Arizona StateRetirement System

Arizona State Retirement System

January 12, 2011

AASBO

Estimates are utilized

Arizona StateRetirement System

What is a “Defined Benefit” (DB) Retirement Plan? A form of retirement plan where retirement benefits can be

determined ahead of time and is based upon a known formula. Social Security, Military Pensions and the ASRS are examples of Defined Benefit retirement plans.

What is a “Defined Contribution” (DC) Retirement Plan? A form of retirement plan where the retirement benefits are not

known ahead of time and are based upon contributions made, investment returns realized, and expenses paid. 401(k)s and IRAs are examples of Defined Contribution retirement plans.

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Forms of Retirement Plan

Arizona StateRetirement System

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Attributes of Retirement Plans

Defined Benefit Plans Generally

Known retirement benefit Guaranteed lifetime retirement benefits Investment decisions made by Trustees Greater retirement equity Less expensive per benefit level More complex Less portable Variable cost sharing

ASRS: 50% EE, 50% ER Variable risk sharing

ASRS: 50% EE, 50% ER

Defined Contribution Plans Generally

Unknown retirement benefit Variable lifetime retirement benefit* Key investment decisions made by employees Less retirement equity More expensive per benefit level Less complex More portable Variable cost sharing Typically 100% risk with EE

*May annuitize at retirement

Arizona StateRetirement System

DB Plan vs. DC Plan

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Defined Benefit Defined Contribution

+ Guaranteed lifetime benefit + Less complex

+ Certainty of future retirement benefit + More portable

+ Greater retirement equity+/- Individualized

investment decision making

+ Less Expensive per benefit level+/- All risk held by

employee

Arizona StateRetirement System Why are Large DBs

Typically Less Expensive?

DB typically results in lower cost per level of retirement benefit because

DB typically has higher rates of return Professional asset allocation Greater time horizon and risk tolerance Greater diversification

DB participants need not plan for outliving assets Therefore less savings required

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Arizona StateRetirement System

Issues Past & Present

Key Plan Design Features Causing Contribution Rates to Increase

DB Plan Membership Decreases Not a Plan Design Feature Return to Work Contributions Remedy in Process Since 2008

Remedies Applied Service Purchase Inequities: Remedies 2004 Refund Accruals: Remedies 2004 Early Retirement Incentives: Remedies 2004 Miscellaneous: Remedies 2004+ Modified Deferred Retirement Option: Remedies 2006 Increasing Longevity: Remedies 2006, 2010 Salary Spiking: Remedies 2009, 2010 Refund Amounts: Remedies 2010

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Arizona StateRetirement System

Distribution of ASRS Pensions as of June 30, 2010

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Average Pension$19,831.05

Arizona StateRetirement System

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Impact of Closing the Defined Benefit Plan

*Assumes no additional funding sources, rates based on 2009 valuation data

Arizona StateRetirement System Investment Returns

(June 30, 2010)

Annualized Rates of Return

ASRS Total Fund

FYTD(12/31/2010)*

1 Year 3 Year 5 Year 10 Year Inception(7/1/1975)

Net of Investment

Fees17.7% 14.9% -4.7% 2.3% 2.4% 9.6%

Gross of Investment

Fees18.0% 15.2% -4.5% 2.5% 2.5% 9.7%

* Estimates

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Arizona StateRetirement System Defined Benefit Pension Plan

Funded Status Projections(June 30, 2010)

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Based on June 30, 2010 Projections with 8% Investment Return and 0% Population Growth

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24

FY25

FY26

FY27

FY28

FY29

FY30

FY31

FY32

FY33

FY34

FY35

FY36

FY37

FY38

FY39

FY40

FY41

Actuarial Value

Arizona StateRetirement System Defined Benefit Pension Plan

Funded Status Projections(June 30, 2010)

11Based on June 30, 2010 Projections with 8% Investment Return and 0% Population Growth

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

FY24

FY25

FY26

FY27

FY28

FY29

FY30

FY31

FY32

FY33

FY34

FY35

FY36

FY37

FY38

FY39

FY40

FY41

Market Value

Arizona StateRetirement System

Defined Benefit Plan

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%FY

80FY

81FY

82FY

83FY

84FY

85FY

86FY

87FY

88FY

89FY

90FY

91FY

92FY

93FY

94FY

95FY

96FY

97FY

98FY

99FY

00FY

01FY

02FY

03FY

04FY

05FY

06FY

07FY

08FY

09FY

10FY

11FY

12

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Historic Contribution Rates

Arizona StateRetirement System

Rates of return

Defined Benefit Plan

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Projected Contribution Rates

Arizona StateRetirement System Public Fund Survey: Plan

Funded Statuses

14Source: NASRA - Public Fund Survey: Summary of Findings for FY 2009

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