dallas area rapid transit employees’ defined …asop no. 44, selection and use of asset valuation...

DALLAS AREA RAPID TRANSIT (DART)

EMPLOYEES’ DEFINED BENEFIT RETIREMENT PLAN

ACTUARIAL EXPERIENCE STUDY

August 19, 2016

13420 Parker Commons Blvd., Suite 104 Fort Myers, FL 33912 · (239) 433-5500 · Fax (239) 481-0634 · www.foster-foster.com

August 19, 2016 Retirement Committee Dallas Area Rapid Transit 1401 Pacific Avenue Dallas, TX 75201 Re: Actuarial Experience Study Dear Committee: As requested, we have performed an experience study determined as of October 1, 2015. In the course of the analysis, we compiled plan experience from October 1, 2010 through September 30, 2015. While we cannot verify the accuracy of all of the information provided, the supplied information was reviewed for consistency and reasonableness. As a result of this review, we have no reason to doubt the substantial accuracy of the information and believe it has produced appropriate results. The purpose of this study is to review the current actuarial assumptions and methods to determine which changes, if any, are necessary in order to achieve the objective of developing costs that are stable, predictable, and represent our best estimate of anticipated experience. It is important to remember that the ultimate cost of your retirement plan is independent of any actuarial assumptions or methods utilized throughout the valuation process. This cost will be the sum of the benefits paid from the fund and the administrative expenses incurred, less any net investment gains received. The specific assumptions and methods investigated throughout the remainder of this study are as follows:

• Funding Method

• Investment Return

• Salary Increases

• Mortality Rates

• Retirement Rates

• Withdrawal Rates

• Disability Rates

The balance of this Report presents details of the experience analysis. In addition, the report also contains the corresponding actuarial impact on the minimum required contribution and the Unfunded Actuarial Accrued Liability (UAAL) for any proposed changes. Please keep in mind the minimum required contribution represented for purposes of this report is the contribution that would be required if paid at the end of the year. To the best of our knowledge, this report is complete and accurate in all aspects. The undersigned is familiar with the immediate and long-term aspects of pension valuations, and meets the Qualification Standards of the American Academy of Actuaries necessary to render the actuarial opinions contained herein. All of the sections of this report are considered an integral part of the actuarial opinions.

Respectfully submitted, FOSTER & FOSTER INC. By: _________________________________ Bradley R. Heinrichs, FSA, EA, MAAA By: _________________________________ Drew D. Ballard, EA, MAAA

Dallas Area Rapid Transit (DART) Employees' Defined Benefit Retirement Plan FOSTER & FOSTER | 3

ACTUARIAL STANDARDS OF PRACTICE

Background The Actuarial Standards Board has provided coordinated guidance through of a series of Actuarial Standards of Practice (ASOP) for measuring pension obligations and determining pension plan costs or contributions. The ASOPs that apply specifically to valuing pensions are as follows:

� ASOP No. 4, Measuring Pension Obligations and Determining Pension Plan Costs or

Contributions, which ties together the standards shown below, provides guidance on actuarial cost methods, and addresses overall considerations for measuring pension obligations and determining plan costs or contributions

� ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations � ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring

Pension Obligations

� ASOP No. 44, Selection and Use of Asset Valuation Methods for Pension Valuations

Please note that the contents displayed throughout the remainder of this report are in compliance and consistent with the above mentioned Actuarial Standards of Practice. When applicable, further details of the ASOP associated with the reviewed actuarial assumption will be provided in the experience analysis, which is the basis for the remainder of the report. Additional Required Communications Please keep in mind that future actuarial measurements may differ significantly from current measurements due to such factors as the following:

• Plan experience differing from that anticipated by the economic or demographic assumptions

• Changes in demographic assumptions

• Increases or decreases expected as part of the natural operation of the methodology used

• Changes in plan provisions or applicable law The data used for purposes of this report was compiled from previous actuarial valuations and from data provided by the retirement system staff, unless otherwise indicated.


EXPERIENCE REVIEW SUMMARY

Funding Method Based on the discussion between Foster & Foster and the Committee during the actuarial valuation

presentation on March 22, 2016, we recommended utilizing the Entry Age Normal actuarial cost method

for future valuations. This change will allow the plan to move away from the outdated funding method of

developing the minimum required contribution as if the plan were subject to Section 412 of the Internal

Revenue Code of 1986. Additionally, this will allow for future funding valuations to be completed

utilizing the same actuarial cost method that is required for completion of the GASB 67/68 disclosures.

The committee endorsed the change in cost methods for future valuations at the March 22, 2016 meeting.

The funding impact, determined as of October 1, 2015, of changing from the Projected Unit Credit to the

Entry Age Normal actuarial cost method, is shown below.

Cost Method Minimum Required

Contribution % of Covered

Payroll UAAL

Projected Unit Credit 9,217,479 49.6% 52,251,074 Entry Age Normal 8,605,350 46.3% 60,170,984

Increase/(Decrease) (612,129) (3.3%) 7,919,910


Economic Assumptions ASOP No. 27, Selection of Economic Assumptions for Measuring Pension Obligations, provides guidance

to actuaries in selecting (including giving advice on selecting) economic assumptions – primarily

investment return, discount rate, post-retirement benefit increases, inflation and compensation increases –

for measuring obligations under defined benefit pension plans.

Throughout the remainder of this section, we have used the standards set forth in ASOP No. 27 as a

guideline for reviewing and if applicable, selecting proposed changes to the following economic actuarial

assumptions:

• Investment Return

• Salary Increases

Please keep in mind that ASOP No. 27 states that “the actuary should develop a reasonable economic

assumption based on the actuary’s estimate of future experience, the actuary’s observation of the

estimates inherent in market data, or a combination thereof.” Further, ASOP No. 27 provides guidance

that “the actuary should recognize the uncertain nature of the items for which assumptions are selected

and, as a result, may consider several different assumptions reasonable for a given measurement. The

actuary should also recognize that different actuaries will apply different professional judgment and may

choose different reasonable assumptions. As a result, a range of reasonable assumptions may develop

both for an individual actuary and across actuarial practice.”

Investment Return

The assumed rate of investment return is currently 7.00% per year compounded annually, net of all

expenses. We believe that the decision to modify the investment return assumption shall be made based

upon input from your investment professionals, reflecting any significant changes to the asset allocation,

and their judgment of capital market returns. Keep in mind, however, that this assumption should reflect

the best estimate of investment returns expected to be realized until the last participant in the plan dies,

which could be 40-50 years from now.

In determining the investment return assumption, one determines the average rate of return the Fund

expects to achieve based on the target allocation along with the corresponding capital market

assumptions. Foster & Foster is an actuarial firm, and we do not have the required expertise to produce

our own capital market assumptions. For purposes of illustrating this concept, we have included

information disclosed in the GASB 67/68 report, shown on the following page. Please keep in mind this

return is net of investment related expenses, as well as the 2.50% inflation assumption, suggesting an

expected return of approximately 7.9%. We also noted that administrative expenses represented

approximately 0.14% of total assets for the year ending September 30, 2015. So, the current 7.00% total

net assumption seems to be reasonable based on long-term expectations.


As stated above, we believe the decision to modify the investment return assumption shall be based upon

input from your investment professionals.

For informational purposes, we have determined the funding impact if the investment return assumption

was decreased by 25 basis points from the current 7.00% assumption to 6.75% per year, net of all

expenses.

The funding impact of decreasing only the investment return assumption is shown below.

Assumed Return Minimum Required


Payroll UAAL

7.00% (Current) 9,217,479 49.6% 52,251,074 6.75% 9,650,516 52.0% 57,906,324

Increase/(Decrease) 433,037 2.4% 5,655,250 Salary Increases The salary increase assumption is used to project a participant’s salary from the valuation date until the assumed retirement age and plays an important role in measuring individual pension costs and obligations. Salary increase assumptions are typically represented as a flat salary scale assumption or a service-based assumption. A flat salary scale assumption assumes that a participant will get the same rate of salary increase for all years of service, whereas a service-based table may assume different rates based on the participant’s longevity with the plan. Salary growth is comprised of three basic components:

• Merit increases

• Longevity increases

• Inflation increases

Currently, the valuation utilizes a flat salary scale assumption of 3.25% per year until the assumed retirement age.

Asset Class Target Allocation

Long Term Expected

Real Rate of Return

Expected

Investment Return

U.S. Market Equities 40.00% 6.8% 2.7%

U.S. Market Fixed Income 40.00% 3.1% 1.2%

International Equities 10.00% 8.0% 0.8%

Opportunity Fund (includes Real Estate) 10.00% 7.0% 0.7%

Total 100.00% 5.4%

Target Asset Allocation vs. Capital Market Assumptions

September 30, 2015


Below, we have included a table which illustrates the actual salary increase experience since 2010 as compared to the current 3.25% per year assumption. It can be seen from our review of the actual salary increase experience since 2010 that actual salary increases were lower than assumed at almost all service points.

In fact, the actual average increase for the last 5 years was approximately 2.6% per year, compared to the current assumption of 3.25% per year. Further, the prior actuary reported that the actual average increase for the 5-year period from 2005 to 2010 was approximately 3.2% per year. Based on these trends and the actual experience realized in the plan, we propose lowering the salary increase assumption from 3.25% per year to 3.00% per year.

The funding impact of only the proposed change to the salary increase assumption is as follows:

Salary Increases Minimum Required


Payroll UAAL

3.25% (Current) 9,217,479 49.6% 52,251,074 3.00% 9,134,344 49.2% 51,526,874

Increase/(Decrease) (83,135) (0.4%) (724,200)

Service Exposures

Prior Year

Salaries

Expected

Salaries

Actual

Salaries

Actual

Salary

Increase

Proposed

Salary

Increase

<25 142 7,327,426 7,565,567 7,412,724 1.2% 3.0%

25 171 8,970,814 9,262,366 9,055,543 0.9% 3.0%

26 206 10,878,210 11,231,751 11,271,928 3.6% 3.0%

27 217 11,926,461 12,314,070 12,269,279 2.9% 3.0%

28 207 11,864,320 12,249,910 12,209,111 2.9% 3.0%

29 171 9,936,871 10,259,819 10,224,566 2.9% 3.0%

30 112 6,634,158 6,849,768 6,847,928 3.2% 3.0%

31 94 5,674,167 5,858,577 5,824,098 2.6% 3.0%

32 78 4,717,189 4,870,498 4,854,150 2.9% 3.0%

33 67 3,881,949 4,008,113 3,988,802 2.8% 3.0%

34 43 2,508,339 2,589,860 2,584,185 3.0% 3.0%

35+ 108 6,314,357 6,519,574 6,473,589 2.5% 3.0%

Total 1616 90,634,261 93,579,873 93,015,903 2.6% 3.0%

Salary Increase Experience

October 1, 2010 through September 30, 2015

Current Assumption: 3.25% per year


Demographic Assumptions

ASOP No. 35, Selection of Demographic and Other Noneconomic Assumptions for Measuring Pension

Obligations, provides guidance to actuaries in selecting (including giving advice on selecting) demographic and other noneconomic assumptions for measuring obligations under defined benefit pension plans.

Over the following pages, the following applicable assumptions will be reviewed:

• Mortality Rates

• Retirement Rates

• Withdrawal Rates

• Disability Rates

Generally, demographic assumptions are based on actual plan experience with additional considerations for current trends. ASOP No. 35 states “the actuary should use professional judgment to estimate possible future outcomes based on past experience and future expectations, and select assumptions based upon application of that professional judgment.”

Demographic assumptions generally remain consistent over time, absent significant changes in plan provisions. Therefore, the best true indicator of future experience is past experience. For each assumption, this analysis compares actual experience for the studied time period to the current assumptions utilized for purpose of the annual valuation.

Note that actuarial assumptions reflect average experience over long periods of time. A change in actuarial assumptions generally results when experience over a period of years indicates a consistent pattern. Proposed changes to the demographic assumptions better reflect actual plan experience over the studied time period. The proposed changes also meet the objective of developing costs that are stable, predictable, and represent our best estimate of anticipated future experience. Mortality Rates The rate of mortality is the probability of death at a given age. As mortality rates have continued to decline over time, concern has increased about the impact of potential future mortality improvement on the magnitude of pension obligations. ASOP No. 35 discusses the importance of actuaries considering mortality improvements when measuring pension obligations. Specifically, an actuary should adjust mortality rates to reflect mortality improvement prior to the measurement date and include an assumption regarding the expected mortality improvement after the measurement date, if reasonable. The plan currently assumes rates of mortality based on the RP-2000 Combined Healthy Mortality Table (sex distinct) with rates increased by 8.59% and with fully generational mortality improvement projections using Scale AA. As you can see, the mortality assumption is in direct compliance with ASOP No. 35. As a result of our review, the actual mortality experience of the plan has been greater than expected. Since 2010, there were 181 deaths while 163 were expected, meaning that there were 11.0% more deaths than expected based on the currently assumed mortality rates. In reviewing the results of the experience study performed by the prior actuary, the actual mortality experience in the plan was very similar from 2005 to 2010 (179 deaths versus 162 assumed).


Given these results, we believe that incorporating fully generational mortality improvements is unnecessarily conservative when determining the pension costs of the plan. Therefore, we propose amending the mortality improvement assumption to remove the fully generational component and replace it with projecting mortality improvements to the measurement (or valuation) date. This will allow for continued recognition of expected mortality improvements when the annual valuations are performed in the future and will remove the assumption of perpetual improvements in life expectancy. The funding impact of only the proposed change to the mortality rate assumption is as follows:

Mortality Improvement Minimum Required


Payroll UAAL

Fully Generational (Current) 9,217,479 49.6% 52,251,074 Projected to Valuation Date 8,663,774 46.7% 46,638,938

Increase/(Decrease) (553,705) (2.9%) (5,612,136) Retirement Rates A retirement rate is the associated probability at a specific point in time that a participant will retire, given that they have attained the eligibility requirements for retirement. The associated cost due to retirement experience is determined by the age at which participants actually retire. As you are probably aware, the current provisions for retirement are as follows:

• Early Retirement: Attainment of Age 55 and 10 years of Credited Service.

• Normal Retirement: Attainment of Age 60 The valuation currently applies varying retirement probabilities beginning at age 55. During the course of our analysis, the actual retirement experience in the plan showed that members are retiring slightly earlier than currently assumed in the aggregate. As shown on the following page, there were 119 retirements since October 1, 2010, while approximately 110 were expected based on current assumptions. In order to better align the assumed retirement rates with actual plan experience, we propose modifying the current assumptions at certain ages. The actual plan experience, along with the proposed rates, are displayed in the table on the following page. The funding impact of only making the proposed retirement rate changes is as follows.

Retirement Rates Minimum Required


Payroll UAAL

Current 9,217,479 49.6% 52,251,074 Proposed 9,564,316 51.5% 55,892,639

Increase/(Decrease) 346,837 1.9% 3,641,565


Withdrawal Rates The withdrawal rate, or termination rate, is the probability that a participant will separate employment from a cause other than disability, death, or retirement. Currently, the valuation utilizes an age-based table for probabilities of withdrawal, with varying rates for males and females.

Overall, the actual incidence of withdrawal was slightly lower than expected. Since October 1, 2010, there have been 11 non-retirement terminations, while approximately 14 were expected. Based on the demographics of the remaining active members in the plan and the actual plan experience since 2010, we propose amending the assumed rates of withdrawal as follows:

Age Rate Prior to Age 54 1.5%

Age 54+ 1.0% The experience, along with the current and proposed assumptions, is displayed in the table on the following page.

Age Exposures

Expected

Retirements

Actual

Retirements

Expected

Retirement

Rates

Actual

Retirement

Rates

Proposed

Retirement

Rates

55 118 11.8 9 10.0% 7.6% 7.5%

56 118 5.9 5 5.0% 4.2% 5.0%

57 117 5.8 7 5.0% 6.0% 5.0%

58 108 5.4 11 5.0% 10.2% 10.0%

59 97 4.8 9 5.0% 9.3% 10.0%

60 84 4.2 7 5.0% 8.3% 10.0%

61 72 3.6 9 5.0% 12.5% 10.0%

62 61 12.1 16 20.0% 26.2% 25.0%

63 51 5.1 11 10.0% 21.6% 25.0%

64 39 3.9 8 10.0% 20.5% 25.0%

65 32 15.9 10 50.0% 31.3% 25.0%

66 21 4.2 8 20.0% 38.1% 25.0%

67 11 4.4 2 40.0% 18.2% 25.0%

68 8 1.6 3 20.0% 37.5% 25.0%

69 6 1.2 0 20.0% 0.0% 25.0%

70+ 20 20.0 4 100.0% 20.0% 100.0%

Total 963 109.6 119 11.4% 12.4% 13.9%


Retirement Experience


The funding impact of only changing the withdrawal rates is as follows.

Withdrawal Rates Minimum Required


Payroll UAAL


Increase/(Decrease) 1,102 0.1% 14,220

Disability Rates

The disability rate assumption is the probability that a member will become disabled while an active member in the plan. Currently, the valuation utilizes an age-based assumption for predicting the occurrence of future disabilities.

Actual disability experience was lower than expected over the studied time period. Since October 1, 2010, only three members were granted a disability retirement, while 7 were expected. Therefore, we propose reducing the probabilities at each age in half.

Reducing the assumed disability rates in half will have a small funding impact, as shown below.

Disability Rates Minimum Required


Payroll UAAL


Increase/(Decrease) 16,606 0.1% 103,331

Age Exposures

Expected

Terminations

Actual

Terminations

Expected

Withdrawal

Rates

Actual

Withdrawal

Rates

Proposed

Withdrawal

Rates

<45 14 0.4 0 3.0% 0.0% 1.5%

45 28 0.8 0 2.9% 0.0% 1.5%

46 40 1.1 0 2.7% 0.0% 1.5%

47 60 1.6 1 2.6% 1.7% 1.5%

48 77 2.0 2 2.5% 2.6% 1.5%

49 87 2.1 1 2.4% 1.1% 1.5%

50 84 1.9 1 2.3% 1.2% 1.5%

51 91 1.7 1 1.8% 1.1% 1.5%

52 98 1.4 2 1.4% 2.0% 1.5%

53 103 0.9 2 0.9% 1.9% 1.5%

54+ 105 0.4 1 0.4% 1.0% 1.0%

Total 787 14.2 11 1.8% 1.4% 1.4%

Withdrawal Experience



Conclusion

As stated throughout the content of this report, we have recommended a number of changes to the actuarial assumptions and methods utilized for purposes of completing the annual valuations. It is our belief that these changes reflect sound actuarial principles, are our best estimate of anticipated future experience, and will assist in achieving the objective of developing costs that are stable and predictable.

Below we have provided a summary of the plan’s funding impact for each of the discussed changes, if made independently of one another. Additionally, if all of the discussed changes were adopted, the minimum required contribution would decrease from $9,217,479 to $8,867,937.

Minimum Required Contribution

Proposed Change Increase/(Decrease)

Current Assumptions/Methods n/a

Entry Age Normal Cost Method (612,129)

6.75% Interest Rate 433,037

3.00% Salary Increases (83,135)

Mortality Rates (553,705)

Retirement Rates 346,837

Withdrawal Rates 1,102

Disability Rates 16,606

Combination (All Changes) (349,542)

Summary of Results


dallas area rapid transit employees’ defined …asop no. 44, selection and use of asset valuation...

Documents