Overview of Act 120 of 2010 A Look at PSERS Retirement Benefit Changes

Overview of Act 120 of 2010

A Look at PSERS Retirement Benefit Changes

Presentation at:PASBO Annual Conference

March 16, 2011

www.psers.state.pa.us 2

PSERS Update

Brief Investment Update


Implementation of Act 120

Questions

Brief Investment

Update


PSERS’ Net Plan Assets as of:June 30, 2002 $43.6 Billion (audited)

March 31, 2003 $38.3 Billion (unaudited)June 30, 2003 $42.5 Billion (audited)June 30, 2004 $48.5 Billion (audited)

June 30, 2007 $67.5 Billion (audited)

June 30, 2005 $52.1 Billion (audited)June 30, 2006 $57.0 Billion (audited)

June 30, 2008 $62.7 Billion (audited)

December 31, 2008 $45.4 billion (unaudited)

September 30, 2008 $54.7 Billion (unaudited)

June 30, 2009 $43.2 billion (audited)June 30, 2010 $45.8 billion (audited)

September 30, 2010 $48.0 billion (unaudited)

PSERS’ estimated net plan assets as of

December 31, 2010$49.3 billion (unaudited)


FY 1999/2000 - 11.9% FY 2000/2001 - (7.4)% FY 2001/2002 - (5.3)% FY 2002/2003 - 2.7% FY 2003/2004 - 19.67% FY 2004/2005 - 12.87% FY 2005/2006 - 15.26% FY2006/2007 - 22.93% FY 2007/2008 – (2.82)% FY 2008/2009 – (26.54)% FY 2009/2010 – 14.59% FY 2010/2011 – Est. to date over 15.82%

PSERS’ Investment Rates of Return as of:

Below PSERS’ annual actuarial earnings assumption therefore resulting in an actuarial loss

Over the past 25 years the Fund earned an

annualized rate of return of 9.01% which is above the Fund’s actuarial rate

of return for the same period

PSERS Investment Performance While PSERS is currently on track to post

another significant positive fiscal year, PSERS cannot earn its way out of the funding issue

Positive investment earnings will help to slightly reduce the employer contribution rate projections, but will not significantly impact them

Higher rate projections will continue into the future



(formerly HB 2497)

Overview Act 120 was enacted on November 23, 2010 Significant progress was made toward

addressing funding issues at the Fund Benefits earned by new members will be almost

entirely funded by the member and new pension liabilities will grow at a lower rate

Over time the employer normal cost will be reduced to nearly 2.60% as a result of the benefit reductions for new members


Overview

The actuarial changes in Act 120 also put a plan in place to pay off the existing pension liabilities through the use of rate collars and funding methodology changes• Although a cost deferral occurs, there is a net

savings under Act 120 vis-à-vis the pre-Act 120 status quo

Still, the employer contribution rate remains high for the foreseeable future as the existing debt still needs to be paid off


PA Public School Employees' Retirement SystemComponents of Projected Total Employer Contribution Rate - Act 120

Based on June 30, 2010 Actuarial Valuation - Assumes 8% Rate of Return

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Health Care Employer Normal Cost Unfunded Liability

Unfunded Liability Rate

Employer Normal Cost

Rate Collars in effectFY 2012 to FY 2015

PA Public School Employees' Retirement SystemProjected Employer Contribution Rate - DB plan is frozen, no future benefits offered

Based on June 30, 2010 Actuarial Valuation - Assumes 8% Rate of Return

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Rate Collars in effectFY 2012 to FY 2015

DB Plan is frozenPrior debt still due

ProjectedFiscal Year

Ending June

Appropriation Payroll

(thousands)

Fiscal Year Market Rate

of Return

PensionRateFloor

Employee Contribution

RateEmployer

Normal CostAppropriation

Payroll ($1,000)

Additional Member

Contribution

Employer Unfunded Liability

Rate

Preliminary Employer

Pension Rate

HealthCare

Contribution

Total Employer

Contribution Rate

Total Employer

Contribution (thousands)

Funded Ratio

UnfundedAccruedLiability

($ Millions)GASB

Compliant?

2008 11,505,093$ 15.26 % 4.00 % 7.16 % 7.61 % (4.28) % 4.00 % 0.69 % 4.69 % 81.2 % 12,162.6$ 2009 12,500,000$ (26.54) % 4.00 % 7.29 % 6.68 % (3.37) % 3.31 % 0.76 % 4.76 % 79.2 % 15,739.2$ 2010 12,899,000 14.59 4.00 7.32 7.35 (3.72) 3.63 0.78 4.78 75.1 19,698.62011 13,510,000 8.00 4.00 7.34 8.08 (0.50) 7.58 0.64 5.64 761,964$ 71.4 23,443.1

2012 14,112,000 8.00 4.00 7.37 8.12 10.15 18.27 0.65 8.65 1,220,688 68.0 27,235.82013 14,565,146 8.00 4.00 7.39 8.05 11.28 19.33 0.69 12.19 1,775,491 64.9 30,899.32014 15,031,927 8.00 4.00 7.40 7.72 12.98 20.70 0.69 16.69 2,508,829 62.5 34,186.32015 15,528,583 8.00 4.00 7.42 7.42 14.53 21.95 0.68 21.18 3,288,954 60.8 37,012.4 yes2016 16,058,316 8.00 7.14 7.43 7.14 1,943,645$ 0.00 % 15.86 23.00 0.66 23.66 3,799,398 59.3 39,732.6 yes

2017 16,624,603 8.00 6.89 7.44 6.89 2,573,495 0.00 16.96 23.85 0.65 24.50 4,073,028 57.5 42,930.9 yes2018 17,226,433 8.00 6.65 7.45 6.65 3,218,600 0.00 17.99 24.64 0.63 25.27 4,353,120 56.3 45,654.5 yes2019 17,869,493 8.00 6.43 7.46 6.43 3,879,299 0.00 19.19 25.62 0.62 26.24 4,688,955 57.1 46,411.6 yes2020 18,555,740 8.00 6.21 7.47 6.21 4,553,352 0.00 20.15 26.36 0.60 26.96 5,002,628 58.0 47,086.0 yes2021 19,283,872 8.00 6.02 7.47 6.02 5,259,307 0.00 20.37 26.39 0.57 26.96 5,198,932 59.0 47,534.6 yes





2042 42,693,996 8.00 2.76 7.50 2.76 34,321,252 0.00 3.60 6.36 0.57 6.93 2,958,694 98.6 3,392.3 yes2043 44,343,227 8.00 2.66 7.50 2.66 36,645,249 0.00 2.41 5.07 0.57 5.64 2,500,958 99.0 2,596.7 yes2044 46,056,166 8.00 2.56 7.50 2.56 39,126,611 0.00 1.45 4.01 0.57 4.58 2,109,372 99.2 2,137.4 yes

Public School Employees' Retirement System of PennsylvaniaProjection of Contribution Rates and Funded Ratios As of June 30, 2010

Market Returns Set by User

Class T-E & T-F Members Shared Risk

ProjectedFiscal Year

Ending June

Appropriation Payroll

(thousands)

Fiscal Year Market Rate

of Return

PensionRateFloor

Employee Contribution

RateEmployer

Normal CostAppropriation

Payroll ($1,000)

Additional Member

Contribution

Employer Unfunded Liability

Rate

Preliminary Employer

Pension Rate

HealthCare

Contribution

Total Employer

Contribution Rate

Total Employer

Contribution (thousands)

Funded Ratio

UnfundedAccruedLiability

($ Millions)GASB

Compliant?

2008 11,505,093$ 15.26 % 4.00 % 7.16 % 7.61 % (4.28) % 4.00 % 0.69 % 4.69 % 81.2 % 12,162.6$ 2009 12,500,000$ (26.54) % 4.00 % 7.29 % 6.68 % (3.37) % 3.31 % 0.76 % 4.76 % 79.2 % 15,739.2$ 2010 12,899,000 14.59 4.00 7.32 7.35 (3.72) 3.63 0.78 4.78 75.1 19,698.62011 13,510,000 15.00 4.00 7.34 8.08 (0.50) 7.58 0.64 5.64 761,964$ 71.8 23,148.3

2012 14,112,000 8.00 4.00 7.37 8.12 10.15 18.27 0.65 8.65 1,220,688 68.7 26,588.42013 14,565,146 8.00 4.00 7.39 8.05 11.13 19.18 0.69 12.19 1,775,491 66.1 29,848.42014 15,031,927 8.00 4.00 7.40 7.72 12.67 20.39 0.69 16.69 2,508,829 64.2 32,678.62015 15,528,583 8.00 4.00 7.42 7.42 14.05 21.47 0.68 21.18 3,288,954 63.0 34,992.3 yes2016 16,058,316 8.00 7.14 7.43 7.14 1,943,645$ 0.00 % 15.19 22.33 0.66 22.99 3,691,807 61.9 37,252.8 yes






2042 42,693,996 8.00 2.76 7.50 2.76 34,321,252 0.00 2.63 5.39 0.57 5.96 2,544,562 99.1 2,257.6 yes2043 44,343,227 8.00 2.66 7.50 2.66 36,645,249 0.00 1.62 4.28 0.57 4.85 2,150,647 99.3 1,720.6 yes2044 46,056,166 8.00 2.56 7.50 2.56 39,126,611 0.00 0.84 3.40 0.57 3.97 1,828,430 99.4 1,474.2 yes

The Board at its January 2009 meeting adopted to reduce the interest rate from 8.50% to 8.25% for the June 30, 2008 valuation and to 8.00% thereafter.

Public School Employees' Retirement System of Pennsylvania

Market Returns Set by UserProjection of Contribution Rates and Funded Ratios As of June 30, 2010

Class T-E & T-F Members Shared Risk

Summary of Benefit Changes


General Information The benefit reductions contained in this

legislation will only impact individuals who become new members of PSERS on or after July 1, 2011

Any existing or former members of PSERS who return to service on or after July 1, 2011 will retain their old membership status

The current pension benefit that a PSERS retiree receives is also not impacted by the legislation


Impact on Current Members of PSERS Once a member qualifies for membership all service

earned after the initial qualification will be considered qualified

Previously members had to qualify each year (500 hours or 80 days for hourly and per diem employees)

Creates a three-year window beginning July 1, 2011 for current active members to file an application to purchase Non-Qualifying Part-Time service (NQPT)

Current members who are inactive but return to active service after July 1, 2011, will have a one-year window to purchase NQPT service


Impact of Benefit Cuts for New Members After July 1, 2011

For school employees who become new members of PSERS on or after July 1, 2011, there are two new classes; Class T-E and T-F

All new members will automatically become Class T-E members

New members however, will have a one-time opportunity to elect Class T-F within 45 days of receiving written notification from PSERS

Failure to elect Class T-F at time of original eligibility will make the member ineligible for Class T-F forever

Once the election is made either by action or inaction, the election is permanent


Pension Multipliers and Contribution Rates Class T-E

• Pension multiplier is 2%

• Contribution base rate is 7.5% with “shared risk” contribution levels between 7.5% and 9.5%

Class T-F• Pension multiplier is 2.5%

• Contribution base rate is 10.3% with “shared risk” contribution levels between 10.3% and 12.3%


Class T-E and T-F Members Cannot withdraw contributions and interest in

a lump sum when retiring Have a ten year vesting period For normal retirement, employees must work

until age 65 with minimum of 3 years of service, or attain a total combination of age and service that is equal to or greater than 92 with a minimum of 35 years of service

One year window for new members to apply for NQPT service (at full actuarial cost)


Class T-E and T-F Members Once qualified for membership, all service

earned thereafter is qualifying Pension benefit cannot exceed the member’s

final average salary The cost to purchase most types of nonschool or

nonstate service credit (other than military service) will be the full actuarial cost

No projection of service for determining superannuation age

Employees starting after July 1, 2011 will contribute based on “shared risk” rate in effect at date of hire


Shared Risk Every 3 years, the System will compare

the actual investment rate of return with the assumed rate of return for the prior 10 year period

If the investment rate of return (less investment fees) is equal to or exceeds the assumed rate of return, the member’s contribution rate will decrease by .5%

If the earnings during the ten-year period are 1.0% or more below the assumed rate of return, the member’s contribution rate would increase by .5%


Shared Risk If the System is fully funded at the time

of the comparison, then the member contribution rate reverts back to base rate for the Class

The investment return measurement return period will begin on July 1, 2011

The rate could never go below the base rate of 7.5% for T-E and 10.3% for T-F members, nor above 9.5% for T-E and 12.3% for T-F members


Other Shared Risk Restrictions

If the employer rate is below the final contribution, the shared risk rate will revert back to the base

If the employer rate has not increased in the prior 3-year period, then the shared risk rate will not increase

Summary of Funding/Actuarial Changes


Funding Changes - Employer Contributions The legislation suppresses the employer

contribution rate by using rate caps in future years to keep the rate from rising too high, too fast

The rate caps limit the amount the pension component of the employer contribution rate can increase over the prior year’s rate as follows:• FY 2011/12 - not more than 3.0% plus the

premium assistance contribution rate • FY 2012/13 - not more than 3.5% plus the

premium assistance contribution rate • FY 2013/14 - not more than 4.5% plus the

premium assistance contribution rate • Thereafter - not more than 4.5%


Funding Changes - Employer Contributions The rate cap remains at 4.5% until the rate cap no

longer applies, i.e. the rise in the employer contribution rate is less than the rate cap in effect at that time

After that, the rate is what is calculated by PSERS actuary and approved by the PSERS Board, subject to a new minimum employer contribution rate that will be the employer normal cost (currently about 8%), plus the premium assistance contribution rate

The “employer normal cost” is the amount needed from the school employers to fund the benefits earned by the active members for that year


Actuarial Changes Currently liabilities are funded over various

periods of time using level dollar of pay Act 120 re-amortizes all unfunded liabilities

over a 24 year period and uses level percentage of pay amortization• Level percentage of pay amortization is

calculated using the same percentage of compensation each year during the amortization period

• Under the level dollar of pay amortization, the annual dollar amount of the payment remains the same each year


Actuarial Changes Changes the recognition of investment

gains and losses from a 5 year smoothing period to a 10 year smoothing period

Any future legislation enacted that adds liabilities to the system (i.e. cost-of-living adjustments, “30 and Out”) will be amortized over 10 years, using a level percentage of pay method

Establishes a prohibition on the use of Pension Obligation Bonds to fund the System

Public School Employees' Retirement System of PennsylvaniaMarket Returns and Pension Rate Floors Set by User and are the same for both Current and Alternative Funding

Market Returns Scenario 1HB2497 Funding assumptions effective 6/30/10 valuation:- Fresh-start accrued liability payments over 24 years - Ten year average return on market value of assets used for Class T-E members' shared-risk

with level percent of pay amortization. additional member contribution determination (maximum additional rate = 2.00%):

- Entry Age Normal funding method. FYE 2014 = 8.00%, FYE2017 = 8.00%, FYE 2020 = 8.00%, FYE 2023 = 8.00%,

- 10-year asset smoothing method effective 6/30/10 valuation. FYE 2026 = 8.00%, FYE2029 = 8.00%, FYE 2032 = 8.00%, FYE2035 = 8.00%,

- Pension Collar limits contribution to prior fiscal year + the collar: FYE 2038 = 8.00%, FYE2041 = 8.00%.

3.00% for FY2012, 3.50% for FY2013, 4.50% for FY2014 and later.

Projection of Employer Contribution Dollars (in Millions)

Alternative funding benefit provisions in accordance with Senator Browne Amendments to HB2497 (Last revised October 7, 2010)

0

1,000

2,000

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Current Law Alternative Funding

8% FY 2010-2011 Rate of Return

June 30, 2009 Valuation w/

actual FY 2009-2010 Rate of

Return


Market Returns Scenario 1HB2497 Funding assumptions effective 6/30/10 valuation:- Fresh-start accrued liability payments over 24 years - Ten year average return on market value of assets used for Class T-E members' shared-risk






Projection of Employer Contribution Dollars (in Millions)


0

1,000

2,000

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Return


Market Returns Scenario 1

HB2497 Funding assumptions effective 6/30/10 valuation:

- Fresh-start accrued liability payments over 24 years - Ten year average return on market value of assets used for Class T-E members' shared-risk






Projection of Total Employer Contribution Rate


0%

5%

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Return


Market Returns Scenario 1

HB2497 Funding assumptions effective 6/30/10 valuation:







Projection of Total Employer Contribution Rate


0%

5%

10%

15%

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Return


Market Returns Scenario 1HB2497 Funding assumptions effective 6/30/10 valuation:







Projection of Unfunded Liability (in Millions)


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Projection of Unfunded Liability (in Millions)


(5,000)

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5,000

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Projection of Funded Ratio


10%

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Projection of Funded Ratio


10%

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Return


Independent Fiscal Office (IFO)

IFO will analyze the shared risk provisions starting 12/15/2015

Implementation of Act 120


Implementation Schedule Implementation of Act 120 will be phased in over

the next few years• Tasks will be prioritized

PSERS expects to use a variety of resources – webinars, workshops, newsletters, publications, direct mailings, website, etc.• PSERS is meeting with its affiliate organizations (PASBO,

PSBA etc) to gain their input and address concerns More specifics on the implementation of Act 120

of 2010 will be given during the afternoon session today at 3pm

Questions?

Documents

Overview of Act 120 of 2010 A Look at PSERS Retirement Benefit Changes