FCERA Board of Retirement and Fresno County Board of Supervisors Joint Meeting – April 30, 2009 Contribution Volatility and Asset Smoothing FCERA Board

FCERA Board of Retirement and Fresno County Board of Supervisors

Joint Meeting – April 30, 2009

Contribution Volatility and Asset Smoothing

FCERA Board of Retirement and

Fresno County Board of Supervisors Joint Meeting - April 30, 2009

Paul Angelo, FSA & Andy Yeung, ASAThe Segal Company

San Francisco5032871

Slide 2

FCERA Asset Smoothing – April 30, 2009

Actuarial Value of Assets (AVA)

Unfunded Actuarial

Accrued Liability (UAAL)

Amortization of UAAL

Normal Cost

Present Value of Future Normal Costs

Current Contribution

Slide 3


Managing Contribution VolatilityAsset allocation – volatility at the sourceAsset smoothing

Specific to investment return volatility

UAAL amortization – assets and liabilities More than just asset volatility control

Direct contribution rate smoothing Contribution collar – limits increases Contribution rate phase-in – delays full impact

Slide 4


Actuarial Value of AssetsTo reduce the impact of short term asset volatility, plans use

an Actuarial Value of Assets (AVA) which “smoothes” returns Each year, take the difference between:

Actual return on Market Value of Assets (MVA)Assumed return on MVA (currently 8.00%)

Difference is spread over (typically) five years

Reduces volatility without reducing long term expected return

Slide 5


Example: one good year

Year 1 2 3 4 5 6

MVA return 13% 8% 8% 8% 8% 8%

Deferred (5%)

Recognized 1% 1% 1% 1% 1%

AVA return 9% 9% 9% 9% 9% 8%

Slide 6


Example: one good, then one bad year

Year 1 2 3 4 5 6 7

MVA return 13% 3% 8% 8% 8% 8% 8%

Deferred (5%) 5%

1% 1% 1% 1% 1% Recognized

(1%) (1%) (1%) (1%) (1%)

AVA return 9% 8% 8% 8% 8% 7% 8%

Slide 7


The one thing to remember:

Actuarial valuation determines the current or “measured” cost, not the ultimate cost

Assumptions and funding methods affect only the timing of costs

C + I = B + EContributions + Investment Income

equals

Benefit Payments + Expenses

Slide 8


Asset Smoothing MechanicsWhen MVA return is greater than assumed

Smoothing “defers gains” Smoothed value (AVA) is less than MVA UAAL and contributions are larger

When MVA return is less than assumed Smoothing “defers losses” Smoothed value (AVA) is greater than MVA UAAL and contributions are smaller

Slide 9


Plan Amount notyr end recognized

thru Dec. thru June

Jun-07 $156,975 $70,522 80% 90% $189,050Jun-06 $61,745 ($26,692) 60% 70% $18,363Jun-05 $111,658 ($56,435) 40% 50% $16,446Jun-04 $141,500 ($42,934) 20% 30% $15,420Jun-03 ($162,072) $67,831 0% 10% $6,783Net GAINS not yet recognized $246,061

Market Value of Assets (MVA) $2,938,652MINUS GAINS not yet recognized ($246,061)Actuarial Value of Assets (AVA) $2,692,591

AVA/MVA ratio 92%

Percent notrecognized

Market ValueGain/(loss)

FCERA Actuarial Value of Assets as of June 30, 2007(Market G/L measured in six month increments)

Slide 10



thru Dec. thru June

Jun-08 ($103,817) ($321,390) 80% 90% ($372,305)Jun-07 $156,975 $70,522 60% 70% $143,550Jun-06 $61,745 ($26,692) 40% 50% $11,352Jun-05 $111,658 ($56,435) 20% 30% $5,401Jun-04 $141,500 ($42,934) 0% 10% ($4,293)Net LOSSES not yet recognized ($216,295)

Market Value of Assets (MVA) $2,726,605PLUS LOSSES not yet recognized $216,295Actuarial Value of Assets (AVA) $2,942,900

AVA/MVA ratio 108%



FCERA Actuarial Value of Assets as of June 30, 2008(Market G/L measured in six month increments)

Slide 11



thru Dec. thru June

Jun-09 ($981,300) $0 80% 90% ($785,040)Jun-08 ($103,817) ($321,390) 60% 70% ($287,263)Jun-07 $156,975 $70,522 40% 50% $98,051Jun-06 $61,745 ($26,692) 20% 30% $4,341Jun-05 $111,658 ($56,435) 0% 10% ($5,644)Net LOSSES not yet recognized ($975,554)

Market Value of Assets (MVA) $1,961,700PLUS LOSSES not yet recognized $975,554Actuarial Value of Assets before corridor $2,937,254Actuarial Value of Assets AFTER corridor $2,354,040

AVA/MVA ratio (before corridor) 150%



FCERA Actuarial Value of Assets as of June 30, 2009ESTIMATED 2008/2009 Market Value return = -28%

Slide 12


Asset Smoothing and “MVA Corridor” Many plans (incl. FCERA) limit how far the AVA can get from the MVA by

limiting the AVA ratio Typical 20% “MVA corridor” means the AVA must be between 120% and

80% of MVA Maximum deferred gain or loss is 20% of MVA Hitting the MVA corridor effectively stops smoothing

MVA corridor will have major impact starting in 2009 For FCERA, 6/30/2009 AVA is 150% of MVA Immediate cost increase with MVA corridor: 15.0% Immediate cost increase w/o MVA corridor: 3.3%

Slide 13


$1.0

$2.0

$3.0

$4.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Valuation Date (6/30)

Asse

ts (

$ in

Billio

ns

)

MVA

AVA with corridor

AVA w/o corridor

FCERA Historical MVA and AVA

Ratio of AVA to MVA (before 20% MVA Corridor)

86% 86% 95% 95% 116% 116% 106% 100% 97% 92% 108% 150%

Slide 14


Actuarial Standards of Practice #44ASOP 44 focuses on two key features

How close does AVA stay to MVARatio of AVA to MVA (“AVA Ratio”)

How long before AVA returns to MVASmoothing period

ASOP 44 also provides some structure If “likely” to be “reasonable”, both are required If “sufficiently close” or “sufficiently short” then only one or the other is

required

Slide 15


Longer Asset Smoothing Period?Possible Systemic Reasons

Longer business/economic cycles Greater actual market volatility (assets) Greater sensitivity to contribution rate volatility Greater asset volatility relative to payroll

Higher funded percentages More mature plan, larger benefit levels

Practical Reasons Reduce immediate impact of market losses Delay full impact of market losses

Slide 16


5 year Smoothing and MVA Corridor Under ASOP 44, is 5 years “sufficiently short”?

Widespread use, industry opinions Also consider cash flow, employer ability to pay

If any action taken, consider wider MVA corridor Considerations beyond just complying with ASOP Maintains policy of some control on AVA vs MVA

Important if also considering longer smoothing Use actual 5 yr smoothing AVA ratio as a guide

For FCERA, consider 130% or 140%Fully aware of current and future implications

Slide 17


Longer Smoothing and MVA Corridor Longer smoothing means larger AVA ratios Longer period increases need for MVA corridor Possible framework for policy alternatives

5 year smoothing: corridor based on actual AVA ratio Longer periods: use this corridor or narrower

Allows more time to get to ultimate contribution rateDoes not lower immediate rate impact

For longest periods (10 - 15 years) use 120%-130%

Slide 18


Q U E S T I O N S

Slide 19


20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Valuation Date (6/30)

Pe

rce

nt

of

Pa

yro

ll

Scenario 1-A: 80%-120% Corridor

Scenario 1-B: 70%-130% Corridor

Scenario 1-C: 60%-140% Corridor

Scenario 1-D: No Corridor

5 Year Smoothing Period (Exhibit 3-1)

108% 150% 144% 128% 113% 101% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Ratio of AVA to MVA(No Corridor) Shown Above

-28% return for 2008/2009, 0% for 2009/2010 and then 8% per year

Employer Contribution Rates

Slide 20


20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022


Pe

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nt

of

Pa

yro

ll






108% 153% 150% 137% 124% 114% 107% 101% 100% 100% 100% 100% 100% 100% 100%




Slide 21


20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022


Pe

rce

nt

of

Pa

yro

ll






108% 155% 155% 144% 132% 123% 117% 112% 107% 104% 100% 100% 100% 100% 100%




Slide 22


20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022


Pe

rce

nt

of

Pa

yro

ll






108% 156% 157% 146% 135% 127% 121% 116% 112% 108% 105% 102% 100% 100% 100%




Slide 23


20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022


Pe

rce

nt

of

Pa

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ll





Various Smoothing Periods – No Corridor (Exhibit 6)



Slide 24


20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022


Pe

rce

nt

of

Pa

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ll





Various Smoothing Periods – 120% Corridor (Exhibit 7)



Slide 25


20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022


Pe

rce

nt

of

Pa

yro

ll








Slide 26


20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022


Pe

rce

nt

of

Pa

yro

ll








Slide 27


20%

30%

40%

50%

60%

70%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022


Pe

rce

nt

of

Pa

yro

ll





Various Smoothing Periods – No Corridor (Exhibit 6)



Slide 28


Q U E S T I O N S

Documents

FCERA Board of Retirement and Fresno County Board of Supervisors Joint Meeting – April 30, 2009 Contribution Volatility and Asset Smoothing FCERA Board