Virginia Retirement System Overview

Presented to:House Appropriations Compensation and Retirement Subcommittee

Presenter: Patricia S. BishopDirector of the Virginia Retirement System

Date: January 18, 2018

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Key Messages

Pension reforms have effectively addressed the cost of benefits.

Hybrid Retirement Plan introduced risk sharing with employees and reduced potential for future unfunded liabilities.

Savings from pension reforms will be fully realized in the future as the hybrid plan becomes the dominant plan.

Legacy unfunded liability being amortized over closed 30-year period with 26 years remaining.

Future liabilities amortized over shorter 20-

year closed periods.

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Key Messages

Governor and General Assembly accelerated:

Statutory commitment to fund 100% of actuarially determined contributions

Repayment of deferred contributions from 2010-2012 biennium Fully repaid State plans Significant infusion ($193 million) into

the Teacher plan

Actions improve health of plans and avoid adding future costs to the plans.

Funded status of statewide plans has stabilized and is expected to trend upwards with the actions taken by the Governor and General Assembly to get to 100% of Board-certified rates, given experience aligns with assumptions.

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As of December 31, 2017

Plan 1 Plan 2 Hybrid Total

Teachers 80,576 34,148 37,430 152,154

Political Subdivisions 50,959 31,688 25,132 107,779

State Employees 41,332 17,104 18,940 77,376

State Police Officers’ Retirement System (SPORS) 1,256 635 ‒ 1,891

Virginia Law Officers’ Retirement System (VaLORS) 3,776 4,913 ‒ 8,689

Judicial Retirement System (JRS) 262 49 113 424

Total Active Members 178,161 88,537 81,615 348,313

Total Active Members

Retirees/Beneficiaries

Inactive/Deferred Members

VRS TotalPopulation

348,313 204,554 148,505 701,372

VRS Total Membership

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Where VRS Retirees Live

86%of VRS retirees

remain in Virginia

North Carolina

3%

Florida

2%

South Carolina

1%

Maryland

1%

Tennessee

1%

Other States/Territories

6%

VRS Financial Overview

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Source of Pension Funding

67%

33%

Source of Defined Benefit Plan Funding

Investment Returns Member and Employer Contributions

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VRS Net Position

$0

$10

$20

$30

$40

$50

$60

$70

$80

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

$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

$42.6

$47.7

$54.6$53.3

$58.4

$66.2

$68.1 $68.1

$75.1

Fiscal Year

Asse

ts i

n B

illi

on

s

9

VRS Fiscal Year Returns

Fiscal Year

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.01

99

2

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

% R

etu

rn

Investment Return Assumption

FY 2017 returnas of

June 30, 2017,is 12.1%

25-year return is 8.3% (net of

fees) as of June 30, 2017

Hybrid Retirement Plan Features

and Tools

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Hybrid Retirement Plan Overview

• Combines features of a defined benefit plan and a defined contribution plan, effective Jan. 1 2014

• Provides for risk-sharing between employer and employee with the introduction of the DC component

• Reduces potential for future unfunded liabilities

• Covers nearly all new VRS members, except hazardous duty

• Becomes dominant plan over the next 10 – 15 years

Defined Benefit Defined Contribution

• Provides reduced benefit multiplier that serves as foundation for the future retirement benefit

• Increased age/service requirements

• Provides tax-deferred savings• Encourages employee savings

by including employer match

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Hybrid Retirement Plan Members by Employer Type

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

School Divisions Political Subdivisions State Agencies

Not Participating in Voluntary Voluntary Members - 0.5% Voluntary Members - 1% and Above

44,314

18,64319,296

17%

42%

42%

21%

37%

42%

29%

34%

37%

82,253Active Hybrid Retirement Plan members

as of January 1, 2018

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Hybrid 457 Plan – Voluntary Contribution Elections

65%

0%1%1%1%2%

2%

28%

35%

0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%

Active members who have a voluntary

contribution as of December 15, 2017

Active members with a voluntary contribution greater than 0.5%

Voluntary Contribution PercentagesNumbers are rounded and may not add up to 100%

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Hybrid Retirement Plan

Auto-Escalation – Implemented January 1, 2017; only 3.1% of members opted out.

SmartStep - Allows Hybrid Retirement Plan members to auto-escalate at a time they choose

Enhanced Voluntary Contribution Messaging – Provides messaging to members to encourage action

Funded Statusand

Contribution Rates

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Virginia Retirement System Unfunded Liabilities by Plan (Dollars in Billions)

Plan

6/30/2016

Funding Basis

Smoothed

Assets

6/30/2016

Funding Basis

Market Assets

6/30/2017

Funding Basis

Smoothed

Assets

6/30/2017

Funding Basis

Market Assets

State $6.2 $6.5 $5.7 $5.5

Teacher $12.8 $13.4 $12.3 $11.9

Political Subdivisions $2.9 $3.3 $2.6 $2.3

Total VRS $21.9 $23.2 $20.6 $19.7

SPORS $0.3 $0.4 $0.3 $0.2

VaLORS $0.8 $0.8 $0.6 $0.6

JRS $0.2 $0.1 $0.1 $0.1

Grand Total $23.2 $24.5 $21.7 $20.7

Notes: • Political Subdivision in aggregate do not include political subdivisions with no

active members.

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Funded Status and Pension Reforms

• Since 2012, State and Teacher plans have experienced a 10% improvement in funded status and Political Subdivisions in aggregate have seen a 15% improvement.

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VRS Retirement SystemEmployer Contribution Rates (% of Total Covered Payroll)

• Contribution rates are net of the 5% and 4% member contribution rates for Plan 1, Plan 2, and Hybrid plan respectively.

Board Certified

General Assembly

Approved Board Certified

State 14.46% 13.49% 13.52%

Teachers 16.32% 14.66%/16.32% 15.68%

SPORS 28.99% 28.54% 24.88%

VaLORS 22.21% 21.05% 21.61%

JRS 45.15% 41.97% 34.39%

System

Fiscal Years 2017/2018 Fiscal Years 2019/2020

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State Plan Projected Employer Contribution Rates Including Estimated Defined Contribution Hybrid Match

• Assumes employer match to defined contribution portion of the hybrid plan of 1.83% of payroll for hybrid plan members.• Rates above are for alternative investment return scenarios only. Liabilities are calculated at 7% under all scenarios.• Liabilities are calculated at 7% under all scenarios.• Amounts are net of member contributions.

Investment Return Sensitivity

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Teacher Plan Projected Employer Contribution Rates Including Estimated Defined Contribution Hybrid Match

Investment Return Sensitivity

• Assumes employer match to defined contribution portion of the hybrid plan of 1.76% for members in the hybrid plan.• Rates above are for alternative investment return scenarios only.• Liabilities are calculated at 7% under all scenarios.• Amounts are net of member contributions.

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OPEB Contribution Rates

• HIC State contribution rates include State, SPORS, VaLORS, ORP, and UVA members.• VSDP contribution rates based upon covered payroll and include long-term disability

and long-term care benefits.• Some employers may require employees to contribute a portion of Group Life rate.

System Board Certified

General

Assembly

Approved Board Certified

Plan Funded

Status

HIC State 1.18% 1.18% 1.17% 8.02%

HIC Teachers 1.23% 1.11%/1.23% 1.20% 7.14%

VSDP 0.66% 0.66% 0.62% 193.09%

Group Life 1.31% 1.31% 1.31% 46.62%

Fiscal Years 2019/2020Fiscal Years 2017/2018

GASB Update

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GASB 74 and GASB 75

In June 2015, GASB released two statements aimed at improving financial reporting by state and local governments of other post-employment benefits (OPEB), such as group life and retiree health insurance.

Statement No. 74 (applies to Plan), Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans

Statement No. 75 (applies to Employer), Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions

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VRS OPEB Liabilities by EmployerJune 30, 2017 Net OPEB Liability (NOL)

• State includes state employees regardless of pension plan.• State HIC also contains state-funded local positions which is considered "special funding situation" for GASB.

($Thousands)

Notes:

Plan State Teacher Political Subdivisions NOL as of 6/30/17

Group Life Insurance $456,366 $646,246 $402,228 $1,504,840

Virginia Sickness and Disability

Program ($205,321) $0 $0 ($205,321)

Line of Duty Act (LODA) $159,605 $0 $103,186 $262,791

Total OPEB NOL $1,360,139 $1,915,451 $522,945 $3,798,535

Health Insurance Credit

Virginia Local Disability

Program

$949,489 $1,268,611 $16,968 $2,235,068

$0 $594 $563 $1,157

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Comparison of Unfunded Liabilities

• Net pension liabilities and Net OPEB liabilities as of 6/30/16.

Line of Duty Act Update

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LODA Administrative Roles

A partnership of VRS and DHRM

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Website: www.valoda.org

Email: loda@varetire.org

Websites & Email Addresses

Website: www.dhrm.virginia.gov/loda

Email: loda@dhrm.virginia.gov

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LODA Resources

Employer Resources:

• Welcome Video

• LODA Overview for Employers

Participant Resources:

• Welcome Video

• Tutorial: How to Apply for LODA Benefits

• Virginia LODA Participant Guide

• LODA Overview for Participants

Helping Members Plan for Tomorrow,

Today!

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Financial Wellness Features

CoursesLearn the fundamentals of money management

Student Loan SnapshotTrack all your student loans in one place in five minutes or less

BudgetPlan for expenses, set goals and keep

your finances on track

GamesPlay financial trivia and real-world simulator games

Scholarship SearchFind quality scholarships to help pay for school

Live WebinarsWatch video webinars with financial wellness experts

CalculatorsExperiment with mortgage, budget, auto, student loan calculators

Modernization

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Multi-year Modernization Project

Guiding Principles

Web-based, self-service for members & employers

Reliable and efficient delivery of member benefits

Paperless, to the extent possible

Safeguard member confidence and VRS reputation

Security of members’ data and personal information

Phase 1: 2009

Phase 2: 2010

Phase 3: 2012

Hybrid Implementation

Phase 4: 2014→

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myVRS Vision

Leverage technology to improve outcomes for VRS members

Provide a comprehensive view of benefits Help members grasp future income needs in

sufficient time to make adjustments Offer intuitive tools and counseling to better

prepare for retirement

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Modernization – Phase 4 Accomplishments

RefundsRefund Calculation Engine (7/2015)Refunds Disbursement (12/2015)

Online Refunds (3/2016)

Benefits Calculation Engine (4/2016)

New Member Portal with Security Enhancements (3/2016)

Online Retirement Planner (1/2017)

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Modernization – Phase 4 Accomplishments

Retiree Portal (6/2017) Online Financial Education (12/2017)

ORPHE/ORPPA Functionality (12/2017)

Online Purchase of Service Functionality (3/2017)

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Modernization – Phase 4 Releases Coming

Retirement Processing(10/2018)

DisbursementsAll remaining functionality

Online Retirement (Spring 2019)

New portal functionalityBeneficiary management

Online MBP

MiscellaneousVLDP

Actuarial Data Payment/Health Insurance Maintenance

(Spring 2019)

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Conclusion

2018 General Assembly Session

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VRS-Related Bills

Bill Number

HB 66 Requires that a school division provide a Health Insurance Credit of $4 per year of service to all employees, not just teachers, who retire with at least 15 years of creditable service.

HB 846 Makes various technical amendments in Title 51.1 relating to VRS-administered benefits (mirrors SB 248). Bill requested by the VRS Board of Trustees.

HB 863 Applies an annual cost-of-living adjustment to the Health Insurance Credit benefit of any state employee who retired with at least 30 years of creditable service (mirrors SB 321).

HB 1107 Requires VRS to invest the Medicaid Legacy Investment Fund alongside the VRS Trust Fund.

HB 1326 Adds E-911 dispatchers to the list of local employees who are eligible for enhanced hazardous duty benefits.

HB 1392 Prohibits anyone subject to the judicial mandatory retirement age of 73 from serving as a justice, judge, or substitute judge.

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VRS-Related Bills

Bill Number

HJ 96 Directs JLARC to study the expansion of hazardous duty benefits for members of the Virginia Law Officers’ Retirement System.

HJ 103 Requests VRS to conduct a feasibility study relating to a state-run retirement savings plan for private-sector employees who do not have access to an employer-sponsored retirement plan.

SB 248 Makes various technical amendments in Title 51.1 relating to VRS-administered benefits (mirrors HB 846). Bill requested by the VRS Board of Trustees.

SB 321 Applies an annual cost-of-living adjustment to the Health Insurance Credit benefit of any state employee who retired with at least 30 years of creditable service (mirrors HB 863).

SB 498 Provides enhanced hazardous duty benefits, 50 percent of which is paid by the state, to certain public safety officers employed by a locality that has two or fewer such employees.

SB 691 Adds conservation officers of the Department of Conservation and Recreation to the list of those eligible for membership in the Virginia Law Officers’ Retirement System.

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LODA-Related Bills

Bill Number

HB 107 Includes correctional officers in the list of public safety officers covered by a presumption that hypertension and heart disease occurred in the line of duty.

HB 472 Adds colon, brain, and testicular cancer to the list of cancers that are presumed to have occurred in the line of duty; removes the requirement that an employee have come in contact with a toxic substance in the line of duty in order for the presumption to apply (mirrors HB 1245).

HB 1245 Adds colon, brain, and testicular cancer to the list of cancers that are presumed to have occurred in the line of duty; removes the requirement that an employee have come in contact with a toxic substance in the line of duty in order for the presumption to apply (mirrors HB 472).

SB 56 Adds children born or adopted after an employee’s date of death or disability to the list of dependents who are eligible for LODA health benefits, but only if such coverage does not result in an increase to the premium paid by the employer.

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LODA-Related Bills

Bill Number

SB 352 Adds lymphoma, non-Hodgkin lymphoma, colon, brain, and testicular cancers to the list of cancers that are presumed to have occurred in the line of duty; requires that an employee have completed five years of continuous service (instead of the current 12) in order for the presumption to apply.

SB 468 Adds Department of Military Affairs employees to the list of those covered by the Line of Duty Act when injured or killed in relation to a Governor-declared major disaster or emergency.

SB 494 Permits the eligible spouse of an employee who dies in the line of duty to remain eligible for LODA health coverage upon remarriage if the employee’s death occurred before July 1, 2017 and the eligible spouse pays for the coverage.

SB 642 Adds colon cancer to the list of cancers that are presumed to have occurred in the line of duty; removes the requirement that an employee have come in contact with a toxic substance in the line of duty in order for the presumption to apply (mirrors HB 1245).