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Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009 GRAHAM SCHMIDT BOB MCCRORY EFI ACTUARIES JANUARY 19, 2010 1

Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

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Page 1: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

Fresno County Employees’ Retirement Association

ACTUARIAL AUDIT

ACTUARIAL VALUATION OF JUNE 30, 2010EXPERIENCE STUDY FOR

JULY 1, 2006 - JUNE 30, 2009

GRAHAM SCHMIDTBOB MCCRORYEFI ACTUARIES

JANUARY 19, 2010

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Page 2: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

•Good news•More good news

•Even more good news

Today’s Discussion2

Page 3: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

Good News

We agree! Liabilities and costs in actuarial

valuation as of June 30, 2010 agree within reasonable tolerances

Our independent experience study from July 1, 2006 to June 30, 2009 produced comparable results

Experience study recommendations are reasonable and in accordance with generally accepted actuarial principles

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Page 4: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

Good News4

($ in Millions) June 30, 2010

ValuationEFI Independent

Review Ratio

Present Value of Benefits $4,961.5 $4,886.9 98.5%

Actuarial Accrued Liabilities 4,092.5 4,041.7 98.8%

Actuarial Value of Assets 2,983.0 2,983.0

100.0%

Unfunded Accrued Liability (UAL) 1,109.5 1,058.7 95.4%

UAL Amortization 99.7 95.2 95.5%

Normal Cost 80.3 77.9 97.0%

Total 180.0 173.1 96.2%

Page 5: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

More Good News

Graham had a baby!

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Page 6: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

Even More Good News

We found some things to quibble about Mortality rates Rate of return Cost of living adjustments Productivity pay increases

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Page 7: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

Mortality Rates

Life expectancy after retirement may be underestimated in recommended mortality rates; therefore, liabilities may be understated A number of retired members were incorrectly

treated as deaths Members with higher benefits tend to live

longer; this is not considered in setting rates Fixing these issues resulted in an 11% margin

decreasing to -3% No allowance for future mortality

improvements Even current mortality rates are

overestimated Not a huge issue, but it is worth addressing

Assumptions for retirees should be carefully considered before changes in GASB rules

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Page 8: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

Rate of Return

Assumed rate of return of 7.75% is reasonable, but may have no margin Gathered assumptions from Wurts –

returns, standard deviations by class, correlation matrix

Simulated your investment allocation – 10,000 trials of a 10-year period

Average compound return: 7.66% after expenses

Probability of making 7.75%: 49.3% This calculation is illustrative, not

definitive Return assumptions are declining in

general

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Page 9: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

Rate of Return9

Page 10: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

Cost of Living Adjustments

Our analysis indicates that the COLAs are likely to average below 3% Current inflation assumption is 3.5% COLA is capped at 3%; any shortfall

relative to inflation is banked In a low inflation environment, new

retirees will not build up a bank balance to offset later inflation

As a result, average COLA will be somewhat less than the cap

Based on typical retiree mix and banking procedures at other ‘37 Act counties, we estimate 2.7% is a reasonable COLA estimate

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Page 11: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

Cost of Living Adjustments11

Page 12: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

Productivity Increases

We are skeptical of productivity increases in wages, at least for the next 10 years Current assumption is wage

increases – not due to merit/longevity – will average 4% per year, 0.5% higher than inflation

We doubt even inflationary increases for the foreseeable future

We also see wage decreases and reductions in force happening now

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Page 13: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

Summary

We confirm Segal valuation liabilities and costs

We confirm Segal experience study recommendations

We have listed areas for further consideration Mortality rates Assumed investment return Assumed cost of living increases Assumed productivity pay increases

Thank you for this opportunity!

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Page 14: Fresno County Employees’ Retirement Association ACTUARIAL AUDIT ACTUARIAL VALUATION OF JUNE 30, 2010 EXPERIENCE STUDY FOR JULY 1, 2006 - JUNE 30, 2009

• Graham Schmidt(415) 439-5313

[email protected]

• Bob McCrory(206) 328-8628

[email protected]

Contact Information14