9 10 1
Volunteer Firefighters’ Compensation Act
7 8 1