Solvency Update - Home - New Mexico Legislature 101917 Item 4...In January 2017, in response to slower than expected growth in long term funded ratios (1.5% growth from FY16 to FY43

Solvency UpdateInvestments and Pensions Oversight Committee

Representative Tomás E. Salazar, ChairSenator George K. Muñoz, Vice-Chair

October 19, 2017

Dan Mayfield, Board Chair, PERAWayne Propst, Executive Director, PERA

Dominic Garcia, Chief Investment Officer, PERA

Slide 2

Asset Class Returns Over Time

-5

0

5

10

15

20

25

Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14 Jan-17

Rolling 10-Year Returns

PERA 10-Year Target Return AssumptionStocks (S&P - 500 Index)Bonds (Bloomberg Barclays - U.S. Aggregate Index)Cash (Citi - 3 Month T-Bill Index)Reference Portfolio (55% S&P 500/ 45% US Agg)

Returns (%)

Slide 3

PERA Fund Performance• The PERA Fund balance was $15.0 billion on June 30, 2017• During FY 2017, the Fund returned 11.13% (net of fees) and was up $967.4 million

(net of fees)• PERA Fund paid out benefits of $1.01 billion during FY 2017• PERA Smart Save (457b) balance was $567 million on June 30, 2017 with 20,466

participants

As of 6/30/2017 1 Year (FY17) 3 Year 5 Year 10 YearSince Inception

6/30/1985

PERA Total Fund Returns

(Net of Fees)*11.13% 4.40% 8.53% 3.97% 9.05%

Policy Benchmark* 11.68% 5.22% 8.50% 5.01% 9.01%

Value Add -0.56% -0.82% 0.03% -1.04% 0.03%

*Annualized returns

Slide 4

In January 2017, in response to slower than expected growth in long term funded ratios (1.5% growth from FY16 toFY43 or 75.3% to 76.8%) and increases to PERA’s amortization period to pay off its unfunded liability of $4.9 billion(from 41 years at the close of FY15 to 58 years at the close of FY16), PERA Board leadership instructed staff toprepare a series of educational sessions focused on liabilities and intended to help clarify the major drivers of PERA’sliabilities.

The purpose of the educational sessions was not to develop recommendations for benefit changes but instead to helpthe Board fulfill its fiduciary responsibilities and shift focus solely from the investment side of the equation to a morein-depth understanding of PERA’s incurred obligations. Staff was asked to provide information on the impact ofbelow and above expected investment returns on the Plan’s funded ratio, as well as to model the impact of majorcontributors to liabilities (contributions shortfalls, plan designs, etc.).

Strong FY17 returns (11.13%) have improved the long term 2043 funded ratio projection for the total PublicEmployees (PE) Plan from 76.8% at the end of FY16 to 87.6% as of the end of FY17, but this still falls short of the100% funded goal set by the Board in 2013. Municipal Fire and State General Plans continue to significantly lag thetotal PE Plan funded ratio.

Lower than expected (7.25%) future returns, could quickly erode gains made as a result of pension reform and aboveexpected investment performance such as the Fund experienced in FY17.

Benefit modeling presented to the Board at its Retreat in June (and contained in this presentation) was intended tobe informational and not to serve as recommendations to the Board or Legislature.

Solvency Update

Slide 5

Projection of PERA Funded Ratios

75.3%

76.8%

113.4%

133.1%

106.2%

63.8%

29.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

Comparison of Projections Total PERA 2012 to 2016(Star includes 2016/2017 asset return of 11.13%)

2016 2015 2014 2013 2012

87.6%

Slide 6

Projection of PERA Funded Ratios by Division

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

2016 Projected Funded Ratio of PERA and Each Division Including2016/2017 Asset Return of 11.13%

PERA Total State General State Police Muni General Muni Police Muni Fire

48.3%

107.5%

87.6%

46.0%

106.5%

Slide 7

Funding Equation: C + I = B + E

To ensure long term solvency the inflows must equal the outflows over the life of the program

INFLOW:Employee Contributions

+Employer Contributions

+Investment Income

OUTFLOW:Benefit Payments

+ Expenses

Slide 8

Expected Benefits Promised

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

Future Members Current Actives Current Retirees

Billi

ons

PERA Expected Total Benefit Payments Including Future Members – Basis forProjections

Slide 9

Allocation of Actuarial Accrued Liability($19.4 billion)

$13,199 68%

$399 2%

$5,876 30%

Retirees Inactives Actives

Slide 10

FY16 NASRA Public Fund Survey

NASRA Median N.M. PERA

Funded Ratio 73.1% 75.3%

Investment Return 7.50% 7.25% 10 yrs., 7.75%

Cash Flow -3.0% -3.4%

Actives/Retirees 1.43 1.31

Slide 11

Sources of UAAL ($4.82 billion) Since Full Funding in 2002

(1.8)

1.5

5.1

0.1

(3.0)

(2.0)

(1.0)

-

1.0

2.0

3.0

4.0

5.0

6.0

Benefit Changes Assumption Changes Asset Experience Other Experience

UAAL Components ($ billions)

Slide 12

Current Statutory Rates

Division Member Employer Total

State General 8.92% 16.99% 25.91%

State Police/Corrections 8.70% 25.59% 34.29%

Municipal General 13.54% 9.81% 23.35%

Municipal Police 17.22% 18.68% 35.90%

Municipal Fire 21.57% 17.56% 39.13%

Slide 13

Minimum Recommended vs. Available UAAL Rates

MinimumRecommended

(% of pay)

Available from Statutory Rate Shortfall

$ millions(increases

2.75% per year)

State General 18.15% 10.16% 7.99% 74.3

State Police/Corr. N/A 12.49% -31.98% (25.7)

Municipal General 8.60% 9.16% -0.56% (4.9)

Municipal Police 15.20% 13.20% 2.00% 4.0

Municipal Fire 27.15% 13.28% 13.87% 16.2

PERA Total 13.20% 10.29% 2.91% 63.9

Slide 14

Median returns:• 7.25% through 2026• 7.75% thereafter

Means 50% likelihood of future returns exceeding expectation Asset gains and losses are equally likely

33rd percentile returns:• 5.79% through 2026• 6.29% thereafter

Means 66.7% likelihood of future returns exceeding expectationAsset gains are twice as likely as losses

25th percentile returns:• 5.02% through 2026• 5.52% thereafter

Means 75% likelihood of future returns exceeding expectationAsset gains are three times as likely as losses

Investment Return Probabilities

Slide 15

Distribution of Expected Returns

7.25%

-3.75%-1 SD

18.25%+1 SD

68% of future annual returns are expected to fall in this range

Slide 16

Illustration of Investment VolatilityModeled change: Return of 11.13% in FY17

76.8%

75.3%

87.6%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio

2016 Projection of Funded RatiosBaseline vs. Modeled Changes

Year 2043 Value Highlighted

2016 Baseline Projection Scenario with Modeled Changes

Slide 17

Illustration of Investment VolatilityModeled change: Return of 11.13% in FY17, and -3.75% in FY18

87.6%

75.3%

77.4%

57.0%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio

2016 Projection of Funded Ratios with 2017 11.13% ReturnBaseline vs. Modeled Changes


2016 Baseline Projection with 2017 Return Scenario with Modeled Changes

Slide 18

Illustration of Investment VolatilityModeled change: 10 random annual returns average 7.32% but

poor returns occur first

Returns

-10.28%

-2.45%

1.05%

2.30%

2.86%

4.46%

12.66%

19.82%

20.58%

28.11%

87.6%

75.3%

77.4%

49.2%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio




Slide 19

Benefit ModelingModeled change: Tier 1 to Tier 2 benefits prospectively, new Tier 3 with

0.50% reduction to benefit accrual rate & 50th percentile returns

87.6%

76.0%

78.2%

101.9%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio




Slide 20


0.50% reduction to benefit accrual rate & 33rd percentile returns

87.6%

76.0%

78.2%

45.8%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio




Slide 21


0.50% reduction to benefit accrual rate & 25th percentile returns

87.6%

76.0%

78.2%

24.6%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio




Slide 22

Benefit ModelingModeled change: Suspend Cost of Living Adjustments & 50th percentile returns

87.6%

87.6%

90.9%

176.2%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio




Slide 23

Benefit ModelingModeled change: Suspend Cost of Living Adjustments & 33rd percentile returns

87.6%

87.6%

90.9%101.5%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio




Slide 24

Benefit ModelingModeled change: Suspend Cost of Living Adjustments & 25th percentile returns

87.6%

87.6%

90.9%

72.7%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio




Slide 25

Benefit ModelingModeled change: Replace 2% annual compounding COLA and with a 5% annual 13th check

87.6%

87.6%

90.9%

153.7%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio




Slide 26

Illustration of Investment VolatilityModeled change: Returns of 11.13% in FY17 and 0.00% in FY22

87.6%

75.3%

77.4%

70.6%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio




Slide 27

Illustration of Investment VolatilityModeled change: Returns of 11.13% in FY17 and -5.00% in FY22

87.6%

75.3%

77.4%

58.8%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio




Slide 28

Illustration of Investment VolatilityModeled change: Returns of 11.13% in FY17 and -10.00% in FY22

87.6%

75.3%

77.4%

47.1%

0%10%20%30%40%50%60%70%80%90%

100%110%120%130%140%150%160%170%180%190%200%

2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 2066

Fund

ed R

atio




Slide 29

NM PERA is not alone in facing head winds to achieving full funding and paying downliabilities. Many states, including Colorado that went through a reform process in 2012, arere-examining liabilities in the light of expected investment experience and other factors.

NM PERA will conduct an experience study in the spring of 2018 that may result in furtheradjustments to economic and demographic assumptions, including revisiting theinvestment return assumption established in 2016.

The experience study should give the Board a clearer picture of the effectiveness of the2013 reforms.

Until the experience study is completed and changes are modeled, staff would notrecommend that the Board consider additional investment rate assumption, contributionor plan design changes.

Conclusion

Documents

Solvency Update - Home - New Mexico Legislature 101917 Item 4...In January 2017, in response to slower than expected growth in long term funded ratios (1.5% growth from FY16 to FY43