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Effective Benefit Management and Allocation of SDRS Resources

September 5-6, 2012

South Dakota Retirement System

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Minimum SDRS Sustainability Equation

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Ideal SDRS Sustainability Equation

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Unsustainable Equation

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The SDRS Sustainability Equation

Contributions + Investment Return = Benefits + Expenses

• Historically in balance except for 2009-2010; Board recommended corrective actions

• SDRS has frequently met ideal standard with healthy Cushion

• Currently, SDRS expected to be slightly out of balance due to:– Board adopted assumption changes

– Expected smaller future Investment Return and less Income

– Relatively small Cushion

– Fixed contributions and commitment to manage SDRS within current resources

• Review of Benefits one option to restore balance

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July 1, 2011 Funding Requirements

90%8%

2%

Amortization and Interest

0.98%

Expense .25%

Normal Cost

11.25%

Funding Policy Contribution Rate: 12.48% of PayTotal Anticipated Contribution Rate: 12.48% of Pay

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Relative Cost of SDRS BenefitsCurrent Benefit Design and Assumptions

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First Step in Benefit Review

Identify:

• Subsidies

• Inequities

• Inefficiencies

• Higher costs than anticipated

• Above/below competitive practices

• Conflicts with good public policy and/or HR objectives

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Board Review of the Following Potential Subsidies

•Special Early Retirement

•Early Retirement

•Benefits for:– Married members

– Large families

– Young spouses

•Class A/Class B

•Alternate Formula

•Retire/rehire

•Pre-retirement Survivor and Disability Benefits

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Subsidies?

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Board Review of the Following Potential Inequities

• Higher benefits for married members and large families

• Class A/Class B

• Alternate Formula

• Retire/Rehire

• Final Average Pay (salary spiking)

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Benefit Inequities?

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Board Review of the Following Potential Inefficiencies

• Pre-retirement Survivor Benefits

• Pre-retirement Disability Benefits

• COLA in excess of CPI

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Benefit Inefficiencies?

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Board Review of the Following Potential Areas of Higher Costs than Anticipated

•Retire/Rehire

•Final Average Pay

•Alternate Formula

•Class A/Class B

•Lifetime benefits due to improving life expectancy

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Higher Costs than Anticipated?

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Benefits Above/Below Competitive Practices

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Board Review of the Following Potential Conflicts with Good Public Policy and/or Human Resource Objectives

•Normal Retirement eligibility

•Early Retirement incentives

•COLA that exceeds inflation

•Total Survivor and Disability Benefits that exceed 100% of pay

•PRO benefits for non-vested members

•Alternate Formula

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Conflicts with Good Public Policy and/or Human Resource Objectives?

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Other Issues: Varying Benefits with Funded Status or Economic Measures

Why? SDRS costs would automatically reduce in bad times and increase in good times

•Current examples:– COLA is indexed to Funded Status and partially to CPI

– Interest on accumulated contributions indexed to T-Bill rate

•Possible additional applications– Performance Account for additional benefit improvements

– Index retirement age to improved life expectancy

– Introduce DC component to SDRS plan design with smaller DB component

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What Next?

• Define the amounts needed to maintain actuarial balance

• Determine what subsidies, inequities, inefficiencies, higher costs, and above competitive practices exist and significance

• Analyze and prioritize

• Consider legislative changes for 2013 Legislation