#1GRS A lookback at the Rhode Island Retirement Security Act of 2011 S1111A and H6319A Joe Newton November 2, 2023 Copyright © 2023 GRS - All rights reserved.#2Agenda . . What prompted the 2011 reforms? Explain the nature and intent of the 2011 reforms Provide an overview of where the system is today Assess where the system (and stakeholders) might be but-for reform GRS 2#3Economic Realities of the 2000's The previous benefit design was very back-loaded, which lead to a high ratio of liability to payroll (or employer budget) as the plan matured • Active headcount had contracted heavily, at least partially due to the previous pension and healthcare reforms, which exacerbated the issue Thus, when the dot.com bubble was followed by the Great Recession, the funding levels of the pension trusts deteriorated to dangerously low levels 78% of the liability was in the retirees and actives already eligible to retire, meaning most of the benefit payouts were going to happen over the next 10-15 years and was putting strain on the cash flow - GRS This limited the ability to use re-amortization alone 3#4The Funded Ratios had dropped below 50% 100% Funded Ratio 90% 81.6% 80% 77.9% 71.7% 80.6% 70% 77.4% 64.5% 61.8% 73.2% 59.6% 56.3% 57.5% 59.0% 60% 64.2% 54.6% 59.3% 60.3% 55.4% 48.4% 50% 55.4% 52.7% 58.1% 48.4% 40% T T GRS 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 ―State Employees Teachers 4#5Employer Contribution Rates had already been increasing, and then finally spiked based on the 2010 valuation Contributions as a Rate of Payroll 40% 35% 30% 25.03% 22.98% 25% 23.88% 22.01% 20.07% 19.64% 20% 16.47% 21.13% 22.32% 20.77% 13.72% 14.84% 20.69% 21.64% 15% 11.97% 18.40% 14.84% 10% 11.51% 9.60% 5%7.68% GRS 36.34% 35.25% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -State Employees Teachers 5#6Contributions were projected to go higher: State Employees Projected Contributions as a Rate of Payroll 50% 40% 36.34% 30% 22.98% 20% 10% 0% 2010 2013 44.73% 2016 2019 2022 2025 2028 Based on Actuarial Value of Assets as of June 30, 2010 With recognition of Current Deferred Losses Assumes ARC met each year and actual investment return of 7.50% during each year •Assumes continuation of current amortization policy and current member rate •Payroll grows at assumed 3.75% per year GRS 6#7Neither a back-to-back 20% return, or a sustained 9% per year return would return contributions to previous levels Projected Contributions as a Rate of Payroll 50% 40% 30% 20% 10% 0% 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 9.00% each year Rate of Return: 7.50% each year .20% for FY2011 & 2012 & 7.50% thereafter •Expected ARC at each valuation date based on stated return during each year •Assumes continuation of current amortization policy and current member rate •Payroll grows at assumed 3.75% per year GRS 7#8If the contributions were not significantly increased, the funded status would continue to deteriorate 120% 100% 80% 60% 40% 20% Projected Funded Ratio 5.75% actual investment return would extinguish fund 0% 2010 2013 2016 2019 2022 2025 2028 2031 2034 2037 2040 2043 2046 - Current Policy (19 year) Current Contribution Extended -Current Contribution Extended with 5.75% Investment Return •Assumes 22.98% employer contribution each year and actual investment return of 7.50% during each year after 2011 •Payroll grows at assumed 3.75% per year GRS 8#9There had already been several rounds of reform prior to 2011 . . Effective 2005: Introduction of Schedule B for Non- Vested Effective 2008: Extension of Retirement Ages, Schedule B COLA for All members Not Eligible to Retire Effective 2009: Reduction of COLA to first $35,000 for members Not Eligible to Retire Effective 2009: Significant change to post retirement healthcare benefits • Total estimated reduction in value as of June 30, 2010: $500 M (State Employees Only, pension only) GRS 9#10Sources of Cost Nearly 90% of employer cost State Employees, $ millions $200 was attributable to $180 amortization costs $160 $140 • 78% of the amortized costs are associated with current retirees and those eligible to retire $120 $100 $80 $60 $40 $20 $0 Actives Retirees or Eligible GRS Amortization Cost Normal cost 10#11Even if current actives were just refunded their contributions, still needed a significant increase in contributions Current Retirees and Valuation Results ($ in millions) Total Eligible to Retire Current Actives 1. Accrued Liabillity $5,204 $4,284 $920 2. Assets 2,532 2,206 326 3. Unfunded actuarial accrued liability $2,672.0 $2,078.3 $593.7 4. Funded ratio 48.66% 51.49% 35.45% 5. FY 2012 Projected Contributions Employer Normal Costs 25.3 4.9 20.4 Amortization Payments 221.2 172.1 49.2 Total Employer Contributions $246.5 $176.9 $69.5 As a percentage of Payroll 36.85% 26.45% 10.40% Employee Contributions Total 55.1 $301.6 8.9 $185.8 46.3 $115.8 Assets for Current Actives equal to member contribution balances, all other assets allocated to Retirees GRS 11#12What are the next steps? Sustainability can only be improved from three areas based on the actuarial funding equation: C + I = B - . Where: 12 。 C = Contributions | 。 I = Investment Earnings 。 B = Benefits GRS 12 12#13Questions to answer How do we deal with the current situation? - Affordability, sustainability What is equitable amongst generations of stakeholders? What should the prospective plan look like? - Target replacement income • How can we ensure we are not back here again? - Appropriate risk sharing GRS 13 لله#14The Details of RIRSA: State and Teachers Provision Current Plan New Plan Member Contribution Rate 8.75/9.50% (State/Teachers) 3.75% (State & Teachers) DC Member Contributions 5.00% +1.00% ER Match Unreduced Retirement Eligibility 65/10, 62/29 Reduced Retirement Eligibility 62/20, reduced from 65 COLA (All members, including current retirees) CPI capped at 3%, on first $35,000 SS NRA; Transition rules: 1) eligibles remain eligible; 2) those age 52+ and vested with retirement age <62 can retire at 62; 3) members with 10+ years of service may retire at current retirement as of 6/30/12 with benefit at distribution date calculated using accrued benefit as of 6/30/12 5 Years from NRA, reduced Investment related (2% target at 7.5% investment returns on first $25K) For all others, COLA suspended until 80% funding reached A COLA will occur every 5th year during the suspension When COLA returns, delayed until later of SS NRA or 3 yrs after retirement Average Salary Period 5 Years 5 Years Vesting 10 Years 5 Years for DB 3 Years for DC Amortization Schedule 19 Years 25 Years GRS 14#15Distribution of changes across generations Relative Value of Current Benefits from DB Plan Current Retirees and Members Eligible to Retire 100 Current Vested Non-Vested and New Hires 81 76 Illustrated changes to the current DB Plan -19% -24% -50% Relative Value of Illustrated DB Plan 81 61 38 Value replaced by Illustrated DC Plan Approximate Relative Value of Combined Illustrated Plan N/A 81 17 78 75 State Risk/6 Self Risk * 55 State Risk/23 Self Risk Relative Value above is a measurement tool to compare the benefit packages to one another. The Schedule A Plan received a score of 100, with all other scores distributed accordingly * Future COLAS will be tied to the funding level and investment performance of the Fund GRS 38 76 38 State Risk/38 Self Risk 15 15#16(GRS What should the benefit levels be from a pension program: Experts recommend 65-80% replacement income in retirement from all sources Average recommended replacement rates (studies may point to varying rates based on income) 100%- Replacement rate from RI pension alone 80. 78% 60. 40- 20- 0 World Bank Aon 75% 75% 74% Myers Greninger Schieber 70% Years of service Schedule A Schedule B 10 17% 16% 20 20 36% 34% 25 25 51% 44% 30 66% 55% 35 80% 68% Source: Retirement at Risk: A New National Risk Index," "Alternate Measures of Replacement Rates for Social Security Benefits and Retirement Income" - Social Security Administration; ERSRI 16#17Considering social security, a member working a full career can get full salary replacement, even in the new plan Replacement income for member hired at 27 (continuous employment until SS NRA) 125%1 108% 100- 111% 103% 38% 30% 75 75% 40% 40% 50- 25- 33% 33% 33% 0. Current plan New plan DC earns 7.5% New plan DC earns 6.5% *Assumes DC plan can earn stated return during active employment and annuitize the balance at 5.00% actuarial equivalence at retirement GRS 17 I New DC New DB Current DB Social Security#18GRS 18 Even with 30-year career, employee has 63% riskless annuity and the new structure is expected to provide retirement income in line with or above expert recommendations Social Security Current DB Alternative DB Alternative DC 100% 86% 84% 80% 83% 80% 23% 20% 17% 60% 51% 30% 30% 30% 40% 63% riskless annuity 20% 33% 33% 33% 33% 0% Current DB Alternate DB/DC DC earns 7.5% Alternate DB/DC DC earns 6.5% Alternate DB/DC DC earns 5.5% *Assumes DC plan can earn stated return during active employment and annuitize the balance at 5.00% actuarial equivalence at retirement 18 13#19Those without Social Security had an increase in benefits and also earn within the expert recommended levels Replacement income for member hired at 27 (continuous employment until 67) 125% 100- 104% 91% 75% 75- 64% 51% 50- 75% 25- 0 Current plan New DC 40% 40% New DB Current DB New plan DC earns 7.5% New plan DC earns 6.5% (GRS A DC supplement is needed to meet the replacement income goals 19 19#20Proposed Plan: MERS P&F Example Changes in Replacement Value New Hire at age 27, Continuous Employment until Age 55 (28 Year career) (GRS Social Security Current DB | Alternative DB 120% 103% 100% 89% 80% 70% 60% 56% 40% 20% 33% 33% 0% Current Alternate DB DB 20 20#21Proposed Plan: MERS P&F Without Social Security: 3%/3% DC contribution New Hire at age 27, Continuous Employment until Age 55 (28 Year career) 21 GRS 100% Current DB Alternative DB Alternative DC 80% 70% 71% 69% 15% 60% 13% 40% 70% 56% 56% 20% 0% Current DB Alternate DB/DC DC earns 7.5% Alternate DB/DC DC earns 6.5% 21 21#22Fiscal Impact: State Employees GRS Valuation Results *(in millions) Baseline Proposed (Current) (incl. 1% DC) Change FY 2013 Contribution Rate 36.34% 21.35% -14.99% Normal Cost Percentage 11.39% 9.19% -2.20% Unfunded Liability* $2,700.4 $1,644.5 ($1,055.9) Funded Ratio 48.4% 60.6% 12.20% Long Term Normal Cost 11.39% 6.24% -5.15% FY 2013 Contribution* $243.0 $169.7 ($73.30) Out-years FY 2014 Contribution Rate 38.92% 22.69% -16.23% FY 2015 Contribution Rate 41.23% 24.25% -16.98% FY 2016 Contribution Rate 42.35% 24.85% -17.50% 22#23Fiscal Impact: On Municipalities $ in millions Proposed Contributions FY 2012 FY 2013 Defined Defined Total Contribution Baseline Benefit Contribution MERS Municipal $20.37 $40.93 $24.59 $2.18 $26.77 MERS Police and Fire $12.77 $24.81 $10.68 $0.99 $11.67 MERS Subtotal $33.14 $65.74 $35.27 $3.17 $38.44 Teachers Retirement $142.82 $220.95 $112.49 $16.17 $128.66 Total $175.95 $286.69 $147.76 $19.34 $167.10 MERS/Teachers GRS 23#24Projections from 2011: State Employees $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $- 2011 GRS Annual Contributions in $Millions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Before After 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 24#25WHAT HAS HAPPENED SINCE THE 2011 LEGISLATION AND WHAT IS THE CURRENT STATUS OF THE PENSION PLANS? (GRS 25 25#26Funded Ratio History Compared to Original RIRSA Projections - State Employees Funded Ratio 100% 90% 80% 70% 60% 50% 40% Actual vs Projected Funded Ratio $800 $700 80.1% in 2030 82.3% in 2031 $600 $500 $400 $300 $200 $100 Cash Outflow 30% 2010 2013 2016 I Net Cash Outflow in $millions $- 2019 2022 2025 2028 2031 2034 Projected from RIRSA Actual 2022 Projection Original Projections from the RIRSA Impact Statement, adjusted for Mediation changes in 2016 (-1.4%) and change to investment return assumption in 2017 (-2.7%) GRS 26#27Actuarial Valuations as of June 30, 2022 Historical Unfunded Actuarial Accrued Liability (UAAL) $ in millions $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 State Employees $1,876 ⚫Teachers $1,855 $1,920 $1,895 $1,936 $2,213 $2,239 $2,244 $2,196 $2,100 $2,032 $2,627 $2,568 $2,682 $2,655 $2,694 $3,116 $3,136 $3,128 $3,046 $2,909 $2,735 Investment Return Assumption lowered from 7.5% to 7.0% in 2017 GRS 27#28$2,500 $2,000 $1,500 $1,000 $500 $0 Projected Unfunded Liability State Employees 2022 2023 2024 UAAL (2021 VAL) 2025 2026 2027 UAAL (2022 VAL) 2028 2029 2030 GRS 2031 2032 Funded Ratio (2021 VAL) 2033 2034 2035 2036 Funded Ratio (2022 VAL) $ in Millions 2037 2038 2039 2040 28 120% 100% 80% 60% 40% 20% 0%#29Actual Compared to Projections: ERS State Share, State Police, Judges Annual Contributions in $Millions $400 $350 $300 $250 $200 $150 $100 $50 $- 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Projected from 2011 Actual GRS 29 29#30Actual Compared to Projections: ERS Local Share, MERS Annual Contributions in $Millions $300 $250 $200 $150 $100 $50 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Projected from 2011 Actual GRS 30#31Projected State Budget State Contributions in $millions $600 $500 Projected State Budget for Contributions to State Employees' Plan and State's Share of the $374 $400 $300 $200 $100 in Teachers Plan $500 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 Proposed Assumptions and Amortization Schedule Proposed Assumptions and Amortization Schedule, Assuming 5% Actual Returns Just completed an experience study, confirming the current assumption set Contributions are projected to grow about 2.1% per year through 2035 Contributions are projected to grow at 3.2% per year annually if returns are closer to 5% (GRS 31#32Where would the pension plans be without the reform? This scenario incorporates known investment performance and payroll growth since 2011 Generally, these scenarios also assume - Changes to assumptions in 2017 still occurred – Actual demographic behaviors, salary increases, etc. occurred - – No other changes occurred (no other benefit changes, re-amortization, etc) GRS 32 32#33Actual Compared to Illustrated without the 2011 Reforms: ERS State Share, State Police, Judges Annual Contributions in $Millions $800 $700 Actual Total: $3.4 billion Total Without Reforms: $6.3 billion $600 $500 $400 $300 $200 $100 $- 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 I Without 2011 Reforms Actual The State has met its Actuarially Determined Requirements each year (GRS 33 33#34Actual Compared to Illustrated without the 2011 Reforms: State Contribution Rate for State Employees Contributions as a Percentage of Payroll 60% 50% 50% 49% 50% 48% 46% 47% 44% 45% 45% 46% 45% 41% 40% 34% 30% 25% 25% 26% 26% 28% 28% 28% 29% 29% 23% 23% 23% 24% 21% 20% 10% 0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Without 2011 Reforms Actual GRS 34#35Actual Liabilities and Assets: With and Without Reforms State Employee Plan Liabilities and Assets as of June 30, 2022 in $billions $9.0 59% Funded Ratio $8.0 $7.0 $6.0 $4.9 $5.0 $4.0 $2.9 $3.0 $2.0 $1.0 $- GRS Actual 61% Funded Ratio $7.4 $4.5 39% Funded Ratio $7.4 $2.9 Without Reform Without Reform, Actual Contributions Pension Liability Asset Values 35 55#36OTHER OBSERVATIONS (GRS 36#37There are likely other factors at play as well, but salary increases have been low since the rise in pension costs Average Salary Increase for "Long Service" Continuing Actives 4.5% 4.0% 3.5% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 4.2% 4.1% 3.8% 1.8% 1.4% 2.8% 2.7% 0.0% 2001-2005 2006-2010 2011-2015 2016-2020 State Employees with 25+ YOS Teachers with 10+ YOS GRS 37#38Turnover Turnover has also been higher for most of the covered groups • At least some of this could be because of the pension reform, as the previous benefit structure did provide a strong incentive to remain with a covered employer However, there are several other factors, including the low salary increases and the change to the medical programs, as well as just an increase in turnover across the whole economy GRS 38#39Salary Experience/Turnover ● • Hypothetical: What would salary increases. have been if reform had not occurred and pension contributions were 50-60% higher than they were? And if there had been almost no salary increases the last decade, what would the turnover look like? GRS 39#40The Defined Contribution Accounts have performed well to provide supplemental income . Annualized returns from 7/1/12 through 9/30/23 for the target date funds: - - - - 2025: 6.8% - 2035: 8.0% 2045: 8.8% 2055: 8.9% The median balance for members who have been active since 2012 is $67,700, with a range of $37,700 to $100,700 - 1 standard deviation GRS 40 40#41Summary The reform did accomplish what was intended: - There have been no further cuts to benefits since the reform - Actual contributions have been very close to projected Cost of living increases have been suspended and are expected to continue to be until 2031 - This was and continues to be the source of most of the savings The current structure was designed to share risk, not lower the expected overall benefit provided - (GRS The new structure provides a benefit in line with industry best practices for a career employees 41 44#42Important to remember as the commission performs its tasks and makes it recommendations The actuarial funding equation is pretty simple: C + I = B - Where: 。 C = Contributions | 。 I = Investment Earnings 。 B = Benefits (GRS 42 42