South CarolinaRetirement Systems

UpdateOctober 2011

SC Budget and Control BoardSouth Carolina Retirement Systems

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Plan Governance

SC Budget and Control Board functions as fiduciaries/trustees of the plan

The Retirement Systems is a division of the SC Budget and Control Board

Assets are managed by the SC Retirement System Investment Commission, which was established in 2005 and immediately began fund diversification to allow for higher investment returns

Trust pays all expenses of maintaining the plan Title 9 of the SC Code of Laws governs most plan provisions

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About the Retirement Systems

Five defined benefit retirement plans South Carolina Retirement System (SCRS) Police Officers Retirement System (PORS) General Assembly Retirement System (GARS) Judges and Solicitors Retirement System (JSRS) National Guard Retirement System (NGRS)

One defined contribution retirement plan More than 458,000 members Approximately 850 participating employers

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Who Participates in the Plans

SCRS is largest plan with more than 190,000 active members, 106,000 annuitants, and 157,000 inactive members.

PORS is second largest plan with more than 26,000 active members, 12,000 annuitants, and 12,000 inactive members.

Member data as of June 30, 2010, actuarial valuation.

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Participating Employers

Participating employers include: State government Public school districts Higher education institutions Local/political subdivisions of government Quasi-governmental organizations

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Employer Contribution Sources

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Benefit Formulas

• SCRS Benefit Formula– Years of service

multiplied by average final compensation multiplied by 1.82 percent benefit multiplier

– Example• (28 years x $50,000) x

1.82% = $25,480 (annual retirement benefit)

• PORS Benefit Formula– Years of service

multiplied by average final compensation multiplied by 2.14 percent benefit multiplier

– Example• (25 years x $50,000) x

2.14% = $26,750 (annual retirement benefit)

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Benefit Eligibility

Vesting Period – Member must have five years of earned service to be eligible to apply for benefits

Retirement Age (for unreduced benefits) SCRS – Age 65 with at least five years of earned

service or at any age with 28 years of service PORS – Age 55 with at least five years of earned

service or at any age with 25 years of service

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SCRS and SS Disability

Plans’ Disability Protection• Occupational disability

– Member may apply for disability retirement if he becomes physically or mentally incapable of performing the regular duties of his job and the disability is likely to be permanent (occupational disability).

• Must have at least 5 years of earned service

Social Security Disability• Total and permanent

disability– Person must prove that

disability has lasted at least 12 months and prevents them from performing any substantial gainful activity

• Must also have enough work credits to qualify for payments

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Cost-of-living adjustments (COLAs)

For both SCRS and PORS members, the plans award automatic cost-of-living adjustments (COLAs) based on Consumer Price Index for Wage Earners and Clerical Workers (CPI-W) up to 2 percent

No COLA awarded if CPI-W is negative

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Actuarial Accrued Liability Calculation

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Actuarial Accrued Liability Calculation

$23 billion (attributable to members already retired)

+$16 billion (attributable to active members)

$39 billion (total actuarial accrued liability)

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Unfunded Liability – SCRS

Market Value basis – Calculated as total actuarial accrued liability ($38.774 billion at FYE2010) less market value of assets ($19.681 billion at FYE2010) = $19.093 billion

Actuarial Value of Assets Basis – Actuarial accrued liability ($38.774 billion) – Actuarial value of assets ($25.400 billion) equals $13.4 billion. This number is the Unfunded Actuarial Accrued liability or UAAL.

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Unfunded Liability – PORS

Market Value basis – Calculated as total actuarial accrued liability ($4.850 billion at FYE2010) less market value of assets ($2.851 billion at FYE2010) = $1.999 billion

Actuarial Value of asset basis – Total Actuarial Accrued Liability ($4.850 billion) less actuarial value of assets ($3.613 billion) = $1.238 billion. Again, This is commonly called the UAAL.

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Funded Ratio

The funded ratio of a pension plan is the:

Actuarial Value of AssetsActuarial Accrued Liability

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Funded Ratio of SCRS and PORS

As of the 2010 actuarial valuation the funded ratio of the SCRS system is: 65.5 percent

The funded ratio of PORS is 74.5 percent It is generally considered that 80 percent is a

healthy funded ratio As of 2009, 31 of the 50 statewide plans were

under 80 percent funded

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Amortization Period

Amortization period is the period of time it will take to pay down the UAAL

GASB requires that the amortization period be 30 years or less

Without additional contribution increases or plan changes the SCRS plan will have a 37.6 year amortization period while PORS will be at 32.8 years as of July 1, 2010 valuations.

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How the Plans Are Funded

Employee and employer contributions are significant sources of income to the state’s retirement plans. Employee Contribution: 6.5 percent Employer Contributions (FY 2011):

SCRS - 9.385 percent PORS - 11.363 percent

Investment income, however, is the largest component of our plans’ funding over time.

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How the Plans Are Funded

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Additions to Pension Trust Funds

Major Factors in Current Situation

COLAs granted that weren’t adequately funded

Investment earnings less than assumed Demographic changes Benefit enhancements

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Where We Are Today – SCRS

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$ in

mill

ions

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SCRS Net Unfunded Liability on a Market Value Basis

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Annual Change in UAAL by Source

Fiscal Year Ended June 30 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Non-COLA Benefits $ - $ 1,810 $ - $ - $ - $ - $ 257 $ - $ - $ - $ - $ -

COLA Improvements 182 - 353 149 278 209 2,632 457 267 2,842 (412) -

Investment Gain/Loss - Recognized (130) (30) 25 215 120 228 107 190 (296) (63) 854 1,213

Liability Experience (192) 281 194 115 273 (274) 177 372 287 462 324 (176)

Assumption Changes (638) - - - 399 690 239 (176) (48) (2,663) - -

Other (50) (110) (26) (6) (17) 61 65 290 290 161 237 370

Annual Change in UAAL $ (828) $ 1,951 $ 546 $ 473 $ 1,053 $ 914 $ 3,477 $ 1,133 $ 500 $ 739 $ 1,003 $ 1,407

Cumulative Change in UAAL by Source

Fiscal Year Ended June 30 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

UAAL Beginning Balance June 30, 1998 (MVA) $ 1,006 $ 1,006 $ 1,006 $ 1,006 $ 1,006 $ 1,006 $ 1,006 $ 1,006 $ 1,006 $ 1,006 $ 1,006 $ 1,006

Non-COLA Benefits - 1,810 1,810 1,810 1,810 1,810 2,067 2,067 2,067 2,067 2,067 2,067

COLA Benefits 182 182 535 684 962 1,171 3,803 4,260 4,527 7,369 6,957 6,957

Investment Gains/Losses - Recognized (130) (160) (135) 80 200 428 535 725 429 366 1,220 2,433

Liability Experience (192) 89 283 398 671 397 574 946 1,233 1,695 2,019 1,843

Assumption Changes (638) (638) (638) (638) (239) 451 690 514 466 (2,197) (2,197) (2,197)

Other (50) (160) (186) (192) (209) (148) (83) 207 497 658 895 1,265

Cumulative Change in UAAL (828) 1,123 1,669 2,142 3,195 4,109 7,586 8,719 9,219 9,958 10,961 12,368

UAAL Ending Balance June 30 (AVA) 178 2,129 2,675 3,148 4,201 5,115 8,592 9,725 10,225 10,964 11,967 13,374

Investment Gains/Losses - Deferred (519) (101) (99) 859 532 13 (78) 160 (871) 1,576 7,459 5,719

UAAL Ending Balance June 30 (MVA) $ (341) $ 2,028 $ 2,576 $ 4,007 $ 4,733 $ 5,128 $ 8,514 $ 9,885 $ 9,354 $ 12,540 $ 19,426 $ 19,093

Where We Are Today – PORS

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$ in

mill

ions

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PORS Net Unfunded Liability on a Market Value Basis

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Annual Change in UAAL by Source

Fiscal Year Ended June 30 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Non-COLA Benefits $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -

COLA Improvements 21 - 32 13 27 20 49 57 43 684 - -

Investment Gain/Loss - Recognized (12) - - 29 13 68 15 28 (30) 5 123 167

Liability Experience (1) 41 15 14 (51) 32 (28) 55 31 16 (23) (45)

Assumption Changes 4 - - - 69 26 - - - (315) - -

Other (8) (8) (8) (5) (1) (12) (5) (9) (4) (4) 26 34

Annual Change in UAAL $ 4 $ 33 $ 39 $ 51 $ 57 $ 134 $ 31 $ 131 $ 40 $ 386 $ 126 $ 156

Cumulative Change in UAAL by Source

Fiscal Year Ended June 30 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

UAAL Beginning Balance June 30, 1998 (MVA) $ 49 $ 49 $ 49 $ 49 $ 49 $ 49 $ 49 $ 49 $ 49 $ 49 $ 49 $ 49

Non-COLA Benefits - - - - - - - - - - - -

COLA Benefits 21 21 53 66 93 113 162 219 262 946 946 946

Investment Gains/Losses - Recognized (12) (12) (12) 17 30 98 113 141 111 116 239 406

Liability Experience (1) 40 55 69 18 50 22 77 108 124 101 56

Assumption Changes 4 4 4 4 73 99 99 99 99 (216) (216) (216)

Other (8) (16) (24) (29) (30) (42) (47) (56) (60) (64) (38) (4)

Cumulative Change in UAAL 4 37 76 127 184 318 349 480 520 906 1,032 1,188

UAAL Ending Balance June 30 (AVA) 53 86 125 176 233 367 398 529 569 955 1,081 1,237

Investment Gains/Losses - Deferred (46) (1) 0 115 50 (2) 1 39 (85) 225 999 761

UAAL Ending Balance June 30 (MVA) $ 7 $ 85 $ 125 $ 291 $ 283 $ 365 $ 399 $ 568 $ 484 $ 1,180 $ 2,080 $ 1,998

Current COLA Legislation

In 2008, the General Assembly enacted legislation based on the recommendations of the State Treasurer’s COLA Task Force. The legislation included:

Increased the assumed rate of investment return to 8 percent from 7.25 percent.

Increased the annual automatic COLA from 1 percent to the increase in the Consumer Price Index for Wage Earners and Clerical Workers (CPI-W) up to 2 percent.

Restricted ad hoc COLAs beyond the 2 percent based on all of the conditions listed on the next slide being met.

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Current Requirements for Ad Hoc COLAs

The amortization period for the prior year’s unfunded liability is at 25 years or below; and

The estimated funded ratio in the current year, after the granting of an additional ad hoc COLA, does not decrease; and

The estimated amortization period in the current year, after granting the additional ad hoc COLA, is still reduced by at least one year; and

No increase in employer contribution is required to support the granting of the additional ad hoc COLA.

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Investment Earnings

Assumed rate of return on investments = 8 percent FY 2011 = 18.59 percent FY 2010 = 14.62 percent FY 2009 = (19.60 percent) 10 year average return = 3.90 percent 20 year average return = 6.42 percent As of 2010 valuation $5.8 of deferred losses

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SCRS Ratio of Active Members to Annuitants

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SCRS Ratio of Active Members to Annuitants

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SCRS Ratio of Contributions Made to Benefits Paid

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Note: Contributions for TERI participants, working retirees and ORP participants are included in contribution amounts

Changes in Life Expectancy

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Possible Ways to Improve Funding

Increase employee contributions Increase employer contributions Increase investment earnings Reduce benefits/plan changes Appropriate additional funds

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Assumed Rate of Return

The assumed rate of return is used to estimate the future value of assets

But, it is also used as the discount factor to determine the present value of future benefit payments

So, any change in the assumed rate of return materially changes the funding of the plan

Setting the assumed rate is really an exercise of setting the amount of risk the plan will accept

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Change in Assumed Rate and COLAs

Should the Budget and Control Board accept the actuary’s recommended assumption changes and reduce the assumed rate of return below 8 percent, the current laws providing for 2 percent automatic COLAs in PORS and SCRS would be automatically repealed and result in the reversion of the COLA laws in the statute in effect immediately prior to the passage of Act 311 of 2008. The respective COLA provisions for SCRS and PORS upon reversion will be as follows:

1) Section 9-1-1810 (SCRS) will provide for a 1 percent automatic COLA with the possibility of an ad hoc COLA up to the CPI (4 percent cap) if the increase would not result in extending the amortization period beyond 30 years, and;

2) Section 9-11-310 (PORS) will not provide for an automatic COLA, but for an ad hoc COLA of up to the increase in the CPI (4 percent cap) as long as the increase does not require an increase in the employer contribution rate.

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The Future

House and Senate Subcommittees are conducting meetings concerning the plans administered by the Retirement Systems

Likely that legislation will be proposed to modify the plans

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Possible Modifications

Change COLA provisions Change retirement eligibility Actuarial cost for service purchase Longer average final compensation period Longer vesting period Eliminate TERI/RTW provisions Other benefit provision changes

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Additional Future Issues - GASB

GASB issued two Exposure Drafts (EDs) this July

If implemented, these EDs will amend GASB Statements 25 and 27

Statement 25 deals with the financial statements of pension plans

Statement 27 deals with financial statements of covered employers

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GASB EDs

Exposure drafts are generally the last public documents issued before the final statements

Comment due on the EDs were originally due back to the GASB by Sept 30, but were extended until October 14th

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Retirement Systems’ Involvement

Retirement Systems commented on the Preliminary Views Document issued by GASB in 2010

We are one of 25 pension plans and employers that volunteered to participate in GASB’s Pension Field Test for the EDs

We have reported the results of our Field Test experience and have also submitted a comment letter on the EDs to GASB

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Current Pension Accounting

The Retirement Systems is a cost-sharing multiple employer plan

Currently, employers show a pension expense of the annual required contribution amount on their financial statements

Current pension liability of the employer is zero unless they fail to make the required contribution

Actuarially Accrued Liability is reported in notes of the Retirement Systems’ financial statements

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What will the EDs change?

Require employers to recognize a portion of the Unfunded Pension Liability on their balance sheet

Require the pension fund to use market value of assets in calculating net pension liability

Change the measure of pension expense Totally disconnect the accounting for pensions from

the funding of pensions Add additional note disclosures and RSI

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Reason for Change

GASB decided that the employment exchange between an employee and the employer creates a future obligation for retirement benefits

To the extent the pension plan has an unfunded liability GASB has determined this should be a liability of the employer

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Unknowns about this Approach

Is it really a liability? GASB defines liability as a “present obligation to

sacrifice resources that a government has little or no ability to avoid”

To be recognized in the financial statements it must also be measureable with sufficient reliability

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Whose Liability is it??? SECTION 9-1-1690. Credit of State is not pledged for payments; rights in

case of termination of System or discontinuance of contributions. All agreements or contracts with members of the System pursuant to any of the provisions of this chapter shall be deemed solely obligations of the Retirement System and the full faith and credit of this State and of its departments, institutions and political subdivisions and of any other employer is not, and shall not be, pledged or obligated beyond the amounts which may be hereafter annually appropriated by such employers in the annual appropriations act, county appropriation acts and other periodic appropriations for the purposes of this chapter. In case of termination of the System, or in the event of discontinuance of contributions thereunder, the rights of all members of the System to benefits accrued to the date of such termination or discontinuance of contributions, to the extent then funded, are nonforfeitable.

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How is the liability allocated?

GASB ED 27 paragraph 46 “The proportion used to calculate the employer’s

share of the collective totals should be a measure of the employer’s projected long-term contribution effort to the pension plan as compared to the total of all projected contributions of the employer.”

What does this mean?

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Employer’s Proportionate Share

We are using the current annual covered payroll of the employer divided by the total covered payroll of all employers to determine an allocation percentage

We then multiply the allocation percentage by the total net pension liability to determine the amount of NPL to attribute to that employer

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Proportionate Share Example

Employer has covered payroll of $5 million Total covered payroll of all SCRS employers

equals $7.8 billion ($5m/$7.8b) X $19.1b equals:

$12.2 million net pension liability to be recognized by employer

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What does this mean for employers?

Such a large liability may distort the employer’s financial statements

Most, if not all, will appear insolvent May be difficult to explain to governing boards and

taxpayers Will most likely increase audit costs Extreme volatility will result in both their

proportionate share of NPL and pension expense

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What it Means to the SC Retirement Systems We will need to provide information on

proportionate share of NPL, pension expense, notes and RSI to each employer

This needs to be done as of each employer’s FYE This requires us to obtain MV of assets and roll

forward the pension liability for each FYE Will make the defined benefit plans appear much

more expensive

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There Is Still Hope

The SC Retirement Systems, as well as numerous other plans and employers, have commented to GASB

GASB is holding public hearings this month It is possible GASB may make changes or delay

implementation If not, the new standards will be effective for FY

beginning after June 15, 2013

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Questions?

Contact Info

Travis Turner, CPA, CISADeputy DirectorSouth Carolina Retirement SystemsPhone 803-737-7751email: tturner@retirement.sc.gov

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Retirement Systems Overview

Key Terms Annuitant – person receiving a monthly benefit Covered Employer – organization that participates in the retirement

plans Active Member – employee currently working for and making

retirement contributions through a covered employer Inactive Member – employee for whom regular retirement

contributions have not been received for at least one fiscal year Employer Contribution Rate – the percentage of payroll that a

covered employer contributes to the retirement plans Employee Contribution Rate – the percentage of earnable

compensation an employee contributes to his respective retirement plan

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Retirement Systems Overview

Key Terms 30-Year Amortization Period – maximum number of years over which a

retirement plan’s unfunded liability may be amortized Funded Ratio – the ratio of a retirement plan’s assets to liabilities Unfunded Actuarial Liability – excess of actuarial accrued liability over the

actuarial value of a retirement plan’s assets Employer Normal Cost – employer's portion of total normal cost of benefits

earned by active members during current fiscal year COLA – cost-of-living adjustment Investment Assumption Rate – the rate of investment return a plan expects

to earn in a given year Smoothing Concept – the spreading over a period of years of a plan’s

investment gains and losses to lessen volatility in rates

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THE LANGUAGE USED IN THIS PRESENTATION DOES NOT CREATE ANY CONTRACTUAL RIGHTS OR ENTITLEMENTS AND DOES NOT CREATE A CONTRACT BETWEEN THE MEMBER AND THE SOUTH CAROLINA RETIREMENT SYSTEMS. THE SOUTH CAROLINA RETIREMENT SYSTEMS RESERVES THE RIGHT TO REVISE THE CONTENT OF THIS PRESENTATION.

This presentation is meant to serve as a guide but does not constitute a binding representation of the South Carolina Retirement Systems. The statutes governing the South Carolina Retirement Systems are found in Title 9 of the South Carolina Code of Laws, and should there be any conflict between this presentation and the statutes or Retirement Systems’ policies, the statutes and policies will prevail.

Employers covered by the South Carolina Retirement Systems are not agents of the Retirement Systems.

Disclaimer

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