Virginia Retirement

System Update

VACO Conference

November 8, 2010Robert P. Schultze

Director

2

Agenda

System Overview

Funding the Benefit

2010 Legislation

Upcoming Issues

System Overview

4

VRS Overview

VRS is the 22nd largest public or private pension system in the U.S.

There are almost 600,000 members, retirees and beneficiaries.

5

VRS Total Membership

Teachers 147,817

Political Subdivisions 104,385

State Employees 78,613

State Police Officers’ Retirement System (SPORS) 1,766

Judicial Retirement System (JRS) 408

Virginia Law Officers’ Retirement System (VaLORS) 9,620

Total Active Members 342,609

Retirees/Beneficiaries 148,496

Inactive/Deferred Members 105,774

VRS Overall Impact 596,879

As of June 30, 2010

6

50,000

70,000

90,000

110,000

130,000

150,000

170,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fiscal Year

Tota

ls

State Teacher Localities

Active Members

7

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fiscal Year

Tota

ls

State Teacher Localities

Retirees

8

July Retirements by Fiscal Year

3,6252,944

3,026

2,996

3,686

3,415

3,619 3,561

3,355

5,248

5001000150020002500300035004000450050005500

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

July Increase in Retirees

Benefit Comparison

State 1 Teachers 1 Local 2

Actives:

Average Age 47.89 45.02 45.5

Average Service 12.91 11.65 10.3

Average Salary $46,222 $47,958 $39,348

Retirees:

Avg. Age @ Retirement 60.64 59.25 61.1

Avg. Service @ Retirement 24.61 24.61 19.5

Avg. Benefit @ Retirement 41.84% 41.84% 33.3%

Avg. Benefit $17,023 $20,814 $13,791

9

1 – Indicates information from the 2010 actuarial valuation.2 – Indicates information from 2009 actuarial valuation.

Funding the Benefit

11

Funding VRS Benefits

How is the VRS benefit funded: 68% of benefit costs funded by investment

earnings

32% of benefit costs funded by employee/employer contributions

VRS Fiscal Year Returns

12

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.01989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

% R

etu

rn

Investment Return Assumption

8.0% from 1988 - 20057.5% from 2005 - 20107.0% from 2010

14.1%

13

Net Assets Available for Benefits

$22.2

$26.9

$31.7$35.7

$40.8$37.7

$34.4 $34.7

$40.0

$44.1

$48.7

$58.3$55.1

$42.9

$47.7

$0

$10

$20

$30

$40

$50

$60

As

se

ts in

bill

ion

s

1996 1998 2000 2002 2004 2006 2008 2010

14

Funded Status

What is meant by funded status: Compares assets available to pay benefits with

present value of future liabilities

Asset/liability ratio is typical measure

Percentage of assets available to pay present value of all future liabilities (until the last member of the plan dies)

15

Funded Status: Teachers

0%

20%

40%

60%

80%

100%

120%

1994 1998 2000 2002 2004 2006 2008 2010

16

Funded Status: Local Governments

91.6

%

83.4

%86

.1% 88

.1%

88.7

%

85.1

%

0%

20%

40%

60%

80%

100%

2004 2005 2006 2007 2008 2009

2009 Aggregate Funded Ratio – 570 Plans

Note: 2009 average funded ratio of 570 plans = 94.5%

17

Contribution Rates

Contribution Rates 2010 - Eliminates employer contributions to VRS in the last five pay

periods of Fiscal Year 2010. VRS estimates the rate holiday will reduce contributions to VRS from about $2.4 billion in FY 2010 to about $2.1 billion.

2011-2012 – Contribution rates for the pension programs and OPEBs funded by the General Assembly are provided in the following charts.

2012 – 2014 - In setting the employer retirement contribution rates in subsequent biennia, the Board shall calculate a separate, supplemental employer contribution rate that will amortize the FY 2011 and 2012 contribution shortfalls over a 10-year period using the Board's assumed long-term rate of return. The Governor shall include funds to support payment of such Board-approved, supplemental employer contribution rates in the budget submitted to the General Assembly.

Retirement Contribution Rates

Rates*

FY 2010

2009 Board Certified

RatesFY 2010-12*

Appropriations Act

2010-2011

Appropriations Act

2011-2012

2010 Interim Valuation Results

State Employee 11.26% 13.46% 7.13% 7.08% 18.29%

Teacher13.81% 17.91% 8.93% 10.16% 22.41%

Locals** 13.00% 13.00% n/a n/a n/a

Locals w/o Haz. Duty**

11.90% 11.90% n/a n/a n/a

Locals with Haz. Duty**

15.0% 15.0% n/a n/a n/a

*Current FY 2010 rates are based on assumptions applied in the 2009 Appropriations Act (8% rate of return, 3% inflation rate, and a 30-year amortization). Board certified rates are based on the following assumptions (7.5% rate of return, 2.5% inflation rate, and a 20-year amortization period). These rates do not reflect the suspension of payments in the 4th quarter.** Average rate for localities.Contribution rates include the 5% member contributions.

19

Teacher Contribution Rates FY ‘84 – ‘14

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

• Above rates include the 5% member contributions paid by employers.

• Assumes 7.00% rate of return and 2.50% inflation rate.

20

Local Government Contribution Rates (Averaged)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

2006 2008 2010

• Above rates include the 5% member contributions paid by employers.

• Assumes 7.00% rate of return and 2.50% inflation rate.

2010 Legislation

2010 Legislation

HB 1189/SB 232 Creates new plan design provisions (Plan 2) for state,

teachers and local government employees hired on or after July 1, 2010

Creates a new plan (Plan 2) for Optional Retirement Plan (ORP) members hired on or after July 1, 2010.

Does not affect current members or current retirees, who are under Plan 1. Members who left employment and did not take a refund are deferred members and remain in Plan 1.

22

23

2010 Legislation

VRS Plan 1 VRS Plan 2

Average Final Compensation

Average of 36 highest consecutive months of creditable compensation

Average of 60 highest consecutive months of creditable compensation

Member Contributions (DB Plan)

Employee or employer contributes 5% employee contribution

State employees contribute 5% on pre-tax salary reduction basis.Schools/political subdivisions employees may contribute some or all of the 5%, depending upon the election by the employer

Member Contributions (ORP Plan)

10.4% employer contribution 8.5% employer contribution and 5% member contribution on a pre-tax basis.Higher education may increase the employer contribution to 8.9% provided it is paid with non-state funds.

Normal Retirement Age

Age 65 Social Security Normal Retirement Age

SPORS, ValORS and political subdivision hazardous duty: Age 60

Same as Plan 1

24

2010 Legislation

VRS Plan 1 VRS Plan 2

Retirement Multiplier

VRS: 1.7%SPORS: 1.85%VaLORS: 1.7% or 2.0%Sheriffs: 1.85%Political subdivision hazardous duty: 1.7% or 1.85%, depending upon election

Same.

Unreduced Retirement

VRS: Age 65 with at least 5 years of service or age 50 with at least 30 years of service

VRS: Normal Social Security retirement age with at least five years of service credit or when age and service equal 90

SPORS, VaLORS, political subdivision hazardous duty: Age 60 with at least five years of service or age 50 with at least 25 years of service

Same.

JRS: Age 65 with weighted service equal to at least 5 years of service or age 60 with weighted service equal to at least 30 years of service

Same.

25

2010 Legislation

VRS Plan 1 VRS Plan 2

Reduced Retirement

VRS: Age 55 with at least 5 years of service or age 50 with at least 10 years of service

VRS: Age 60 with at least five years of service

SPORS, VaLORS, political subdivision hazardous duty: Age 50 with at least five years of service

Same.

JRS: Age 55 with weighted service equal to at least 5 years of service

Same.

COLA Matches first 3 percent increase in the Consumer Price Index-Urban and one-half of the remaining increase up to a maximum COLA of 5 percent, when provided

Matches first 2 percent increase in the Consumer Price Index-Urban and one-half of the remaining increase up to a maximum COLA of 6 percent, when provided

26

2010 Legislation

Employer Paying 5%

Plan 1

Plan 2 Employee

Paying 5%

Plan 2 Employee Paying a

Share of the 5%

Schools 144 7 1

Municipals 223 64 8

Authorities/

Commissions

181 49 1

Total 548 120 10

Proposed Savings From Pension Reform

(Teachers)

-3%

-2%

-1%

0%

1%

2%

2012-14 2014-16 2016-18 2018-20

27 Above chart assumes all Plan 2 members pay the 5% member contribution.

Line of Duty Act The Line of Duty Act (LODA) Fund can be found in Item 258

of the Budget Bill; imposes annual contributions upon state and local agencies, beginning July 1, 2011.

LODA provides health insurance and death benefits for hazardous duty employees and volunteers and their families upon death or disability in the line of duty.

A new LODA Fund comes under VRS’ investment management. Contributions will be made by state and localities.

Contribution rates will be calculated by VRS Board of Trustees in mid-December.

Localities may opt out and provide for separate financing.

Upcoming Issues

Pending Changes in Pension Accounting

Rules GASB has issued “preliminary views” Final rules to be issued in two years Changes affecting local governments and school

boards:1. Pension liabilities/expenses go from footnotes to

balance sheet2. Pension assets would be marked to market causing

significant volatility in annual reporting3. Cost-sharing pension plans (VRS Teacher Plan) must

allocate liabilities proportionally to each employer

30

Thank you!