Virginia Retirement System Update

Virginia Executive Institute Alumni Association

June 7, 2012Patricia Bishop, VRS Deputy Director

Agenda

System Overview Pension Reform Legislative Overview

2

System Overview

VRS Total MembershipTeachers 147,129

Political Subdivisions 104,600

State Employees 78,622

State Police Officers’ Retirement System (SPORS) 1,812

Virginia Law Officers’ Retirement System (VaLORS) 9,552

Judicial Retirement System (JRS) 403

Total Active Members 342,118

Retirees/Beneficiaries 161,006

Inactive/Deferred Members 109,291

VRS Overall Impact 612,415

As of December 31, 20114

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dec 12

50,000

70,000

90,000

110,000

130,000

150,000

170,000

State Teacher Localities

Fiscal Year

Tota

ls

Active Members

6

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dec 12

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

State Teacher Localities

Fiscal Year

Tota

ls

Retirees

Benefit ComparisonState Teachers Local

Actives: Average Age 48.0 45.2 46.1 Average Service 12.9 11.8 10.9 Average Salary $48,619 $47,363 $39,282Retirees: Avg. Age @ Retirement 62.2 61.1 61.7 Avg. Service @ Retirement 23.3 24.4 20.5 Avg. Benefit @ Retirement 39.6% 41.5% 35.0% Avg. Annual Benefit $21,118 $24,359 $15,446

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Information obtained from the June 30, 2011 Actuarial Valuation.

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Net Assets Available for VRS Benefits

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011$0

$10

$20

$30

$40

$50

$60

$22.2

$26.9

$31.7

$35.7

$40.8$37.7

$34.4 $34.7

$40.0

$44.1

$48.7

$58.3$55.1

$42.9

$47.7

$54.6

Ass

ets

in b

illio

ns

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Funded Status: State Employee Retirement

Plan

1994 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110%

20%

40%

60%

80%

100%

120%

78.0% 81.

7% 89.3%

95.3%

105.5% 106

.8%

104.1%

100.4%

94.6%

85.8%

83.3% 85.

1% 88.0%

84.0%

75.2%

70.6%

Chart Title

Reasons for Decline in Funded Status

Decline in funded status:1. Two recessions since 2000, producing investment gains

below actuarial assumptions2. More conservative estimates of long-term future

investment gains: Pre-2005: 8.0% 2005 – 2009: 7.5% 2010 – Present: 7.0%

3. Long-term trend (since mid-90s) of funding contribution rates below board certified rates

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VA Retirement System Liabilities

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Plan 6/30/2011 (in billions)

State Employees (includes SPORS, JRS, VaLORS)

$7.33

Teachers $12.60

Local Political Subdivisions $4.0

Total $23.95*

Unfunded Liabilities by Plan

* Note: Total may not add up due to rounding.

Pension Reform Initiatives

Pension Reform Efforts in VA

Year Reform Effort2008 General Assembly requests JLARC Compensation Study2010 General Assembly creates Plan 2 for members hired on or after July

1, 2010: Normal retirement changed to Social Security normal retirement age Unreduced benefits commencing at Rule of 90 Reduced early retirement benefits moved to age 60 with at least five

years of service Members required to pay 5 percent member contribution (Local Option) COLA formula revised Five-year AFC formula

2011 General Assembly enacted 5/5 program for Plan 1 state employees State employee Plan 1 members required to pay 5 percent member

contribution Offset with 5 percent salary increase

JLARC updated study on pension reform.

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2012 General AssemblySummary

2012 Legislation

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Bill Number Patron DescriptionSB 497 Watkins Requires members employed by local government or school boards to pay the 5%

employee contribution, effective July 1, 2012. All local employers authorized to phase in the 5% contribution over a maximum of five years and must provide salary increases to offset these mandatory contributions. All new hires must pay the full 5% employee contribution.

Employee ContributionsEffective July 1, 2012

2012 Legislation HB 1130/SB 498

(Howell/Watkins)

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Changes to the DB Plan Effective 1/1/2013Plan Feature Group Comment

60-month AFC General state employees, SPORS, VaLORS, JRS, teachers and localities (including hazardous duty with enhanced benefits)

Applies to Plan 1 members who are not vested as of 1/1/13. Already applies to Plan 2 members.

1.65% multiplier for service after 1/1/13

General state employees, teachers, localities and JRS (Does not apply to SPORS, VaLORS or local hazardous duty with enhanced benefits)

Applies to non-vested Plan 1 and Plan 2 members as of 1/1/13.

Rule of 90 General state employees, teachers and localities (Does not apply to SPORS, VaLORS or local hazardous duty with enhanced benefits)

Applies to Plan 1 members who are not vested as of 1/1/13. Already applies to Plan 2 members.

COLA General state employees, SPORS, VaLORS, JRS, teachers and localities (including local hazardous duty with enhanced benefits)

Employees within 5 years of eligibility for an unreduced benefit as of 1/1/13 are grandfathered. No COLA until member who retires with less than 20 years of service has received an allowance for 1 full calendar year after reaching unreduced retirement age.

COLA General state employees, SPORS, VaLORS, JRS, teachers and localities (including local hazardous duty with enhanced benefits)

Applies to all Plan 2 members and Plan 1 members who are not vested as of 1/1/13. COLA capped at 3% (first 2% of CPI-U plus one-half of the next 2%, for a maximum total of 3%).

2012 Legislation HB 1130/SB 498

(Howell/Watkins)

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Changes to the DB Plan Effective 1/1/2014Phase-in Board Certified Rates over 3 biennia Board certified rates would be fully funded by the 2018-2020 biennium. General Assembly would not use its own economic assumptions.

Implement Mandatory Hybrid Plan, Effective 1/1/2014 New state and local employees eligible for regular VRS or JRS automatically enrolled in a hybrid plan with both DB and DC features. Public safety employees with hazardous duty coverage are exempt. Public safety employees without hazardous duty coverage are

covered with the same benefits provided to general employees of the locality. Employees currently in an ORP would not be eligible to participate in the new plan; future employees eligible for the ORP may elect the

hybrid. DB component would have a 1.0% multiplier meant to produce a nearly 30% replacement rate after 30 years of service. DC component requires employee and employer contributions to self-directed employee accounts on VRS investment platform. Total mandatory employee contribution (both DC/DB) is 5%; total possible employee contribution is 9%. Employee contributions automatically escalated every three years by one-half of a percentage point ,unless the employee opts out or

the employee is already at the maximum contribution of 5% to the DC component. Employer contributions to the DB component based on actuarial valuations. Employer contributions to the DC component consist of the mandatory 1% match, plus a 1% match on the first percent elected by the

employee, plus a one-half matching contribution on the next 3% elected by the employee. Total contributions as much as 5% from employee and 3.5% from employer.

Provides a new optional disability program. The locality may choose to join the VRS-administered program or provide a disability program with comparable coverage from another source.

Contributions in the Hybrid Plan

Employee EmployerDB Plan Contribution 4% Actuarially

DeterminedDC Plan Contributions:

Mandatory Contribution 1% 1%

Optional Contributions 1% 1.0%*

Optional Contributions 1% .5%*

Optional Contributions 1% .5%*

Optional Contributions 1% .5%*

Total Optional Contributions: 4% 2.5%

Total 9% 3.5% + Actuarial

18* Indicates the employer required match if the employee elects to make optional contributions.

Estimated Income Replacement Ratio

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Final Pay $40,000

Age 60 with 30 Years of Service Age 67 with 37 Years of Service

Assumptions & Methods:Replacement Ratios are equal to the annuity payable at selected retirement age divided by the compensation in final year before retirement.

Salary increases are assumed to be 4% per year. Inflation/Cost-of-Living is assumed to be 2.5% per year.Mortality assumptions used to annuitize defined contribution balances are those prescribed by Internal Revenue Code 417e(3) for calculating minimum lump sum balances in 2011.Defined contribution plan balances assume 6% pre-retirement investment returns.

Assumes member works entire career under one benefit formula. (No transition)

For purposes of calculating the social security replacement ratio at age 60, the replacement ratio is the expected benefit amount that will become payable at social security normal retirement date unadjusted.

Defined contribution plan balances are converted to annuity at retirement assuming a 4% investment return and a 2.5% benefit increase annually in retirement. It is unl ikely that an individual could purchase an annuity that included the 2.5% increases, but in order to be comparable to the defined benefit annuity, we have included this feature.

SB 498 Hybrid Minimum contributions assume 1% employee contribution and corresponding 1% employer match. Maximum contributions assumes 5% employee contribution and corresponding 3.5% employer match.

Estimated Income Replacement Ratio

20

Final Pay $80,000

Age 60 with 30 Years of Service Age 67 with 37 Years of Service

Assumptions & Methods:Replacement Ratios are equal to the annuity payable at selected retirement age divided by the compensation in final year before retirement.

Salary increases are assumed to be 4% per year. Inflation/Cost-of-Living is assumed to be 2.5% per year.Mortality assumptions used to annuitize defined contribution balances are those prescribed by Internal Revenue Code 417e(3) for calculating minimum lump sum balances in 2011.Defined contribution plan balances assume 6% pre-retirement investment returns.

Assumes member works entire career under one benefit formula. (No transition)

For purposes of calculating the social security replacement ratio at age 60, the replacement ratio is the expected benefit amount that will become payable at social security normal retirement date unadjusted.

Defined contribution plan balances are converted to annuity at retirement assuming a 4% investment return and a 2.5% benefit increase annually in retirement. It is unl ikely that an individual could purchase an annuity that included the 2.5% increases, but in order to be comparable to the defined benefit annuity, we have included this feature.

SB 498 Hybrid Minimum contributions assume 1% employee contribution and corresponding 1% employer match. Maximum contributions assumes 5% employee contribution and corresponding 3.5% employer match.

Thank you!