© 2020 by The Segal Group, Inc.

Actuarial Education Session

Colorado PERA

March 20, 2020

Koren Holden – Senior Actuary, PERAMelissa Krumholz – Senior Consultant, Heath Care Actuary, SegalBrad Ramirez – Vice President & Consulting Actuary, Segal

Board of Trustees Meeting

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Actuaries

Deliverables

Valuation Reports

Actuarial Valuation Process

Retiree Health Valuations

Experience Studies

│Agenda

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Pension Actuarial Organizations

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Actuarial Designations

ASA – Associate of the Society of Actuaries

FSA – Fellow of the Society of Actuaries

MAAA – Member of the American Academy of Actuaries

EA – Enrolled Actuary (IRS/ERISA)

FCA – Fellow of the Conference of Consulting Actuaries

Actuaries are required to pass a series of examinations, have relevant experience, and satisfy annual continuing education requirements

Actuaries

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Actuarial Standards of Practice (ASOPs)– Developed by the Actuarial Standards Board (ASB)

– ASOP No. 4: Measuring Pension Obligations (currently being updated)

– ASOP No. 6: Measuring OPEB Obligations

– ASOP No. 27: Economic Assumptions

– ASOP No. 35: Demographic Assumptions

– ASOP No. 44: Asset Valuation Methods

– ASOP No. 51: Assessment and Disclosure of Risk

Code of Professional Conduct– Developed by the American Academy of Actuaries

– Integrity, communications, conflicts, control of product, and cooperation

Enforcement– Actuarial Board of Consulting and Discipline

– Guidance, complaints, counseling, mediation, and sanctions

Professional Code and Standards

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Presentations for Board meetings, Audit Committee, and LAC Hearing

Actuarial valuation report and funding projections

GASB 67/68/74/75 reports

Input for CAFR

Actuarial Letter of Certification

Review of MD&A and Actuarial Section

Signal Light report

Pension modeler design and update for Board planning meeting

Tier 2 Annual Increase analysis

415 benefit limit calculator update

Experience analysis and report (every four-to-five years, next in 2020)

Segal’s Deliverables for Colorado PERA

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Primary deliverable provided to the Board every year

Typically has three (or four) sections

– Summary

– Detailed results

– Supplemental information/exhibits

Should provide enough detail that another actuarycan evaluate the reasonability of results

What goes in

– Plan provisions

– Member data

– Financial data

– Actuarial assumptions and methods

– Funding policy

What comes out

– Actuarial balance sheet

– Various measures of assets, liabilities, and funded status

– Actuarially determined contribution rates (for comparison to PERA’s statutory contribution rates)

– Automatic Adjustment Provision (AAP) assessment

– Other required disclosures and risk assessments

Valuation Reports

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Every year, the actuary will

1. Collect inputs including assets, valuation data, and description of plan changes

2. Groom data by comparing it to last year and process it for valuation system

3. Program and test valuation system for plan provisions and assumptions

4. For every participant, project every possible plan benefit for each year using current data, plan provisions, and assumptions

5. Allocate liabilities to past, future, and current year service

6. Calculate actuarial value of assets using the smoothing method

7. Apply funding policy to determine actuarially determined contribution

8. Produce results, reports, exhibits, and additional information items

9. Perform analysis, studies, etc.

Valuation Process

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Valuation Assumptions

Demographic

Retirement Disability Withdrawal Mortality Form of benefit Marital/Beneficiary status Beneficiary age

differences

Inflation Long-term rate of investment return Salary increases Payroll growth

Economic

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Using the valuation software, benefits are projected for every participant and for every possible plan benefit

Projection of Benefits

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Annual Pension Cost – Individual Basis

Cost as% of pay

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Annual Pension Cost – Individual Basis

Current Year Normal Cost

Present Value of Future Benefits

Actuarial Accrued Liability

Present Value of Future Normal Costs

Current AgeEntry Age Retirement Age

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Defined to be the fund’s assets after application of the asset smoothing method

Objectives

– Reflect market value of assets

– Smooth out fluctuations in market values

– Produce less volatile funding measures, reducing contribution volatility

Application of smoothing

– Period restricted to a finite period (example: four years)

– Each year’s excess return recognized over the period in a systematic

– Gains and losses are treated the same

Effects of smoothing

– Delays recognition of asset gains and losses, allowing them to offset each other over time

– Dampens volatility of UAAL and actuarially determined contributions

Asset smoothing is appropriate for some measures (actuarially determined contributions) and not necessarily for others (solvency projections, GASB calculations)

Actuarial Value of Assets

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Defined to be the value of retirement benefits assigned to a single year

Budgeting tool

– Matches economic retirement benefits to years of service

– Portion of total benefits allocated to a year

– Series of amounts needed to be collected over working career that will fund present value of projected benefits at retirement

Methodology varies

– Most common methods are Projected Unit Credit and Entry Age

– Choice of methodology determines normal cost and actuarial accrued liability

– Determined for each active member every year

– Not necessarily directly determined by benefit earned each year

Entry Age method

– Used by most public sector systems for funding valuations, including Colorado PERA

– Required for GASB 67/68 calculations

– Benefit accrual is smoothed over entire career and adjusted for pay

– Relatively stable from year to year

– Usually expressed as a percentage of pay

Normal Cost

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Defined to be the accumulated value of past normal costs

What it is

– Amount of benefit that has been “assigned” to past service

– Portion of total benefits allocated years up to today

– Calculated for every participant under Entry Age method

– Can be thought of the amount that would be in the fund if• Current plan, data, and assumptions were always so• Contributions always equaled the normal cost• All assumptions always came true

What it isn’t

– The value of benefits that plan participants are eligible for today

– Amount of liability that is “due” immediately

– Amount of assets needed if the plan were to shut down

Actuarial Accrued Liability

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Defined to be Actuarial Accrued Liability minus Actuarial Value of Assets

Common measure of plan funding

– Positive amount means assets less than liabilities

– Negative amount (or surplus) means assets exceed liabilities

– Equivalent measure is funded percentage (assets/liabilities)

Used to determine actuarially determined contributions

– Funding policy should target a UAAL of zero (or possibly some excess)

– Equivalent policy target is a funded percentage of 100% (or possibly higher)

UAAL and funded percentage do not measure

– Plan solvency

– Termination liability

– Amount of assets that are needed to pay benefits today

Unfunded Actuarial Accrued Liability is not the only measure of the plan’s ability to pay benefits and should always be observed in consideration with other measures

Unfunded Actuarial Accrued Liability

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Funding policy determines how unfunded liability is paid over time

Sources of unfunded liability

– Plan changes

– Assumption and method changes

– Actuarial gains and losses

Amortization period

– Fixed period (closed) or rolling period (open)

– One layer or multiple layers

Amortization method

– Level dollar

– Level percentage of pay

Colorado PERA’s funding policy

Closed periods, level percentage of pay

– UAAL as of December 31, 2017 – 30 years until December 31, 2047

– Each year's increase/decrease in existing UAAL – Remaining period until December 31, 2047

– Assumption changes, actuarial gains and losses – 30 years from valuation date

– Plan changes – duration of enhancement, not to exceed 25 years

Amortization of UAAL

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Annual Pension Cost – Plan Basis

Actuarial Value of Assets

Unfunded Actuarial Accrued Liability

Amortization of UAAL

Normal Cost

Present Value of Future Normal Costs

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Automatic Adjustment Provisions (AAP) Test

Sum of StatutoryContribution Rates

ADC + Member Contribution Rate

Member contribution rate+ Employer contribution rate

+ Direct distribution (converted to a rate of pay)

Actuarially Determined Contribution (ADC) =

ER Normal Cost+ Amortization of UAAL

Actual Contributions Received

Amount Determined Necessary to Fund

the Plan

If resulting ratio does not fall into acceptable

corridor (98% - 120%), adjustments are required

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Retiree Health Valuation

Active/Inactive Census

Actuarial Cost Method

Demographic Assumptions

Benefit Provisions

Economic Assumptions

Claims and Enrollment Experience

Legislative Requirements

Funding and Investment Policies

Actuarial Valuation INPUTS

Plan Asset and Income Information

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Health Plan Participation– Future enrollment for current active employees and eligible dependents upon retirement

– Enrollment by plan option where multiple options exist

Healthcare Cost Trend– Short (select) and long-term (ultimate) expectations for future cost increases

– Can vary by type of benefit (health vs. pharmacy) and Medicare eligibility

Implicit Subsidy– Additional cost or value beyond a specified total premium cost due to impact of aging

– Example: retired members contribute based upon a specified full cost premium (blended with actives or other eligible groups with a lower cost) where the cost attributable to the retired members is higher than that premium due mainly to impact of age.

Explicit Subsidy– A specified amount of plan or employer funds that will be applied to total retiree health plan premiums on behalf of

participating members.

– May be a fixed amount or an amount based upon a formula, can vary by groups or age/service

Morbidity– Measures the impact of aging on healthcare claim cost;

– Additional annual cost increase beyond trend as a person ages

Medicare Coordination Effect– Plan and member liability after Medicare pays for those eligible

– Varies by coordination method selected by plan or is reflected in Medicare Advantage premiums and cost sharing provisions

Retiree Health Valuation Definitions

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Retiree Health Valuation Assumptions

Demographic

Retirement Disability Withdrawal Mortality Marital/Beneficiary status Beneficiary age

differences Morbidity Health plan participation

Inflation Long-term rate of investment return Salary Increases Payroll Growth Health Care Cost and Trend: variable

by plan/benefit and year Medicare Coordination

Economic

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Responsibilities

Board’s external, independent actuarial service provider – performs the periodic experience analysis when requested (every four-to-five years)

– Makes recommendations to the PERA Board regarding all actuarial assumptions

PERA Board – Ultimately responsible for the actuarial assumptions (per statute)

– Considers the information provided by their actuaries (and perhaps other experts) regarding each assumption

– Decides to retain or adjust the actuarial assumptions used for valuation purposes

Purposes of an Experience Analysis

Evaluate each actuarial demographic and economic assumption and each actuarial method used in the annual valuations

Periodically recalibrate the actuarial assumptions, as necessary, to more closely estimate the costs and provide PERA with a more accurate representation of future benefit responsibility

Note: The assumptions do not directly affect the “actual cost” of the plan, only the estimates produced.

Process to Perform an Experience Analysis

To be discussed in detail at the September Board Planning Session

Experience Study

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Questions?