Dallas Police Fire Pension Investments

Dallas Police and Fire Pension System Investment Return Assumption

July Board Meeting July 9, 2015

Investment Return Assumption

• The Board has adopted an assumption for the long-term rate of return on

assets

– The assumption should be the best estimate of future experience

– The assumption is used to value the liabilities of the System

– The current assumption is 8.5%, net of investment and administrative

expenses

• In order to develop the assumption, we take into account past experience,

future expectations, and professional judgment

– Buck uses a model called GEMS® Economic Scenario Generator from

Conning and Company to produce asset return forecasts

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GEMS®

• The GEMS is particularly well suited to develop the long-term market

assumptions suitable for public pension

– GEMS is calibrated to reflect current conditions

– Over the longer term, GEMS allows for a broader range of economic and

capital market environments and related asset performance, determined in

part by historical observations

– The broad range of economic and capital market simulations produced by

GEMS provides a more complete picture than more static models of the

potential rewards and risks that a pension fund will be exposed to over its

lifetime

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Investment Return Analysis

• The results of the asset return analysis produced by GEMS is shown on the

following slides

– Please note that we are providing the results at a 30 year investment horizon,

as well as a 20 year investment horizon, for comparison with results produced

by other sources

– The results assume administrative expenses of 0.24%

– The results assume average annual rates of inflation of roughly 2.75% over

20 years and 3.00% over 30 years

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Expected Arithmetic Return

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Horizon

Expected

Real

Return

Assumed

Inflation

Expected

Nominal

Return

Administrative

Expenses

Expected Nominal

Return Net of

Expenses

20 years 6.32% 2.79% 9.11% 0.24% 8.87%

30 years 6.61% 3.04% 9.65% 0.24% 9.41%

Expected Geometric Return

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Geometric Net Nominal Return

Horizon 40th Percentile 50th Percentile 60th Percentile

20 years 7.52% 8.21% 8.86%

30 years 8.07% 8.81% 9.40%

- Assumes Administrative Expenses of 0.24%

- 20 year horizon: assumed annual rate of inflation of 2.77%

- 30 year horizon: assumed annual rate of inflation of 3.01%

Recommended Return Considerations

• When recommending a return assumption, in the past we have looked at a 30-year horizon, and assumed that future experience will be close to the 50th percentile of the distribution of expected returns over that horizon

• The System currently maintains a not insignificant portion of its holdings in “non-traditional” assets

– The assets have no liquid market

– The revaluation of these assets has resulted in significant write-downs in 2013 and 2014

• The report we issued in May showed an actuarial loss of $279 million on assets in 2014

– Please note that since the January 1, 2014 valuation did not reflect the final audited asset values, a portion of the $279 million actuarial loss is due to losses that actually occurred in 2013

• Since May more 2014 asset values have been reported

– The resulting actuarial loss for 2014 is now closer to $460 million

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• Considering the magnitude of the 2014 and 2013 losses, as well as the size of

the non-traditional assets, we may need to re-evaluate how the asset return is

determined

– Specifically, if we assume that these non-traditional assets will continue to be

a drag on the fund in the near term, we may want to look at an asset return

that is lower than the 50th percentile

• As noted on a previous slide, the 40th to 50th percentiles of the distribution of

future asset returns were in the ranges of:

– Over a 20 year horizon, 7.52% to 8.21%

– Over a 30 year horizon, 8.07% to 8.81%

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• A reduction of the long-term assumed rate of return could be accompanied by a

somewhat greater reduction in the short-term assumed rate of return, if it is

expected that the performance of the non-traditional assets will continue to

dampen the return in the near future

– This would be implemented in the form of a select-and-ultimate return

assumption

– We would assume that the return is somewhat lower over the near term (the

select period) but will rise to the long-term expected rate of return is after the

select period is over

– For example, if we believe the long-term rate of return is actually 7.75%, but

we expect lower returns on the non-traditional assets in the near term, we

might assume the return is 7.5% for 2015 – 2019 but then increases to

7.75% for 2020 and beyond

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Impact of the Asset Losses

• The following slide shows the impact of the asset losses for 2014 on the

System’s funded percentage (i.e. the ratio of Actuarial Value of Assets to

Accrued Liability)

– The “2014 Report” line shows the projection based on the 1/1/2014 valuation

• It assumes that the fund earns 8.5% in 2014

• It reflects the Plan changes that were implemented in 2015

– The “May 2015 Report” line shows the projection based on the 1/1/2015

valuation that was presented in May

• It reflects that the fund had a $279 million actuarial loss in 2014

– The “Updated July 2015 Assets” line shows the projection based on the

1/1/2015 valuation and reflects the most recent 2014 asset valuation

information

• It reflects that the fund had a $460 million actuarial loss in 2014

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Impact of the Asset Losses - Current Plan Provisions

Assumed Future Asset Returns of 8.5%

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0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

180.0%

Fu

nd

ed

Perc

en

tag

e

2014 Report

May 2015 Report

Updated July 2015 Assets

Impact of Asset Losses

• As seen on the previous graph, under the current plan provisions the asset loss

in 2014 leads to the projection that the System will run out of money, even if it

makes the 8.5% return every year after 2014

• Based on the stochastic projections we provided in 2014, without significant

gains in the near future, the return for 2014 puts the results in about the 25th

percentile of those projections

• If the asset return assumption of 8.5% is lowered, the results are even worse

since the plan will have less asset return to pay for future benefit payments

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Impact of Revised Asset Assumption

• The following slide shows the impact on the same funded percentage

described earlier if the long-term asset assumption is changed

• We have made projections under the following assumed rates of asset returns:

– 8.50% (current assumption)

– 8.00%

– 7.75%

– 7.50%

– 7.50% for 2015 – 2019 and 7.75% for 2020 and beyond

– 7.25%

– 7.00%

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Impact of Revised Asset Assumption Current Plan Provisions

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0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Fu

nd

ed

Perc

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tag

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8.50% Return

8.00% Return

7.75% Return

7.50% Return

7.50% for 2015-2019, then 7.75%

7.25% Return

7.00% Return


• The January 1, 2015 funded percentage (i.e. the ratio of Actuarial Value of

Assets to Accrued Liability) under each of the scenarios is as follows:

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Return Assumption Funded Percentage

8.50% 71.4%

8.00% 68.3%

7.75% 66.8%

7.50% 65.3%

7.50%/7.75% 66.4%

7.25% 63.8%

7.00% 62.3%


• The asset return assumption should be our best estimate of what we believe

the future long-term return on assets will be

• If we believe that certain assets are going to continue to be a drag on the fund,

that should be reflected in the assumed rate of asset return

• The GEMS output indicates that the 40th percentile of expected long-term asset

returns is between 7.52% and 8.07%

• If ongoing problems with non-traditional assets lead us to expect that future

returns will be in that range, it will be necessary to adjust the assumption

accordingly

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GASB 67 Impact

• The asset return assumption also impacts the Total Pension Liability (TPL)

under GASB 67

– The long-term rate of return on plan assets can only be used to measure the

TPL if the plan is projected to have assets

– If there is a point where assets are no longer projected to be available to pay

for benefits, a municipal bond rate would need to be used.

– Therefore, if assets are projected to be depleted, the result is a blended rate

that would be lower than the long-term rate of return on plan assets

– As shown on the previous graphs, as a result of the most recent asset write-

downs the plan is projected to run out of assets, even if returns of 8.5% per

year can be achieved

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GASB 67 Impact

• The following shows the impact of the blended rate, as well as an example of

the impact of changing the return assumption to something lower than 8.5%

– The blended rate is computed by applying a discount rate of 3.34% to

benefits projected to be paid after assets are projected to be depleted, which

is based on the S&P Municipal Bond 20 Year High Grade Rate Index

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Assumed Rate of Return 8.50% 7.75% 7.50%

Net Pension Liability

at Assumed Rate of Return

$ 2,211,158,099

$ 2,591,207,587

$ 2,729,480,109

Blended Discount Rate 6.19% 5.20% 5.01%


at Blended Discount Rate

$ 3,566,972,478

$ 4,353,822,629

$ 4,523,257,470

Assumed Rate of Return 7.25% 7.00%


at Assumed Rate of Return

$ 2,874,106,889

$ 3,025,458,414

Blended Discount Rate 4.83% 4.67%


at Blended Discount Rate

$ 4,689,884,750

$ 4,843,214,819

Projection Assumptions

• Except as noted in the presentation, results were based on the same plan

provisions, assumptions, methods, assets and data as noted in the 2015

valuation report issued in May.

• Specifically assets are assumed to earn the returns noted in the presentation

for 2015 and beyond.

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Certification

Future actuarial measurements may differ significantly from current

measurements due to plan experience differing from that anticipated by the

economic and demographic assumptions, increases or decreases expected as

part of the natural operation of the methodology used for these measurements,

and changes in plan provisions or applicable law. An analysis of the potential

range of such future differences is beyond the scope of this report.

Use of this presentation for any other purposes or by anyone other than the

Dallas Police and Fire Pension System may not be appropriate and may result in

mistaken conclusions because of failure to understand applicable assumptions,

methods, or inapplicability of the report for that purpose. This presentation should

not be provided without a copy of this certification. No one may make any

representations or warranties based on any statements or conclusions contained

in this presentation without Buck Consultants’ prior written consent.

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Certification

The results were prepared under the direction of David Driscoll and David Kent

who meet the Qualification Standards of the American Academy of Actuaries to

render the actuarial opinions contained herein. These results have been

prepared in accordance with all applicable Actuarial Standards of Practice, and

we are available to answer questions about them.

David L. Driscoll, FSA, EA, MAAA David Kent, FSA, EA, MAAA

Principal, Consulting Actuary Director, Consulting Actuary

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Questions?

THANK YOU

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Dallas Police Fire Pension Investments

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