perc note sb 1082 & 1071, december 2015

7/23/2019 PERC Note SB 1082 & 1071, December 2015

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COMMONWEALTH

OF

PENNSYLVANIA

PUBLIC

EMPLOYEE

RETIREMENT

COMMISSION

ACTUARIAL NOTE TRANSMITTAL

Bill ID:

Senate

Bill

Number

1082,

Printer s Number

1460,

Amendment Number

04826 to

Senate

Bill

Number

1082,

Printer s Number

1460,

and

Amendment Number

05049 to

Senate Bill Number 1082,

Printer s

Number 1460

System: Public School Employees'

Retirement

System (PSERS)

and

State Employees'

Retirement

System (SERS)

Subject: Retirement Benefit Reform

SYNOPSIS

December 17, 2015

Senate

Bill

Number

1082,

Printer s Number

1460, would

amend the

Public School Employ

ees' Retirement Code, the State Employees' Retirement Code and the Military Code to:

1)

implement a hybrid

retirement

benefit plan applicable to most new members of both

PSERS and SERS; 2) exempt State Police officers, Correction officers, and other hazardous

duty

officers from membership in

the

new hybrid benefit tier; 3)

permit

certain elected

officers who

are currently

active members of SERS

and are

re-elected to a

term

of office

that begins on or

after

January

1,

2018,

the

option to opt-out of

the

new hybrid

plan

and

remain

in their current class of service; 4) modify

the

future benefit entitlements of current

members of both PSERS and SERS; and 5) further modify

the

actuarial funding require

ments

of both PSERS

and

SERS.

More specifically,

the

bill would

amend the

Public School Employees'

Retirement

Code

to:

1) Effective July 1, 2017, establish a hybrid benefit tier, which includes defined

benefit and defined contribution components, applicable to all new school em

ployees. Current members of PSERS would be ineligible to participate in

the

new hybrid benefit tier.

2) Under the defined benefit component, new school employees would become mem

bers of Class T-G and would earn benefits at a 1 benefit accrual rate. A

member would be vested in

the

defined benefit component

after

accumulating 5

years

of service credit. The benefit formula would be equivalent to 1% multi

plied by

the

member's years of service, multipl ied by the member's final average

salary

(highest five years). Class T-G members would contr ibute 4 of compen

sation.



D

) \

J ~ ] ,

SYNOPSIS (CONT D)


Senate

Bill No. 1082, P . N. 1460,

and

Amendment

Nos. 04826 and 05049 to

Senate

Bill

No

. 1082, P. N. 1460

3) Establish

a defined contribution plan under a new chapter of

the

Code,

Chapter

84, called the School Employees' Defined Contribution

Plan

for new school em

ployees with an employee contribution of 3.5%

of

compensation. The employer

contribution would be 2.5

of

compensation.

4) Taper the

employer contribution

rate

collars for

Fiscal Year

2016-2017 to be lim

ited to 2.25% of total payroll. Currently, under Act 120 of 2010, the contribution

collar is 4.5% of total payroll.

The bill would amend

the

State Employees' Retirement Code to:

1)

Effective January 1, 2018, establish a hybrid benefit tier, which includes defined

benefit and defined contribution components, applicable to

most

new State em

ployees. Current

members of

SERS would be ineligible to

participate in the

new

hybrid benefit tier.

2) Under the defined benefit component, most new State employees would become

members of Class A-5

and

would earn benefits at a 1% benefit accrual rate.

member

would be vested in

the

defined benefit component

after

accumulating 10

years of

service credit. The benefit formula would be

equivalent

to 1 multiplied

by

the

member's

years

of service, multiplied by

the

member's final average sala

ry (highest five years). Class A-5 members would contribute 3 of compensation.

3) Establish a defined contribution

plan

under a new

chapter

of

the

Code, Chapter

58, known

as the State

Employees' Defined Contribution Plan, for

most

new

State

employees with an employee contribution of 3.25%

of

compensation. The

employer contribution would be 2.5% of compensation.

4) Exempt the following groups of employees from participation in the hybrid plan:

Pennsylvania

State

Police officers; correction officers; enforcement officers; wild

life conservation officers

and other

commissioned law enforcement personnel

employed by the

Game

Commission; Delaware River Port

Authority

Policeman,

park rangers

or

Capitol Police officers;

campus

police officers employed by

any

State-owned educational institutions, community college or Penn State Universi

ty; and police officers employed by

Fort

Indiantown

Gap or other

designated

Commonwealth military installations

and

facilities. All prospective employees of

this group would continue to be eligible for membership

in

Class A-3 in the

State

- 2 -



SYNOPSIS (CONT'D)


Senate Bill No. 1082, P. N. 1460, and

mendment

Nos. 04826

and

05049 to

Senate Bill No. 1082, P. N. 1460

Employees' Retirement System until they become eligible for the enhanced State

Trooper

retirement

benefits upon

attaining

20 years of credited service.

5 Permit school employees (employees and officers of the Pennsylvania State

System of

Higher

Education [PASSHE]

institutions and the Department

of Edu

cation,

most

employees of

the Pennsylvania State

University,

and

community

college employees) to continue to have

the

option of electing

the

alternative re

tirement

plan provided

under

Section 5301(a)(12)

of

the SERS Code

rather

than

participating in

the

hybrid plan.

6

Permit

the

Governor,

the Lieutenant

Governor,

the

Attorney General,

the

Audi

tor General, the State Treasurer and all members of the General Assembly who

are currently active members

of

SERS and are re-elected to a term of office that

begins on or

after

January

1,

2018,

the

option t opt-out of the new hybrid

plan

and

retain membership in their

current

class of service.

7 Taper the employer contribution rate collars for Fiscal Year 2016-2017 to be lim

ited to 2.25% of total payroll. Currently,

under

Act 120 of 2010,

the

contribution

collar is 4.5% of total payroll.

mendment Number

04826 would

amend the

bill to:

1 Remove the tapered employer contribution rate collar of 2.25% of total payroll for

the

Fiscal Year 2016-2017 for both PSERS and SERS.

mendment Number

05049 would

amend the

bill to:

1

Remove the option for elected officers who are currently members in SERS to

opt

out

of

the

new hybrid plan once they are re-elected

t

a term of office that be

gins

on or

after January

1,

2018, and

instead

require

them

to become

mandatory

members of Class A-5 upon re-election.

2

Remove

the tapered


rate

collar of 2.25% of

total

payroll for

the

Fiscal Year 2016-2017 for both PSERS and SERS

. 3



DISCUSSION


Senate Bill No. 1082, P. N. 1460,

and

Amendment

Nos. 04826

and

05049 to

Senate

Bill No. 1082, P. N. 1460

Benefit Modifications ffecting New School and State Employees

The

bill would establish side-by-side

hybrid

retirement benefit plans applicable to

most

public employees

hired

by school or State employers within the Commonwealth beginning

July 1, 2017,

in

the case of PSERS, and January 1, 2018,

in

the case of SERS. The hybrid

retirement

plans would be comprised of two components:

1

a defined contribution (DC)

plan; and 2 a defined benefit (DB) benefit tier added to

the

existing defined benefit

structure .

The

new governmental defined contribution retirement plans, known

as

the

School Employees' Defined Contribution

Plan and

the

State

Employees' Defined Contribu

tion Plan ( Plans ), would supplement the defined benefit plans provided by PSERS and

SERS for new school

and State

employees. Future Pennsylvania State Police Officers,

Correction Officers and other hazardous duty personnel would be exempt from participation

in

the

side-by-side hybrid plan. Members who return following a break

in

service would

still

remain members

of

their respective classes in the Systems.

The bill mandates the creation of the hybrid retirement plans, directs the PSERS

and

SERS Boards to administer or ensure the administration of the respective Plans, and sets

forth

the

Boards' powers

and

duties. Most of

the

details governing

the actual

operation

of

the new Plans are delegated to the

Boards

which will be responsible for

establishing the

rules

and

regulations governing the

Plans.

These

rules

and

regulations

will

presumably

address the many

specific details involved

in

the

operation

of

a public pension

plan

.

t

also

appears

that

most of the new Plans investment and administrative functions may be

handled by third-party administrators contracted by the Boards to provide the necessary

services.

Defined

ontribution

Plan

New school employees would contribute 3.5% of compensation with an employer contribu

tion of 2.5% of compensation to the DC plan. State employees who participate in the new

DC

plan

would contr ibute 3.25% of compensation with an employer contribution of 2.5% of

compensation.

Future

Pennsylvania State

Police Officers, Correction Officers

and

other

hazardous

duty personnel would be

exempt

from

participation

in

the

side-by-side

hybrid

plan.

Current members

of

the

General

Assembly along with the Governor, the Lieutenant

Governor,

the

Attorney General, the Auditor General, and

the

State Treasurer would have

the option to

opt

out of the new

hybrid

plan once re-elected to office beginning on or after

January 1, 2018, and instead remain in their current class of service

. 4 •



DISCUSSION

(CONT'D)


Senate Bill

No

. 1082, P. N. 1460, and

Amendment

Nos. 04826 and 05049 to


A participant in

the Plans

may make additional contributions to

the Plans

up to the IRS

limits allowed by law. Contributions on

behalf

of

the participant and the

employer would

be credited to an individual

investment

account for each

participant

of the new Plans,

along

with

all interest and

investment

gains or losses.

For investment

purposes,

the

Board

may pool

the assets

of

the participants in the

Plans. Additionally,

the

bill

states

that the

Systems' boards will not be held responsible for any investment losses incurred by partici

pants in the Plan or for the failure of

any investment

to earn a specific or expected return.

All fees, costs

and

expenses of administering

the Plans

will be assessed

against the

accounts

created

on

behalf

of

participants

, except

that

for fiscal

years

2015-2016

and

2016-

2017 (with an additional fiscal year

in the

case of SERS),

the

fees, costs

and

expenses of

establishing

and

administering the Plans shall

be

paid

by

the

Commonwealth

through

annual appropriations, made on the basis of estimates from

the

Boards.

A

participant

in

the Plans

would become fully vested

in the

employer contributions after

three years

of employment.

The

employee's contributions would

vest

immediately.

Upon termination of school or State service, members may receive a full or partial lump

sum

of the vested balance in

their

individual

investment

account, which

can

be rolled over

into

another

account to

the extent the

IRS allows, or a single life

annuity

actuarially

equivalent to

the

value of all

the

employer

and

employee contribut ions

and

interest in their

individual

investment

accounts, or

the

portion

not

withdrawn.

Defined enefit Tier

New school employees

hired

on or

after

July l 2017, and most new state employees

hired

on

or after

January

1,

2018, would also become members in

the

new defined benefit tiers.

As

part of

the

new side-by-side hybrid plan, new school employees would become members

of Class T-G in PSERS and new State employees would become members of Class A-5 in

SERS.

The

employee contribution to the DB

plan

for school employees would be 4 of

compensation

with

a 1 accrual

rate.

The employee contribution to

the

DB

plan

for State

employees would be

3

of compensation

with

a 1% accrual

rate.

Class T-G members in PSERS would become vested

in

the employer contributions after

accumulating 5 years of service credit. For SERS, Class A-5 members would become vested

in

the

employer contributions after accumulating 10 years of service credit. The superan-

nuation

age for members

of

the new classes would be age 65

with

3

years

of service,

or the

Rule of 92

with

35

years

of service

as currently

applicable

to

post-Act 120 members of

the

Systems.

- 5 -



DISCUSSION

(CONT'D)



Amendment Nos. 04826

and

05049 to


Treatment o Educational Employees

Under current law, school employees (employees and officers of the

Pennsylvania

State

System of Higher Education [PASSHE] institutions and the Department of Education, most

employees of the Pennsylvania State University, and community college employees) are

eligible to choose coverage in

an

employer-approved, defined contribution

alternative

retirement program as

an alternative

option to membership

in either the

State Employees'

Retirement

System

(SERS)

or the

Public School Employees' Retirement System (PSERS).

According to

the

latest demographic data available from SERS (as

of

December 31, 2014),

the number of educational employees

in

question constitutes approximately 8,000 active

members (or 7-8% of the total population). Of the school employees who are eligible to

choose membership

in

an alternative

retirement program, approximately 50% elect

membership in SERS, 45% elect membership in an

alternative

retirement

program

and

5

elect membership in PSERS. Section 5301(a)(I2)

of the

SERS Code directs employers to

contribute up to 9.29% of pay into the independent retirement program, and all affected

employers currently contribute at

that

rate.

Under the bill, eligible employees would continue to have the option

of

electing

the

alternative

retirement plan rather than the new hybrid DC/DB

plans

offered by either

of

the Systems. Since the

alternative

defined contribution plan offered to school employees

would have

an


rate

more

than

twice

the amount

of

what

would be

offered under the side-by-side hybrid plans and significantly lower employee contributions

(currently set at 5 by contract),

it

is likely that there will be a significant shift

in

the

percentage of

future

eligible employees choosing the

alternative

retirement plan

as the

more attractive plan.

Pennsylvania State Police Correction Officers and Enforcement Officers

The bill would also

exempt

the following groups of employees from

participation

in the side

by-side hybrid plan:

Pennsylvania

State Police officers; correction officers; enforcement

officers; wildlife conservation officers

and

other

commissioned

law

enforcement personnel

employed by the Game Commission; Delaware River Port

Authority

Policeman, park

rangers or

Capitol Police officers;

campus

police officers employed by any State-owned

educational institutions, community college or

Penn State

University;

and

police officers

employed by Fort Indiantown Gap or other

designated

Commonwealth

military installa-

tions and facilities. All prospective employees of

these

employee groups would continue to

be eligible for membership in Class A-3 or A-4

in

SERS. In the case of State Police officers,

-

6



D

]

) 6

y' 1

.

>l _

DISCUSSION

(CONT'D)



and

Amendment

Nos. 04826 and 05049 to


they would continue to be eligible for membership in SERS until they become eligible for

the enhanced

State

Trooper

retirement

benefits upon

attaining

20

years

of credited service.

Among

the

104 state

and independent

agencies

participating in

SERS is

the Department

of

Corrections. The

Department

is responsible for

the management

and supervision

of the

Commonwealth's adult correctional system. Included are all state correctional institutions

and

regional facilities, as well as community-oriented pre-release facilities, known as

community corrections centers. There are 25 state correctional institutions, 14 community

corrections centers, and one motivational boot camp with a total

inmate

population of more

than

51,000.

Correction officers

are hazardous duty

personnel employed by

the

Department

of Cor

rections who are responsible for the care, custody and control of inmates housed in state

correctional

institutions

located

throughout the

Commonwealth. As of June 2015,

the total

number

of correction officers employed within the Commonwealth was 13,368 employees.

This employee group constitutes approximately 13 of the current active membership for

SERS.

Special

retirement

coverage for various public safety employees often is provided in public

employee

retirement

systems. The

enhanced

benefits

are premised

on

the hazardous

nature

of public safety employment and

the

physical

and

psychological

demands

of public

safety work.

Under the

State

Employees'

Retirement

Code,

the

special

retirement

benefit

for most Commonwealth public safety employees is

the

eligibility to retire at age 50

with

full

retirement

benefits. For public safety employees who first became

members

of SERS

after the

effective date of Act 120,

retirement

age is age 55. Because

the death

benefit for

any

Commonwealth employee

is

dependent on

the retirement

age, the special public safety

employees'

retirement

coverage also increases

the death

benefit.

The

term

enforcement officer is a defined

term

in the SERS Code designating

certain

categories of public safety employees, including

the

following: Liquor Control

Board

enforcement officers

and

investigators; Office of Attorney

General

special agents, narcotics

agents,

asset

forfeiture agents, Medicaid

fraud

agents,

and

senior investigators of

the

hazardous prosecutions unit; Pennsylvania Board of Probation and Parole parole agents;

and

waterways conservation officers of

the

Pennsylvania

Fish and

Boat Commission.

While Pennsylvania

State

Police Officers, Correction Officers, and enforcement officers

would be

exempt

from participation in

the

side-by-side hybrid plan,

they

would still be

subject to the following changes proposed under Senate Bill Number 1082, Printer s

Number 1460: 1) the actuarially neutral Option 4 withdrawal on post-July 1, 2016, member

- 7 -




Senate Bill

No.

1082, P. N. 1460, and

Amendment Nos. 04826 and 05049 to

Senate Bill

No.

1082, P. N. 1460

DISCUSSION

(CONT D)

contributions and statutory interest

on

those contributions;

2 the

change in the final

average salary calculation from the average of the

highest three

to

the

greater

of

a 3-year

final average salary, excluding overtime, for all

future

service

or

a 5-year final average

salary, including overtime; and 3 a shared risk provision, tying

the

member s contribution

rate to the investment performance of the System.

Under the bill, one employee group

that

is

currently

eligible to

retire at

age 55 with full

retirement benefits, psychiatric security aides, would

still

be required to become partici

pants in the new hybrid plan. The rationale for this group s inclusion in the hybrid plan

while exempting all other public safety employees is unclear.

Employee Groups Affected Under Senate Bill No. 1082, P.

N 1460

State Employees Retirement System Employee Group

Sworn Members of the Pennsylvania State

Police

Enforcement

Officers

Correction Officers

Wildlife

Conservation

Officers

Other

Commissioned

Law

Enforcement Personnel of

the

Game Commission

Delaware River Port Authority Policemen

Park

Rangers

Capitol Police Officers

Campus Police Officers Employed by a

State-owned Educational Institution

Campus Police Officers

Employed

by a

Community

College

Campus

Police Officers

Employed

by

Penn

State

University

Police Officers Employed by Fort Indiantown Gap

Police Officers Employed by Other Designated Military

Installations

and Facilities

Total Estimated Membership

Number

of

Members

4,677

1,118

13,368

70

176

142

181

90

188

20

estimated)

91

15

Unknown

20,136

Note: he bill does not exempt psychiatric security aides from mandatory participation

in

the new hybrid plan,

although they are categorized as enforcement officers under the SERS Code. (The number

o

members is

unknown.)

- 8 -



DISCUSSION (CONT'D)



mendment Nos. 04826 and 05049 to


Benefit Modifications pplicable to Current Members o PSERS and SERS

Current members of Class T-D, T-E and T-F in PSERS would be subject to the following

changes:

1

the actuarially neutral Option 4 withdrawal on post-July

1,

2016, member

contributions

and statutory

interest on those contributions; and 2 a shared

risk

provision,

tying

the

member's contribution

rate

to

the investment

performance of

the

System.

Current members of Class AA, A-3 and A-4 in SERS would be subject to

the

following

changes: 1

the

actuarially neutral Option 4 withdrawal on post-July

1,

2016, member

contributions and

statutory interest

on those contributions; 2 a change in

the

final average

salary

calculation from

the

average of

the highest three

to

the greater

of a 3-year final

average salary, excluding overtime, for all future service or a 5-year final average salary,

including overtime; and 3 a

shared

risk provision, tying the member's contribution rate to

the investment performance of

the

System.

lected Officers

Under

the

bill, upon re-election after January 1, 2018, all current members of the General

Assembly,

the

Governor, the

Lieutenant

Governor,

the

Attorney General,

the

Auditor

General,

and the

State Treasurer would have

the

option of

remaining in their

current class

of service

instead

of becoming

participants

in

the

new

hybrid plan

as

Class A-5 members.

While

the bill exempts current members of the judiciary from becoming mandatory

participants in

the

new hybrid plan, future members

of

the judiciary elected to a

term

of

office that begins on or after January

1,

2018, would be required to become members of

Class A-5 in

the

DB

plan

and

mandatory participants in the

State Employees' DC Plan.

Limitation on Final verage Salary

The Systems currently employ a member's final average salary as one of the components

of

the

statutory formula

that

is used to compute a member's

retirement

benefit

entitlement

.

Currently, a member's final average

salary

is calculated

as the

average of

the highest three

years

of compensation.

The

bill would

amend the

SERS Code to change

the

final average

salary

calculation from the average of

the

highest

three

to the

greater

of a 3-year final

average salary, excluding overtime,

or

a 5-year final average salary, including overtime, for

all service performed by

current

SERS members

after

the effective date of

the

bill.



D

DISCUSSION (CONT'D)

Shared Risk Provision


Senate Bill

No.

1082, P. N. 1460,

and

Amendment

Nos. 04826

and

05049 to

Senate Bill

No.

1082, P. N. 1460

One of the major pension reforms imposed by Act 120

of

2010

was

the

implementation

of a

variable

employee contribution rate, known

as the shared

risk contribution rate which

is

applicable to post-Act 120

members

(Classes A-3, A-4, T-E, and T-F)

of both

Systems. The

shared risk contribution rate is

tied

to the investment performance of

each

System's

pension fund

and

would be added to the basic contribution

rate

of each membership class

under certain conditions. Every three years, each System compares the actual investment

rate

of

return, net of

fees, to

the

actuarial

assumed rate of return

for

the

previous 10-year

period.

f the

actual rate

of return is less

than

the

assumed rate by 1%

or

more,

the total

member

contribution

rate

will increase by

Y2

per

year, up to a

maximum total

increase

of

2.0%. f the actual rate is equal to or more than the assumed rate, the total member

contribution rate will decrease by Y2 .

New members contribute at

the rate

in effect

when they

are hired. The additional shared

risk contributions are used to reduce the unfunded accrued liabilities

of

the Systems. f the

System

is fully funded

at

the

time of

the comparison, then the shared-risk rate will be zero

for

that

period. For any year in which the employer contribution rate is lower than the

final contribution rate, the employee contribution

rate

would be

the

basic contribution

rate

.

There would be no increase

in

the employee contribution rate where there

has

not been an

equivalent

increase to

the


rate

over

the

previous

three-year

period.

Until there is a full 10-year look back period, the look back period will begin as

of

the

effective

date

of the act. The bill would

make

both pre-Act 120 active

members

of PSERS

and SERS as well as new members of Class T-G in

PSERS

and Class A-5

in

SERS subject

to the shared-risk provision, with a corridor of

4

for the employee contribution rate.

Actuarially Neutral Option 4

In both PSERS

and SERS, the member's accumulated deductions are the

total

of the

member's employee contributions to the retirement

system that

have accrued over

the

member's working lifetime,

plus

accumulated

interest

at

the statutory rate

of

four percent.

Retirement Option 4 permits a retiring member to withdraw all or a portion of the

member's

accumulated

deductions. member

may

elect to receive

this withdrawal

in one

lump sum

or

in up to four installment payments. The installments continue to

earn

interest at

the statutory rate

of

four

percent

per year until

they

are paid to the member.

member

who elects to withdraw his

or

her accumulated deductions

is

entitled to a lifetime

monthly pension benefit

that

is

smaller than under either the

maximum single-life annuity

-10-



DISCUSSION

(CONT D)


Senate Bill

No.

1082, P. N. 1460, and



or Options 1

thru

3, because the benefit will be computed on the present value of the

member s benefit entitlement less

the

amount of the accumulated deductions that were

withdrawn.

Under

Act 120 of 2010,

the

election to

withdraw the

member s accumulated deductions

under

Option 4

was

eliminated

as

an option for new

members

of PSERS

and

SERS who

otherwise would be eligible to receive

retirement

benefits. Members of Classes T-E, T-F, A-

3 and A-4 who terminate service before vesting continue to be entitled to withdraw their

accumulated deductions plus

the

interest

earned

on those contributions upon termination

of

service, in lieu of

any

claim to

other

benefits. The bill would now allow members of

Classes T-E, T-F,

A-3

and

A-4 to elect to

withdraw

their

accumulated deductions,

but

the

Option 4 withdrawal would be actuarially neutral for all member contributions and

statutory interest on those contributions. New members of Class T-G in PSERS and Class

A-5 in SERS would also be subject to

the

actuarially neutral Option 4 withdrawal provi

sions.

Additionally,

the

bill would change

the

manner in which

the

Option 4

withdrawal

is

computed for pre-Act 120 active members of PSERS and SERS. For all current members,

the

Option 4 withdrawal would only be actuarially neutral for all member contributions and

statutory interest on those contributions credited on or

after July 1,

2016. For all service

performed

and

credited before

July

1,

2016,

the

accumulated deduction calculation will

remain

unchanged.

ctuarial Funding Provisions

PSERS

and

SERS

are

funded through: 1 employer contributions,

2

employee contribu

tions, and 3 returns on investments. The employer normal contribution rate represents

the

employer portion

of the

value or cost (normal cost) of

the

benefits

earned during

a given

year,

based

upon

the

Systems

actuarial

funding methods.

The


requirements

for both PSERS

and

SERS are

determined

using

the

employer portion of

the

employer

normal

cost,

plus any

amortization contribution

requirements

necessary to

amortize

the

unfunded liabilities of

the

System over the statutorily specified amortization

time periods as modified by

the

experience

adjustment

factor.

The

experience

adjustment

factor is a reference to

the

experience of

the

pension funds, most importantly,

the

invest

ment experience of those funds. f gains from positive plan experience are greater than

expected, employer contributions may be reduced. Conversely, losses from negative plan

experience require additional employer contributions to compensate for those losses.

-

11



DISCUSSION (CONT'D)


Senate

Bill No. 1082, P. N. 1460,

and

Amendment

Nos. 04826

and

05049 to

Senate

Bill No. 1082, P. N. 1460

Under Act 120 of 2010, the methods

used

to

determine the

employer contribution require

ments for both

PSERS

and SERS were modified by imposing limits,

referred

to as collars,

on the rate

at

which employer contributions may rise from year

to

year. For the fiscal years

beginning July 1, 2011, July 1, 2012, and on or after July 1, 2013, Act 120 established

temporary collared contribution rates, equal to 3 , 3.5% and 4.5%, for each

year

respective

ly. The collars apply only if

the

calculation of the employer contribution rate results in

an

actuarially required contribution rate

that is

greater than the collared rate. The effect is to

limit

the year-to-year increase in the employer contribution rate by the percentage amounts

specified for each year. Beginning with the July 1, 2013, fiscal year, and for each year

thereafter,

Act 120 limits

the

annual increase

in

employer contributions to no more

than

4.5%,

until

such

time as the actuarially required

contribution

rate

calculated by

the

Systems'

actuaries

results in

an increase

in the employer rate that is less than the collared

rate of 4.5%. At this point, the collared contribution limits would expire and a new

employer contribution floor rate equal to each System s employer normal cost

rate

would be

established.

As it is written, the bill would further modify the collars by tapering the rate

at

which the

employer contributions may rise from year to year. For the fiscal year 2016-2017 only, the

bill would

establish

a one-time collared contribution

rate that the

contribution

rate shall

be

limited to 2.25% greater than the prior year's final contribution

rate.

For fiscal

years

2017-

2018

and later, the

contribution collars would once

again limit the

annual

increase

in

employer contributions to no more than 4.5%.

Special Membership lasses

Within

SERS, there

are

a number

of

special membership classes entitled to enhanced

retirement benefits, reduced superannuation requirements or both. These include all

members of the judiciary, members of the General Assembly, certain enforcement officers

and Pennsylvania

State

Police Officers. Additionally, certain highly compensated employ

ees would be

entitled

to

enhanced

retirement benefits by

virtue of

their

higher

than

normal

final average

salary

calculations.

Under the

bill,

there are

no

such

special benefit provi

sions for

members of

the judiciary or

members

of the General Assembly in the new hybrid

plan.

In

1974, an

attempt was made

to reform

and make

uniform the benefit provisions of

the

SERS Code.

This attempt at

reform

prompted

a series

of lawsuits

brought by members

of

the judiciary challenging the benefit changes as applied to members of

the

judicial branch.

These

court

cases ultimately resulted in the preservation of the judiciary's entitlement to

- 12 -



DISCUSSION

(CONT'D)



and

Amendment

Nos. 04826

and

05049 to

Senate Bill No. 1082, P . N. 1460

special membership status and enhanced benefits. The most salient of these cases were

the

Goodheart

Supreme

Court decisions (See Goodheart

v.

Ca sey 521 Pa. 316 (1989); 523

Pa.

188 (1989), and Klein v. State Employees Retirement System, 521

Pa.

330, 555 A.2d 1216,

1221 (1989)). Essentially, the Supreme

Court

of Pennsylvania ruled that the 1974

amendments to

the

Code, which eliminated the option to elect special class membership,

were

unconstitutional

as applied

to

members

of

the judiciary.

The Supreme Court

ruled

that in order to preserve an

independent

judiciary, judges

must

be adequately compen

sated, pension benefits are part of compensation, and all members of a single-level court

performing similar functions and exercising similar authority must be compensated at the

same

rate.

As a

result

all individuals who became

members

of the judiciary following

the

1974

amendments

to

the

SERS Code

must

be

permitted

to elect special class (Class E-1

or

E-2) membership, make the required

higher member

contributions, and receive the higher

pension benefit attributable to

their

membership class.

Based upon the independent status

of

the judiciary in

Pennsylvania

and the case law

regarding the special status of

its

members, if enacted, the bill is likely to be challenged in

the

courts.

There

is

also case law concerning altering the benefit provisions for members

of

the

General

Assembly or other State office-holders after being re-elected to office. In Shiomos v. State

Employees Retirement Board,

533

Pa.

558, 626

A.

2d

158 (1993),

the Supreme Court held

that

a public official, at every new term

of

employment,

renews his

pension contract to

include

his

new public service and to place

at

risk

that

which

was already

earned. A public

official's re-election to office renews the official's employment

contract

subject to the law as

it stands at

the

time the new

term

of office commences.

Potential ontract Impairment

By

altering the

benefit provisions for active

members

in

PSERS

and SERS on or

after

July

1 2017,

and

January 1 2018, respectively,

it

appears

that

the bill would be subject to

challenge for

impairment of the retirement

benefit

rights of

active members

of the

Systems.

Historically, public employee retirement benefits are recognized as deferred compensation

for work already performed, which confers upon public employees certain contractual rights

protected by the Pennsylvania Constitution (Article I section 17).

2

McKenna v. State

Employees Retirement Board, 495

Pa.

324, 433 A.2d 871 (1981); Catania

v.

State Employ-

ees Retirenient Board, 498

Pa.

684, 450 A.2d (1982). Association of

Pa.

State College

nd

i Berkhi

m r

v. State Employees Retirement Board,

2031 C.0 . 2011

- 13 -



D R F

DISCUSSION (CONT D)


Senate

Bill No. 1082, P.

N.

1460,

and

Amendment

Nos. 04826 and 05049 to


University Faculties v State System

o

Higher Education

505

Pa.

369, 4 79 A.2d 962 (1984).

t

is likely

that

affected employees will seek judicial action.

ncillary Issues

Members

o

the Judiciary.

Under

the

bill,

it appears that Class

E-1 and Class E-2

members

of

the

judiciary will be

subject

to:

1 the

actuarially

neutral

Option 4

withdrawal

on

post

July 1,

2016,

member

contributions

and statutory interest

on those contributions;

2

the

change

in the

final

average salary

formula; and 3)

the shared risk

provision,

tying the

member s

contribution rate to

the investment

performance of

the

System.

Premium Assistance.

New employees in Class T-G would be eligible for the

same

post

retirement health

insurance premium assistance

now provided to eligible

retired

members.

Pension Forfeiture Act. Under

Act 140

of

1978,

known

as

the

Public Employee Pension

Forfeiture Act (43 P.S. §§ 1311-1315), a public official

or

public employee who is convicted

or pleads

guilty

or

no defense to a crime

related

to public office

or

public employment is

disqualified to receive a retirement or

other

benefit or payment of

any kind

except a return

without

interest

of

the contributions

paid

into a retirement system. Under the bill,

the

accumulated

contributions of a

participant shall

not

be forfeited,

but

will be

made

available

for

payment

of

any

fines

or restitution.

Miscellaneous Provisions

Amortization Periods.

Currently, changes in the

unfunded

accrued liability, except those

due to legislative action, are amortized on a level-percentage

of

compensation over 24

years

for

PSERS

and

on a level-dollar

basis

over a 30-year

period

for SERS.

Changes

due to

legislative action

are

to be

amortized

over a

ten-year

period.

Under the

bill, for fiscal

years

beginning on

or after

July

1,

2016,

changes in the

accrued

liability of

SERS due

to benefit

changes

under the

bill will be

amortized

on a level-dollar

basis over a period of 30

years

.

Additional Board Member. Under the bill,

membership

in the boards of both Systems

would be

expanded

to include

the

Secretary

of

Banking

and Securities

as an

ex-oficio

2

The Pa. Constitution provides: No ex post facto law, nor any law impairing the obligations o contract, ... shall

be passed.

- 14 -



DISCUSSION (CONT D)


Senate

Bill No. 1082, P. N. 1460,

and


Senate

Bill No. 1082, P. N. 1460

member. By doing so,

the number

of members on each board would consist of

an

even

number of members (16 for the PSERS Board and 12 for the SERS Board). As it is

currently written however, there are no tie-breaking procedures in place in the event of a

tie vote.

Normal Cost Calculation

PSERS and SERS use dissimilar methods for calculating

the

normal

cost

rate.

Under

the current

SERS method,

the normal

cost

is

calculated based

upon the

average new entrant

to the

System.

n

contrast,

the

method employed by PSERS,

which is based on a more liberal reading of

the

statute than the SERS interpretation the

normal

cost rate reflects the average cost

as

a percentage of

pay

from

entry

into the System

reflecting

the

actual

class of membership of each active member. This is

the

traditional

method for calculating

the normal

cost under

the entry

age

normal

actuarial cost meth

od. Using

this

method,

the

PSERS

actuary

develops a

normal

cost

rate based

on a blend of

the benefit accrual rates and member contribution rates, depending on

each

member s date

of hire

and

class of service. Under the bill, both Systems would codify the PSERS

interpre-

tation of the

normal

contribution

rate

determination effective for the fiscal

year

beginning

on

July

1, 2016.

Public Pension Management nd Asset Investment Review Commission

The bill would

provide for the creation of a commission comprised of

investment

professionals and

retirement

advisors

that

would study, publish findings

and

make

recommendations to

the

General

Assembly

and the

Governor, as

to 1

the performance of

current investment

strategies

and procedures of

both state retirement

systems

as

to realized

rates

of return

against established benchmarks and associated fees paid for active and passive manage

ment; 2 the costs and benefits of active

versus

passive

investment strategies

in relation to

future investment

activities of both state retirement systems; 3

alternative

future

investment strategies

of both

state

retirement

systems

which will maximize

future

realized

net

of fees

rates

of

returns with

available assets;

and 4

extensive, detailed on-line publica

tion of information

about

assets,

returns

financial managers, all consultants, RFPs,

and

investment

performance

measured

against benchmarks. The commission would include

three members appointed by the

Speaker

of

the

House,

the

President Pro tempore of

the

Senate

and

the

Governor.

The

commission would

submit its

recommendations to

the

Governor and the General Assembly

within

six

months

of

its

first organizational meeting.

Funding Protection Mandate

Each

member

of PSERS

and

SERS,

after the current

employer compensation schedule meets

the

full

actuarial

amount, will have a

contractual

right to the annual required contribution made by the employer or by

any

other public

entity. The contractual right to the

annual

required contribution

means

that the employer

-

15.



DISCUSSION

(CONT'D)




and

05049 to


or

other

public entity

must make the annual required

contribution on a timely basis

and

that the

previously accrued retirement benefits to which the

members

have earned

by

statute will be

paid

upon

retirement. The

failure of the State or any other public employer

to

make

the annually

required

contribution will be deemed to be an impairment of

the

contractual right of each employee. The Supreme Court will have jurisdiction over

any

action brought by a member of

any system or

fund

or any

board of trustees to enforce

this

contractual right. The State and other public employers will submit to the jurisdiction of

the court

and will

not

assert sovereign immunity in

such an

action.

f

a

member or

board

prevails in such,

the court

may

award that

party reasonable

attorney's

fees.

Contractual Benefit Rights

o

DC Plan Participants

Section 401

of

Article 4

in the

bill

explicitly

states

that

a participant in

either

the School Employees' Defined Contribution

Plan or

the State

Employees' Defined Contribution Plan

shall

not have an express

or

implied

contractual

right in relation to

requirements

for any of

the

following provisions: 1)

qualification of the Plans as a qualified plan(s) under the Internal Revenue Code; 2)

contributions to, participation in, or benefits from the Plans; 3) compliance with the

Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA); and 4)

domestic relations orders regarding alternate payees of participants

in the

Plans.

Amendment Number 4826

Amendment Number 04826 would amend the bill to remove the provision in the bill

that

would further modify the contribution collars to 2.25 for the fiscal year 2016-2017 only.

Instead,

the

collared contribution rate would remain limi ted to 4.5% greater than

the

prior

year's final contribution rate,

as

implemented under Act 120.

Amendment Number 5 49

Amendment Number 05049 would remove

the

provision

in

the bill that would

further

modify

the

contribution collars to 2.25% for the fiscal

year

2016-2017 only. Instead, the

collared contribution

rate

would

remain limited

to 4.5%

greater

than

the prior

year's final

contribution

rate,

as

implemented

under Act 120.

Additionally, the amendment would remove the language

in

the bill that would allow

elected officers the option to decline membership in the new class A-5 and instead

remain

a

member in their

current

class of service

after

re-election. By removing

the language

in the

bill allowing elected officers to decline membership in the new

hybrid

plan, elected officers

would instead be required to become mandatory members of Class A-5 upon re-election.

- 16 -



. F 1

SUMMARY OF ACTUARIAL COST IMPACT


Senate Bill No. 1082, P. N 1460, and

Amendment

Nos. 04826

and

05049 to

Senate

Bill No. 1082, P. N 1460

The Commission's consulting

actuary

(Milliman) has reviewed

the

bill,

the

amendments,

the actuarial

cost

estimate

provided to

the

Commission by Buck Consultants,

the

consult

ing actuary for PSERS (see attachments), and

the

actuarial cost estimate provided to the

Commission by Hay Group, the consulting

actuary

for SERS (see attachments).

The Commission's consulting

actuary has created

a table showing

the

expected accumulat

ed nominal dollar cash flow costs/(savings) on the employer contributions for the fiscal

years 2015-2016 through 2047-48 for both Systems

under the

bill, with and without

the

amendments,

as

provided by

the

System actuaries.

The

table also shows

the present

value

of

the

expected

cash

flow costs/(savings)

as

of June 30, 2015,

assuming end

of

year

pay

ment,

at

3.9 (a proxy for

budget

growth)

and

7.5 (the

current investment return

for

the

Systems). The 3.9 proxy for budget growth is based on

the

annual growth in

estimated

general fund revenue from 2017-2018 to 2019-2020 shown on page

Cl 12

in

the

Governor's

Executive Budget for 2015-2016. The

reader

will note that

the total

costs/(savings) shown

in

the

Commission's consulting actuary's table differs from that

in the

System actuary's

cost estimates for SERS. The reason for this is

that

the

Commission's consulting actuary

shows

their

projections

through

2047-2048, while

the

System

actuary

makes projections

through

2051-52.

For further

detail, please see

the attached actuarial

notes provided by

Milliman

and the

Systems' consulting actuaries.

- 17 -




Senate Bill No.

1082,

P. N.

1460,

and

Amendm ent Nos.

04826 and 05049

to

Senate Bill No.

1082,

P. N.

1460

SUMMARY OF ACTUARIAL COST IMPACT (CONT'D)

PSERS

SERS

Total

PSERS

SERS

Total

Impact on Employer Contributions

i

Senate Bill 1082 PN 1460 is enacted

For Fiscal Years 2015-2016 through 2047-2048

(Amounts n millions

nd

based on System actuary s projections)

Cash Flow Costs I

Present Value o Present Value o

(Savings) as deter-

Cash Flow Costs I

Cash Flow Costs I

mined by System

(Savings) at 3.9% (Savings) at 7.5%

Actuary

as

o

June 30, 2015

as o June 30, 2015

Without any Amendments

$(484) $(947) $(904)

(2,468) (1,402) (892)

$(2,952)

$(2,349) $(1,796)

With Amendment A04826 or Amendment A05049

*

$(716) $(1,020) $(910)

(2,644)

1

,452) (887)

$(3,360)

$(2,472) $(1,797)

*

Amendment No. 04826 removes the tapered employer contribution rate collar. Amendment No. 05049 removes the

tapered employer contribution rate collar and requires elected officers reelected after January

1,

2018, to become

members

o

Class A-5.

The

Systems'

actuaries

cost

estimates

also

indicated the

costs/(savings)

of the

various

provisions on a step-by-step basis.

The attached exhibit

(see

Exhibit 1

page 24

of the

Milliman

actuarial

note)

summarizes

the

impact

for the

various steps

for the changes in the

bill (without

any amendments)

on

the cash

flow costs/(savings) for fiscal

years

2015-2016

through

2047-2048

and

shows

the present

value of

the cash

flow costs/(savings)

at

7.5

as

of

June

30, 2015.

The

cost

of each step is dependent upon the order in

which

the

changes

were implemented.

f

a different

order

is used,

the individual step results

would

vary but

the total

costs/(savings) would

remain the

same. Specifically,

the

cost

of the

DC plan is

determined

after the savings of reducing

the

DB plan benefit

has been

determined.

As the actuarial analyses

demonstrate, the

bulk

of the

savings achieved by Senate Bill

Number

1082

arise

from the

changes

to the Option 4

lump-sum

contributions

return

to

. 18 -



D

J F

111

r] . J.

SUMMARY

OF

ACTUARIAL

COST IMPACT

(CONT D)





active employees. Should that provision not survive a legal challenge,

the

bill s savings are

significantly reduced.

However,

the restructuring

of the

retirement

system from a purely defined benefit program

to a hybrid of defined benefit and defined contribution features does entail a significant

shift

of

the

investment, inflation

and

longevity

risks

from

the

employer (i.e., taxpayers) to

the

employees. This is consistent

with the

trend among private sector employers over

recent years. The shifting

of

risk does not

guarantee

a cost savings; it

is

not designed to do

so. What it does is limit volatility

in

the employer contribution requirement. This can be

helpful in budgeting

future

expenses for pension plans, since

annual payments are

less

susceptible to market fluctuations.

The

Commission s consulting

actuary

(Milliman)

has made the

following observations on

the

analyses for

the

bill s impact on

the

Systems (starting on page 19 of

the

Milliman

actuarial

note).

• The consulting

actuary

for PSERS (Buck)

assumes that

employees who became

members of PSERS during

the

period July 1 2011, through June 30, 2014, would be

representative of members

entering the

system each

year

in

the

future. Act 120 re

duced

the requirements

for membership into PSERS

such

that

part-time

school employ

ees who work

at

least 500

hours

or 80 days became members for all future service

until

a

break

in

membership occurs,

whereas

previously

part-time

members

had

to qualify for

PSERS membership each year. Therefore, there may be a higher percentage of part

time members

entering

PSERS

in the

past

three years than

would necessarily be ex

pected in

future

years. These members would have lower

salaries

and lower DB

plan

costs than full-time members as these members would not be expected to accrue a full

year of service each

year

in

the

future. Milliman recommends

that the

System

and its

actuary

review

the

new entrant profile used in

the

projection to determine

if

its repre

sentative of members

entering the

system in future years.

•

In

Buck s

actuarial

valuation,

they

note that no specific additional provision is made to

reflect

the

possible

future

improvements in mortality. f

such

provisions were made

and

included in the projections, Milliman would expect

that

the expected contributions to

PSERS would increase

under

current provisions and also increase to a lesser

extent

under the

bill due to the lower DB plan benefits and

the

additional DC benefits which

would be unaffected by a change in

the

mortality assumption.

• For SERS, in

the

consulting actuary s (Hay) actuarial valuation, they note

the current

mortality table includes a

margin

for future improvements in life expectancy. However,

.

19.



D

8

1

1T

i=n. I ] .

SUMMARY OF ACTUARIAL COST IMPACT (CONT'D)


Senate

Bill No. 1082, P. N. 1460, and

Amendment

Nos. 04826 and 05049

to


this

margin

would be expected to decrease or be

eliminated

over a 30-year projection

period.

f

mprovements in

mortality

were included in the projections beyond the current

margins, Milliman would expect that the expected contributions to SERS would increase

under current provisions and also increase to a lesser extent under

the

bill due to the

lower DB plan benefits and the additional DC benefits which would be unaffected by a

change in the mortality assumption.

•

The

projected DB percent contribution shown on Hay's projection for the

amended

bill

is

the

rate that

would be applied to the DB

plan

and DC/DB plan payroll,

not

just the DB

plan payroll. Because Class A-5

members

would remain part of the DB plan if the bill is

enacted, Milliman recommends

that

the

DB payroll shown include

the

payroll associated

with Class A-5 members,

in

addition to showing

the

DC

plan

payroll separately. Milli

man also recommends revising the presentation to develop the DB

plan and

the DC plan

employer contributions separately,

as they

are

currently

combined.

• n Hay's December 14, 2015, cost estimate, they indicated that based on

the

small

percentage of elected officials currently

in

SERS active membership (about .025 ) and

their expectation

that most of

the affected elected officials would not

opt

out

of

Class A-5

membership upon re-election, the opt-out provision would

have

no material impact on

their overall December 3 2015, cost estimates. Milliman agrees that the opt-out provi

sion for elected officials does

not

have a

material impact on

the

overall costs of

the

bill.

POLICY CONSIDERATIONS

n reviewing the bill, the Commission identified the following policy considerations:

Potential Contract Impairment.

Historically, public employee retirement benefits

are

recognized as deferred compensation for work

already

performed, which confers

upon public employees certain

contractual

rights protected by the

Pennsylvania

Consti tut ion (Ai·ticle I, section 17). As writ ten, the active

member

benefit modifica

tions proposed

in the

bill may be found to impair

the

benefit rights of the affected ac

tive members.

Benefit Value

and

Security. The hybrid

plans

proposed in the bill would provide

new public school and State employees

with

a retirement income that is likely to be

less

valuable, predictable and secure than that provided by the traditional DB pen-

- 20 -



POLICY CONSIDER TIONS (CONT D)


Senate

Bill No. 1082, P. N. 1460,

and

Amendment

Nos. 04826

and

05049 to

Senate

Bill No. 1082, P. N 1460

sion plans.

Retirement planning based

on

the

side-by-side

hybrid plan

is likely to be

less predictable

and

involve

greater

individual

attention

to

risk management

than

participation in a traditional DB plan. Policymakers must determine the appropri

ateness

of such a change

in the

Commonwealth s public pension policy.

Further

Departure from Actuarial Funding Standards The bill would taper the col

lared contribution rates implemented

under

Act 120 for both PSERS and SERS, fur

ther delaying

the

increases in employer contributions and spreading

the

increases

over future years. The Commission is well

aware

of

the

fiscal challenges facing

the

Commonwealth

resulting

from

the

increased pension contributions. However, it

must

be noted that

the tapering

of

the

collared contribution

rates

proposed

in the

bill will generate additional liabilities for the Systems in

the

long term. The short

term effect of

the tapering

of

the

collars would be to further defer

the payment

of

contributions to both PSERS and SERS, resulting

in the

additional underfunding of

both

retirement

Systems. The Commonwealth s policymakers

must

determine

whether the further departure

from

actuarial

funding

standards

proposed by

the

bill

is consistent with

the

Commonwealth s pension plan funding and fiscal management

goals. Amendment Numbers 04826 and 05049 would remove this provision from

the

bill.

Fundamental

Shift

in

Risk Sharing.

The

benefit reforms proposed

in

the

bill will

take several

years

to modify

the risk

profile of

the

Systems. Over time,

as

member

ship

in

the

legacy defined benefit plans decreases and membership in the hybrid

plans

increases, the Commonwealth and school employers will assume less

risk

and

more

risk

will be shifted to members

of the

Systems.

Delegation of Legislative Authority.

The

bill empowers

the

Boards

of

both Systems

to develop the details of major DC

plan

design elements and administrative details

by rule

or

regulation. Policymakers must determine if the broad powers afforded

the

Boards constitutes an appropriate delegation of legislative authority.

Special Membership Classes.

Under the

SERS Code,

there

are a

number

of special

categories of public employees entitled to enhanced benefits, reduced superannua-

tion requirements, or both. These include members of

the

General Assembly,

the

judiciary, Pennsylvania

State

Police Officers and certain

other

hazardous

duty

per

sonnel. Under

the

bill,

there

are no such special benefit provisions for members of

the

General Assembly or

the

judiciary in

the

new hybrid plan. The uniform benefit

level under

the

bill would result in a major reduction

in the

value of employer-

- 21 -



D

1

y

'

[

~ ].

POLICY CONSIDERATIONS

(CONT'D)


Senate Bill

No.

1082, P.

N.

1460, and


and

05049 to

Senate

Bill No. 1082, P. N. 1460

provided benefits for these groups of employees in

the

future and would result

in

significant benefit disparities between similarly

situated

employees.

Alternative Retirement Benefit. t is recommended that

the

policymakers review

the

provisions of Section 530l a) l2) of the SERS Code and

the

appropriateness of

continuing

that

separate benefit structure unchanged.

Judicial Benefits. The Supreme Court of

the

Commonwealth has ruled

that,

in or

der to preserve an independent judiciary, judges must be adequately compensated,

pension benefits are part of compensation, and all members of a single-level court

performing similar functions and exercising

similar authority

must be compensated

at

the same rate. Based upon the independent status

of

the judiciary

in

Pennsylva

nia

and the case law regarding the special status of its members, i f enacted, the bill

is likely to be challenged in

the

courts.

Renewal of Pension Contract.

In

Shiomos v State Employes Retirement Board, 533

Pa.

588, 626 A.2d 158 (1993),

the

Supreme Court held that a public official, at every

new elected term of office,

renews

his pension

contract

subject to the

law in

effect

when

the

new term of office commences. While this case, and

the

subsequent deci

sions

that

follow its holding, specifically relates to Section 3 of

the

Public Employee

Pension

forfeiture Act, 1978,

July

8, P.

L.

752, No. 140, 43 P.S.

§

1313(c),

the

core

of

the

court's analysis

is

that a

statutory

provision can

alter

otherwise protected bene

fits contingent upon a change

in

the nature

of

the employment. That

analysis

may

apply equally to the statutory amendment proffered by this legislation.

Normal Cost Calculation. PSERS and SERS use dissimilar methods for calculating

the normal cost rate. Under the

current

SERS method, the normal cost is calculated

based

upon

the average new

entrant

to the System.

In

contrast, the method em

ployed by PSERS, which is based on a more liberal reading of

the

statute than the

SERS

interpretation,

the normal cost

rate

reflects the average cost as a percentage

of pay

from

entry

into

the System

reflecting

the

actual

class of membership of each

active member. This

is the

traditional method for calculating the normal cost under

the entry age normal actuarial cost method. Using

this

method, the PSERS' actuary

develops a normal cost rate based on a blend of

the

benefit accrual

rates

and mem

ber contribution rates, depending on each member's date of hire and class of ser

vice. Under the bill, both

Systems

would codify the

PSERS

interpretation of the

normal contribution rate determination effective for

the

fiscal year beginning on

Ju-

ly 1 2016. The Commission's consulting actuary has historically indicated

that

the

- 22 -



POLICY CONSIDERATIONS (CONT D)



and

Amendment

Nos. 04826 and 05049 to


PSERS method

is the

preferred approach for

determining

the normal cost for both

PSERS and SERS. This is especially

important

if the reduced benefit classes are

adopted for new members in order to avoid having a decrease in the normal cost for

current

members

and an

increase in

the actuarial

accrued liability.

Under the

new

approach,

the

normal cost and unfunded

actuarial

accrued liability would

not

change for current members, but

there

would be a reduced normal cost for new

members as they join the Systems. Thus the total normal cost of the Systems would

gradually decline

as

new members are added and

current

members retire.

COMMISSION RECOMMENDATION

The Commission voted to attach the actuarial note to

the

bill and

the

amendments,

recommending that

the General

Assembly and

the

Governor consider

the

policy

issues

identified above.

ATTACHMENTS

Actuarial

note provided by

Katherine Warren

of Milliman, Inc., consulting

actuary

for

the

Public Employee

Retirement

Commission.

Actuarial cost estimates provided by Buck Consultants, consulting actuary for

the

Public

School Employees Retirement System.

Actuarial

cost

estimates

provided by

the Hay

Group, consulting

actuary

for

the State

Employees

Retirement

System.

. 23



• illiman

December

16,

2015

Mr.

James L. McAneny

Executive Director

Public Employee Retirement Commission

P.O. Box 1429

Harrisburg, PA 17105-1429

1550

Liberty

Ridge Drive

Suite 200

Wayne,

PA

19087-5572

Tel

• 7

5 44

Fax 1

l t A7

4231

www mllllman com

Re: Senate Bill 1082, Printer s Number 1460, and as amended by AmendmentA04826

or Amendment A05049

Dear Mr.

McAneny:

As requested, we have prepared an actuarial note on Senate Bill 1082, Printer s Number

1460, and as amended by Amendment A04826 or by Amendment A05049. This note

indicates the differences between the Bill and as amended by the two amendments.

Due to time constraints dictated by the Commission for providing this actuarial note, we

are providing this letter

on an

accelerated basis.

In

particular, we were provided with

Senate Bill 1082, Printer s Number and Amendments A04829 and A05049

on

December

10, the PSERS actuarial analyses on December 2 and December

14,

and the SERS

actuarial analyses

on

December 3 and December

14.

Please note that Buck Consultants

recently presented 2015 valuation results

to

the PSERS Board; although a formal

actuarial report will not be available for several weeks. As directed by the Commission,

the analysis provided does not reflect these results. If additional time was available, the

analysis could

be

based on the most recent actuarial valuation and some of the issues

described

in

this letter could have been discussed with the Systems actuaries

in

more

detail, leading to potentially additional and/or different commentary. Additional time may

have also afforded the possibility that issues that are not presented

in

this actuarial note

could have been discovered and opined upon.

Please note this is a lengthy commentary on the Bill and its two possible amendments,

which is indicative of the significant changes proposed

to

PSERS and SERS for the two

multi-billion dollar systems. Comments and discussion on benefits, actuarial methods,

and the projections completed by the System actuaries are included throughout this

actuarial note.

In

addition, the Bill increases the variability

in

contributions paid by

members based on actual investment experience of the Systems. Our comments and

discussion are summarized in the following Executive Summary.

This analysis was prepared solely for the Pennsylvania Public Employee Retirement Commission and

may not be appropriate for other purposes. Milliman does not intend to benefit and assumes no duty or

liability to other parties who receive this work.

Milliman



Mr. James L. McAneny

December 16, 2015

Page

xecutive Summary

This actuarial note on Senate Bill 1082, Printer s Number 1460 as potentially amended

by Amendment A04826 or by Amendment A05049 contains several items that we believe

are important to the reader. These items are summarized below and are expanded

in

further detail throughout this actuarial note.

• We understand that there are drafting errors in the Bill that impact the shared-risk

and shared gain provisions for SERS and the required member contributions for

elected officials in Class

0-4

who are eligible to opt-out but fail to do so also in

SERS (see pages 13 and 14 for discussion). These drafting errors should be

corrected prior to the Bill s enactment.

• We support the change in the normal cost determination to be based on all active

members in the System rather than the average new member. As PSERS was

already using this methodology, this change only impacts SERS. (See page 14

for discussion).

• In light of the shared-risk and shared-gain provisions, it

is

our opinion that

stochastic modeling analyzing various economic outcomes should be performed

for both Systems to fully understand the underlying risks to employer costs and

employee contributions associated with these provisions (see page 18 for

discussion).

• In light of the potential reduction in employer provided benefits, consideration

should be given to having a formal analysis conducted to review member benefit

adequacy reflecting

v rying

economic scenarios (see page 12 for discussion).

• We are concerned that the mortality assumption used by the actuaries is stagnant

throughout the projection period thereby underestimating life expectancies (see

page 19 for discussion).

• We are concerned that the new employee cohort utilized for PSERS may overstate

the percentage

of

part-time employees entering PSERS due to the one-time spike

in existing part-time employees becoming members due to Act 120 (see page 19

for discussion).

• Prior to the Bill s enactment, we suggest that the following differences between

PSERS and SERS be reviewed to ensure that this is the intent of the Bill s

sponsors.

We

understand that some differences date back to Act 120. (See pages

11

and

13

for discussion)

Vesting for new members would be 5 years in PSERS and 10 years in

SERS.

The disability benefit for new members

is

higher in SERS than in PSERS

for members with the same characteristics.

Under the shared risk and shared gain provisions, the member contribution




Milliman



Mr.

James

L

McAneny

December

16,

2015

Page 3

rate changes when the difference between the actual investment return and

the interest rate assumption

is

greater than or equal to 1 in PSERS and

only greater than 1

in

SERS.

Summary o the ill

Senate Bill 1082, Printer's Number 1460, would amend both the Public School

Employees' Retirement Code and the State Employees' Retirement Code to enact

significant reforms applicable to both current and future members of the Public School

Employees' Retirement System (PSERS} and the State Employees' Retirement System

(SERS}.

The primary provisions that would impact the actuarial valuations are briefly summarized

below.

Current members including future State Police officers and most other hazardous duty

members in SERS)

The following changes for current active members would apply prospectively (i.e. no

change to the value o the benefit earned for service accrued as o the effective date}.

These changes would also apply to future State Police officers and most other hazardous

duty members who would continue to

be

classified as Class A-3 or A-4 members

in

SERS.

• For current Class T-E and T-F members

in

PSERS and current Class A-3 and A-

4 members

in

SERS, the following changes would occur.

o

For PSERS, the current shared-risk provision would be modified and for

SERS a shared-gain provision would be added, to allow a member's

contribution rate to be reduced by up to

2

below the member's basic

contribution rate, under the same conditions which current member

contribution rates could increase under Act 120.

In

PSERS, the decrease

in

the member contribution rate could not exceed 0.5 at any one time.

In

SERS, there are circumstances that could lead to a change

in

the member

contribution rate by as much as 1 at one time.

o

The Option 4 member contribution with interest withdrawal option would

become available

on

an

actuarially neutral basis for all service. (Currently

such members cannot elect Option 4.) Actuarially neutral refers to the

interest rate used

in

the calculation, which would be changed to be

consistent with the valuation interest rate assumption ratherthan the current

4 interest rate. This provision is effective July

1,

2016 for SERS members.




Milliman



Mr. James L McAneny

December 16, 2015

Page

• For current Class T-C and T-D members in PSERS, the following changes would

occur:

o

Shared-risk provision consistent with the provisions for Class T-E and T-F

members is added.

• The member contribution rate reflecting the shared-risk provision

would not be more than 2 above the basic contribution rate nor less

than 2 below the basic contribution rate.

• Every three years beginning with the June 30, 2020 valuation, the

System would calculate the difference between actual and assumed

rates

of

return for the past ten years (excluding years prior to July 1,

2011

).

(The three year determination period began June 30, 2014

for Class T-E and T-F members.)

• If the actual investment rate

of

return, net

of

fees, is equal to or below

the assumed investment rate of return by less than 1 , the member

contribution rate would increase by 0.5 , provided the member

contribution rate was less than the basic contribution rate.

• If the actual investment rate

of

return, net

of

fees, is less than the

assumed investment rate of return by 1 or more, the member

contribution rate would increase by 0.5 , subject to the maximum

accumulated increase of 2 .

•

If

the actual investment rate of return, net of fees, is equal to or

exceeds the assumed investment rate of return by less than 1 , the

member contribution rate would decrease by 0.5 , provided the

member contribution rate was more than the basic contribution rate.

• If the actual investment rate of return, net of fees, is more than the

assumed investment rate

of

return by 1

of

more, the member

contribution rate would decrease by 0.5 , subject to the maximum

accumulated decrease of 2 .

• If the System's funded status is at least 100 as of the date

of

determination and the member contribution rate exceeds the basic

contribution rate, the member contribution rate would be reset to the

basic contribution rate.

o

All member contributions made

on

or after July 1, 2016 and all statutory

interest on those contributions, if withdrawn under Option 4, would be

subject to

an

actuarially neutral Option 4 calculation. Member contributions

made prior

to

July 1, 2016 and statutory interest

on

those contributions

would be withdrawn first

if

an Option 4 election is made.




Milliman



Mr.

James

L

McAneny

December 16, 2015

Page

• For current members in SERS that were not Class A-3 or A-4 members, the

following changes would occur.

Beginning July

1,

2020 and every three years thereafter, member

contributions would be adjusted based on the shared-risk contribution rate

and the shared-gain adjustment, consistent with the provisions for Class A-

3 and A-4 members.

• Every three years beginning with the December 31, 2019 valuation,

the System would calculate the difference between actual and

assumed rates of return for the past ten years (excluding years prior

to January 1, 2017). (The three year determination period began

December 31, 2013 for Class A-3 and A-4 members.)

• The shared-risk contribution rate would not

be

more than

2

and not

less than

0 ,

with

an

initial value of 0 .

• If the actual investment rate of return, net of fees, is less than the

assumed investment rate of return

by

more than 1

,

the shared-risk

contribution rate would increase

by

0.5 .

• If the actual investment rate of return, net of fees, is more than or

equal to the assumed investment rate of return, the shared-risk

contribution rate would decrease by 0.5 .

• If the accrued liability contribution rate

is 0

or less, the shared-risk

contribution rate for the next fiscal year would be 0 .

• The shared-gain adjustment would not be more than 0 and not less

than -2 , with

an

initial value of

0 .

•

If

the actual investment rate of return, net of fees,

is

more than the

assumed investment rate of return by more than 1

,

the shared-gain

adjustment would decrease by 0.5 .

• If the actual investment rate of return, net of fees, is less than or

equal to the assumed investment rate of return, the shared-gain

adjustment would increase

by

0.5 .

All member contributions made

on

or after July

1,

2016 and all statutory

interest on those contributions, if withdrawn under Option 4, would

be

subject to an actuarially neutral Option 4 calculation. Member contributions

made prior

to

July

1,

2016

and

statutory interest

on

those contributions

would be withdrawn first if an Option 4 election is made.

• For all SERS members (except for State police officers who qualify for the

Dilauro

Award benefits), the final average salary determination for credited service earned

after December

31,

2016 would be revised to be the greater of (a) a 3-year final

average salary excluding overtime paid after December 31, 2016, or (b} a 5-year

final average salary, including overtime.




Milliman




December 16, 2015

Page

• State Police would continue to be eligible for the Dilauro Award upon the

completion of 20 eligibility points. However, any Class A-5 service (such as from

military service, purchased service,

or

other State service) would not count as

eligibility service for the Dilauro Award. Instead any Class A-5 service would

result in additional benefits from the System based on just the Class A-5 service.

uture members

Employees who join PSERS on

or

after July 1 2017 and most employees who join SERS

on or after January 1 2018 would become members

of

Class T-G and Class A-5,

respectively. State Police and most other hazardous duty members would be exempt

from becoming Class A-5 members in SERS and instead would continue to be classified

as Class A-3 or A-4 members. The new benefit tier within each System for each would

continue to be a traditional defined benefit formula, as provided to current members, but

with a lower accrual rate along with other changes. Such members would also be enrolled

in a defined contribution plan maintained by the Board of each System.

Defined Benefit Plan for future members

Except for the following changes, Class T-G members would have the same benefits as

current Class T-E members in PSERS and Class A-5 members would have the same

benefits as current Class A-3 members

in

SERS.

• The accrual rate would be 1 (instead of 2 ).

• The final average earnings would be determined over a 5-year period (instead

of

a 3-year period as in PSERS or the updated determination in SERS).

• Employer-provided benefits

in

PSERS for Class T-G members would vest after 5

years of service (instead of 10 years of service for Class T-E members). Class A-

5 members in SERS would continue to have the same 10 year vesting as for Class

A-3 members.

• Mandatory member contributions would be 4 and 3 of compensation for

PSERS and SERS members, respectively (instead of 7.5 and 6.25

respectively), subject to the same shared risk/gain adjustments as for Class T-E

and A-3 members.




Milliman



Mr. James

L

McAneny

December 16, 2015

Page

Defined Contribution Plan Portion for future members

The primary features of the new defined contribution plans are as follows:

• Mandatory member contributions

of

3.5% of compensation in PSERS and 3.25%

of compensation in SERS such that there would be no change in the total

contribution rate from Class T-E members of 7.5% and Class A-3 members of

6.25%.

• Voluntary member contributions made on an after-tax basis, subject to applicable

Federal limitations.

• The Board would have the authority to add an auto-escalation feature that would

increase voluntary member contributions that could apply even if

no

voluntary

member contributions were being made. Participants would be able to opt out

of

such feature.

• Employer contributions of 2.5% of compensation

• Employer contributions and earnings thereon would become 100% vested after

three years of service.

• Each member would have

an

individual investment account where all member and

employer contributions would be accumulated and investment experience, fees,

and costs are credited or charged.

• Upon termination of service, a member could elect a lump sum distribution of the

accumulated member contributions with investment income.

lected Officers

n

S RS

The Bill outlines that all current active SERS members who are elected officers

(regardless of their membership class) would not be allowed to continue in their current

membership class but would instead be treated as new members upon election or re

election, unless the member elects out of becoming a Class A-5 member. Elected officers

include those (1) elected

or

re-elected to a term of office that begins after December 31

2017, as Governor, Lieutenant Governor, Attorney General, Auditor General, State

Treasurer, or member of the General Assembly and (2) elected to a term of office that

begins after December 31, 2017 as a member

of

the judiciary who has not previously held

the office the individual is elected to.

An elected officer who first became a member of SERS before January 1 2018 may elect

to remain in their current membership class and not become a Class A-5 member for

service as an elected officer. Such election must be made to the Board before the start

of the first term of office in any position as an elected officer starting after December

31

,

2017. The

election, would be irrevocable and applicable to all future service as an elected



liability to other parties who receive this work .

Milliman




December 16, 2015

Page 8

officer.

Elected officers who are eligible to make the above election, but fail to do so, would

continue to have the same member contributions as before with 3%

of

compensation

going to the defined benefit plan and the remainder going to the defined contribution plan,

with the following exceptions:

• 3.25%

of

compensation would be contributed to the defined contribution plan

(instead

of

4.5%) if the member would have been a Class 0 4 member if the

election was made.

• The contribution to the defined benefit plan would be increased by the shared-risk

contribution and reduced by the shared-gain adjustment for Class A-5 members .

• The contribution to the defined contribution plan would also be increased by the

shared-risk contribution and reduced by the shared-gain adjustment applicable to

the elected official's current class of service. For example, a current elected official

in

Class D-4 who becomes a Class A-5 member upon re-election would have his

defined contribution plan contribution adjusted by any shared-risk contribution or

shared-gain adjustments applicable to Class D-4 members.

unding

PSERS

The Bill, if enacted, would change the following four items with regard to the employer

contribution rate determination for PSERS.

1.

The normal contribution rate

in

§8328(b) would be revised effective with fiscal year

beginning July 1 2016 to be determined as a level percentage of the

compensation of all active members, which percentage, if contributed from the

start of their employment on the basis of their prospective compensation through

their entire period

of

active school service, would be sufficient to fund the liability

for any prospective benefit payable to them, in excess of that portion funded by

their prospective member contributions, excluding the shared-risk contributions.

Previously the normal contribution rate was to be based on the average new

active member . The changes

in

the wording are now more consistent with the

methodology that has been employed in the actuarial valuations.

2.

The employer's normal cost cannot be less than $0.

3. Beginning with the June 30, 2015 actuarial valuation, the actuarial value of assets

cannot be less than 70% of the market value of assets nor more than 130% of the

market value

of

assets.

4. For the fiscal year beginning July 1 2016 only, the pension employer contribution

rate cannot be more than 2.25% (instead of 4.5%) of total compensation of all




Milliman



Mr. James

L

McAneny

December 16, 2015

Page

active members greater than the final contribution rate for the fiscal year beginning

July 1 2015.

In

accordance with §8328(c)(4), any increases

in

the unfunded accrued liability due to

increases

in

plan benefits determined on a total plan basis due to this Bill would be

amortized beginning the July 1 second succeeding the date the Bill is enacted over a 10-

year period using level percentage

of

pay amortization payments for PSERS. Such

increases would not be considered costs added by legislation for purposes of the collared

contribution rate. Since the Bill would reduce the unfunded accrued liability for PSERS,

a 10-year amortization period would not be used and the 24-year period used for

experience gains or losses would be used. The change

in

the unfunded liability due to

the Bill would be measured as of June

30

2015. Please note that there is a disconnect

in the first year that the changes are recognized in the normal cost compared to the first

year changes are recognized

in

the unfunded liability as a result

of

this Bill.

SERS

The Bill, if enacted, would change the following four items with regard to the employer

contribution rate determination for SERS.

1. The normal contribution rate

in

§5508(b) would be revised effective with fiscal year

beginning July

1

2016 to be determined as a level percentage of the

compensation of all active members, which percentage, if contributed from the

start

of

their employment on the basis

of

their prospective compensation through

their entire period

of

active State service, would be sufficient to fund the liability for

any prospective benefit payable to them,

in

excess of that portion funded by their

prospective member contributions, excluding the shared-risk member

contributions and shared-gain adjustments to

regular member contributions.

Previously the normal contribution rate was to

be

based

on

the average new

active member''. Unlike PSERS, this has a significant impact on the portion

of

the

contribution attributable to normal cost versus unfunded liability.

2.

The employer's normal contribution rate cannot

be

less than 0%.

3.

For the fiscal year beginning July

1

2016 only, the employer contribution rate

cannot be more than 2.25% (instead of 4.5%) of total compensation of all active

members greater than the final contribution rate for the fiscal year beginning July

1

2015.

4. The change

in

the accrued liability as of December 31, 2015 due

to

this amended

Bill would be amortized beginning July 1 2016 over a 30-year period using level

annual dollar amortization payments, instead of the current 10-year amortization

period for changes

in

the accrued liability due to legislation.




Milliman



Mr. James

L.

McAneny

December 16, 2015

Page 10

Also, §404 o the Bill indicates that the costs added by this legislation would not be

considered costs added by legislation for purposes of the collared contribution rate.

Summary o the Bill as amended y Amendment A04826

Amendment A04826 to Senate Bill 1082, Printer's Number 1460 removes the one-time

collar reduction from 4.5 to 2.25

in

determining the collared contribution rate for the

fiscal year beginning July 1 2016. All other items described earlier would remain.

Summary

o

the Bill as amended y Amendment A05049

Amendment A05049 to Senate Bill 1082, Printer's Number 1460 removes (1) the one

time collar reduction from 4.5 to 2.25 in determining the collared contribution rate for

the fiscal year beginning July 1 2016 and (2) the ability for current elected officers to

make an election to remain in their current class and opt out o Class A-5 membership,

including the increased member contributions to the defined contribution plan

i

the

elected officer was eligible to make the election but failed to do so. All other items

described earlier would remain.

Discussion

o

the Bill including Amendments

Defined ontribution Plans

-

General Information

Employers have been replacing traditional final average pay plans

in

the private sector

with defined contribution plans for many years. Many employers have been ending their

existing final average pay retirement plan (via benefit freezes or plan terminations) and

replacing it with a defined contribution plan or hybrid plan design

in

an attempt to control

plan costs, reduce volatility, and shift some o the inherent risk associated with

maintaining a defined benefit plan from the employer to the employee.

Defined contribution plans shift inflation, investment, and longevity risks from the

employer to the employee as the account balance is a function o earnings over the

working lifetime

o

the employee and the investment yield

o

the funds selected by the

employee. As employees typically withdraw account balances upon retirement, they bear

the risk

o

outliving their retirement assets.

With a defined contribution plan, the employer contributions are typically a percentage

o

member compensation, and can be easily budgeted each year without the added risk o

additional contributions due to investment and demographic losses. Forfeitures o non

vested employer contributions with interest from members who terminate employment




Milliman



Mr.

James

L

McAneny

December 16, 2015

Page 11

prior to full vesting would serve to slightly lower future employer contributions.

New enefit Tiers

The benefit accrual rate currently applicable to new members

in

PSERS and for most

new members in

SERS is 2.0 with a member contribution rate of 7.50

in

PSERS and

6.25

in

SERS. This benefit structure is similar to benefits provided to other members

o

PSERS and SERS and provides retirement benefits

in

a traditional defined benefit

formula reflecting a member's final average salary and years

o

service.

The Bill would establish new tiers

o

benefits and separate defined contribution plans for

members entering PSERS and most members entering SERS. State Police and most

other hazardous duty members would be exempt from the new benefit tier in SERS and

would continue

to

be classified as Class A-3 or A-4 members. The new tiers would be

designed as a final average pay plan which has a lower accrual (1 ) and a longer

averaging period for final compensation

(5

years). Members would

be

required to

contribute 4 and

3 o

compensation

in

PSERS and SERS, respectively.

New members

in

the lower accrual final average pay plan tiers would also be enrolled

in

a defined contribution plan. Members would

be

required to contribute 3.

5

and 3.25

of compensation

in

PSERS and SERS, respectively, with the opportunity

to

make

additional voluntary contributions. Employer contributions would

be

2.5

o

compensation . Members would be vested in the employer contributions and earnings

thereon after 3 years

o

service.

Traditionally, the benefits provided to PSERS members and general SERS members are

the same, except for the required member contributions. If the

Bill

is

enacted, the vesting

of the defined benefit plan benefit for new members would

be

5 years

in

PSERS and 10

years

in

SERS. In addition, the disability benefit provided to new members with the same

characteristics would generally be higher under SERS then under PSERS. Prior to the

Bill's enactment, we suggest that these differences be reviewed to ensure that this

is

the

intent of the Bill's sponsors.

Having differing benefit accrual rates (and resulting pension amounts) for different groups

o

employees results

in

additional administrative costs as well as the necessity for clear

and consistent communication about the benefits provided. There is also a potential

equity issue when two employees, one hired before the change and one after, have the

exact same job but have different pension benefits. Please note this situation already

exists

in

PSERS and SERS.




Milliman



Mr. James L McAneny

December

6

, 2015

Page 12

ew Member Benefit dequacy

Depending on the level o employer contributions, projected retirement benefits expected

to

be

received by members are typically lower when a portion

o

a traditional final average

pay retirement plan

is

replaced with a defined contribution plan. Most notably, the

expected reduction in retirement benefits typically impacts members who enter the

system at older ages since the time available to accumulate substantial account balances

is limited.

In

a traditional final average pay plan, the value o the retirement benefit

increases significantly as members approach retirement and past years o service are

based on current higher earnings. While this legislation continues the traditional final

average pay plan but with a lower accrual , the addition o the defined contribution plan

provides that benefits are earned more equitably over the working lifetime

o

a participant.

Therefore, there is generally a decrease in the projected retirement benefits, depending

on the relationship between past salary increases and the investment income earned

on

the defined contribution accounts.

It was beyond the scope of our assignment to provide a comparison o the two benefit

designs and the value to members. We note that each system's actuary provided some

benefit comparisons in the cost estimates referenced below. Serious consideration

should be given to having a formal analysis prepared prior to any revision in benefits.

Such analysis should reflect the impact o varying investment returns and annuity

conversion rates. In addition,

i

the pension benefits are reduced, there may be pressure

to increase other forms o compensation to provide for the same level o total

compensation value as before.

Reform

of

Current Member Benefits on Prospective Basis

The Bill would revise the prospective benefits for current members. The value

o

benefits

earned as of the effective date o the Bill would not be impacted as these benefits would

continue to increase resulting from increases in a member's final average salary after the

effective date based on the current plan provisions.

Under the Bill, a shared-gain provision for current Class T-E, T-F, A-3, and A-4 members

would be added in parallel to the current shared-risk contribution. As a result, member

contributions could change within a 4 corridor (up from the current 2 corridor) every

three years depending on the System's investment performance. The member

contributions

could change in 0.5 increments in PSERS and up to 1 increments in

SERS.

In

addition, the shared-risk and shared-gain provisions would be extended to Class T-C




Milliman



Mr.

James

L

McAneny

December 16, 2015

Page 15

change aligns with the prior PSERS interpretation and there would

be

no cost impact due

to this change for PSERS.

For SERS, this would reflect a change

in

interpretation. Under the SERS interpretation

of the average new member , the SERS' actuary currently bases the normal cost

calculation

on

new members

in

Class A-3, as the average new general employee member

would enter this

Class

. f the Bill was enacted without the normal contribution rate change,

the SERS' actuary would base the normal cost calculation on new members

in

Class A-

5

which would result

in

a significant decrease

in

the normal contribution rate and a

significant increase

in

the unfunded actuarial accrued liability. However, if the Bill

is

enacted, the SERS' actuary would instead base the normal cost calculation on all active

members, not just

on

the new general members entering Class A-5. As discussed

in

prior

actuarial notes for other bills, we prefer this normal cost determination for a tiered

retirement system over the method currently used by SERS.

Basing the normal contribution rate

on

all active members aligns the normal cost rate

with the average costs being earned by current members during the year. This

is

the

traditional way to calculate the normal cost under the entry age normal cost method.

Under this method, the actuary develops a normal cost rate based

on

current active

members and the benefits to which each member

is

entitled. Thus, the normal cost rate

would be based

on an

average of each member reflecting the various benefit accrual

rates, the special membership classes

in

SERS, and the various member contribution

rates, depending

on

each member's date of hire and class

of

service. As a result, the

normal cost rate would gradually decline as current members leave active service and

are replaced by new members

in

Class T-G and A-5.

In

Hay's analysis for SERS, there is a cost for the new entry age normal cost approach

over the specified projection period. Under the current methodology, the normal cost rate

for new members is lower than the traditional entry age normal cost for pre-Act 120

members. The differences

in

these normal cost rates is captured

in

the actuarial accrued

liability as part

of

the experience adjustment. Because normal costs are payable during

the active member's working lifetime and changes

in

the unfunded actuarial accrued

liability due to experience adjustments are amortized over 30 years, the change to a

normal cost determined for all active members means that the prior differences would

now be paid over the active members' expected working lifetime, which

is

significantly

shorter than 30 years. This would result

in

higher contributions during the 30-year

projection period, but also a higher projected funded ratio . The higher projected funded

ratio would eventually lead to lower contributions after the end of the projection period

utilized

in

these analyses. Effectively, this change more closely aligns the pattern of

contributions during the period benefits are accrued.




Milliman



Mr. James L McAneny

December 16, 2015

Page 17

and note that the use of the temporary collar contributi9n rates does not follow generally

accepted actuarial standards of practice.

Initial Employer Cost after the Bill s enactment

f

the Bill is enacted, we note that

in

the actuarial analysis for PSERS, the reduction

in

the

accrued liability rate would first occur for the employer contribution rate for the 2016-2017

fiscal year, but the reduction in the normal contribution rate would first occur for the

employer contribution rate for the 2017-2018 fiscal year. This mismatch between when

the Bill is first reflected

in

the components of the employer contribution rate should be

reviewed to ensure compliance with the statute, as amended by the Bill, the drafter s

intent and actuarial standards of practice.

Potential increased scrutiny regarding selected investment return assumption

Economists, investment professionals, actuaries, employee representatives, and

retirement systems may all have different viewpoints related to the expected long-term

return on plan assets. With additional members subject to the shared-risk and shared

gain member contributions, it would be expected that the selection

of

the System s

investment return assumption and fiduciary responsibilities with regards to selection

of

investments could fall under heightened scrutiny as this assumption would have a direct

impact on additional future member contributions. Any methodology currently in place

that yields the current investment return assumption and selection of investments should

be reviewed

in

light of this expected increased scrutiny. Consideration should also be

given to the appropriateness of this long-term assumption impacting future member

contributions prior to the Bill s enactment. It was beyond the scope

of

this analysis to

determine the reasonableness of the System s long-term investment return assumption

or the appropriateness of this assumption for member contribution adjustments. We do

note that a decrease

in

the assumption would decrease the probability that employee

contributions would increase due to the shared-risk provision.

Option 4 and Actuarial Equivalent Mortality

In

producing the estimates for this Bill, both PSERS and SERS assumed that the actuarial

equivalent mortality used for determining the Option 4 offset would be consistent with the

mortality assumption used in the actuarial valuation for all future years. We note that this

is currently true for PSERS, but actuarial equivalence for SERS

is

still based on the 1983

Group Annuity Mortality table. If the actuarial equivalence is not updated for SERS,

actuarial gains would occur if members elect the cost neutral Option 4 withdrawal. Hay

did not reflect any potential actuarial gains

in

their analysis and we concur with this




Milliman



Mr. James

L.

McAneny

December 16, 2015

Page 18

approach.

Alternative Retirement Plan such

as

TIAA CREF

Certain public employees hired by state or school employers within the Commonwealth

have the opportunity to waive membership in SERS

I

PSERS and elect an alternative

retirement plan such as TIAA-CREF. Depending on the differences between the benefits

for Class T-G and Class A-5 members versus those provided by the alternative retirement

plans, there could be a potential inequity for such eligible employees as the employer

contribution rates could differ and potentially incent such eligible employees to join

PSERS/SERS or the alternative retirement plan. If eligible new employees elect an

alternative retirement plan, the anticipated membership within SERS and PSERS could

slowly decline, impacting the appropriation payroll which could lead to increases in the

employer unfunded liability rate, although not necessarily the dollar amount of the

unfunded liability.

Estimated ctuarial Cost

You provided us with a copy of the December

1

2015 and December 14, 2015 estimates

by Buck Consultants for PSERS and the December 3 2015 and December 14, 2015

estimates by Hay Group for SERS with the projected impact of this Bill and Amendments

A04826 and A05049. In addition, Buck Consultants and Hay Group have provided us

with additional details regarding their projections.

e

appreciate their cooperation

in

providing this information on a timely basis to meet the accelerated timeframe for

providing this cost note.

The cost estimates included multi-year projections of the employer contribution rate under

the current law and if this Bill, including amendments, was enacted. These estimates

show the projected appropriation payroll and the employer contribution rate for the

System as well as for the new defined contribution plan. These projections are based on

the latest actuarial valuation for SERS (December 31, 2014) and the most recently

published actuarial valuation for PSERS (June 30, 2014), and assume that future

experience will exactly match the actuarial assumptions used to prepare the valuation

and projections.

The multi-year projections reflect a single-point scenario assuming that all assumptions

are exactly realized, including actual investment return on the market value of assets

of

7.5 each and every year. In reality, actual investment returns will vary from year to

year, which will have an impact on the future employer costs. Due to the scope and

impact of this Bill, we strongly recommend and feel it is most prudent that stochastic




Milliman



Mr. James

L.

McAneny

December 16, 2015

Page 21

is based on the annual growth in estimated general fund revenue from 2017-2018 to

2019-2020 shown on page C1-12 in the Governor's Executive Budget for 2015-2016 .

Impact on Employer Contributions i Senate Bill 1082 PN 1460 is enacted


(Amounts

n

millions and based on System actuary s projections)

Cash Flow Costs

I

Present Value of Present Value

o

(Savings) as Cash Flow Costs

I

Cash Flow Costs

I

determined by (Savings) at 3.9% (Savings) at 7.5%

System Actuary

as

o

June 30, 2015 as of June 30, 2015

Without any Amendments

PSERS (484)

(947) (904)

SERS {2,468)

(1,402) (892)

Total

{2,952) (2,349) (1,796)

With Amendment A04826 or Amendment A05049

PSERS

(716)

(1,020) (910)

SERS

(2,644) (1,452) (887)

Total (3,360) (2,472)

1,

797)

The System actuaries' cost estimates also indicated the costs/(savings)

o

the various

provisions on a step by step basis. The attached exhibit summarizes the impact for the

various steps for the changes in the Bill (without any amendments) on the cash flow

costs/(savings) for fiscal years 2015-2016 through 2047-2048 and shows the present

value

o

the cash flow costs/(savings) at 7.5% as o June 30, 2015. (We did not receive

enough information to determine the present values at 3.9% for each o the steps for

PSERS; accordingly this information is not shown on the attached exhibit.) Also note that

the costs

o

each step is dependent on the order

in

which the changes were implemented.

If a different order is used, the individual step results would vary but the total

cost/( savings) would remain the same. Specifically, the cost of the DC plan is determined

after the savings

o

reducing the DB plan benefit has been determined.

For the projections o the Bill's impact, the actuaries of both systems continued to use the

same actuarial assumptions adopted for use in the latest published valuations. Please

note that the actual cost of this Bill, if enacted, would depend on the actual experience for




Milliman



Exhibit I

Impact on Employer Contributions o the Various Reforms if Senate Bill 1082 PN 1460 is enacted


(Amounts n millions

nd

based on System actuary s projections)

PSERS

SERS

Cash Flow Costs

Present Value

of

Cash Flow Costs

Present Value of

Cash Flow Costs Cash Flow Costs

I

(Savings) as

I

(Savings) at

I

(Savings) as

I

(Savings) at

determined by

7.5% as

of

June

determined by

7.5% as

of

June

System Actuary

30 2015

System Actuary

30 2015

1% accrual rate and reduced member (5,335) (1,038) (2,071) (184)

contributions for most new hires

Defined contribution plan for most new

9,456

1,917 3,781 776

hires

5 year vesting for PSERS new hires

130

27 n/a n/a

Change in Final Average Earnings

(new hires, and SERS current

(319) (61)

(1,138)

(401)

members

on

a prospective basis)

Cost-neutral Option 4

(4,648)

(1,755) (358)

(197)

Normal Cost based on all active

0

0

546

(994)

members

~ m o r t i z a t i o n

period for plan change

n/a n/a (3,404) 113

from 10 to 30 years for SERS

Subtotal (applies i f Bill is amended by

(716) (910)

(2,644)

(887)

A04826 or A05049)

Revised contribution collar

232

6

176

(5)

Grand Total (applies if Bill is not

(484) (904) (2,468)

(892)

amended by A04826 or A05049)

The impact o f the items

is

dependent on the order in which the Systems determined the costs. If the order is revised, the impact of the

items may vary but not the total. This exhibit is

an

attachment to a December 16, 2015 letter to M

r

James

L

McAneny. Please refer

to that letter for more information, including explanatory notes and statements of reliance.

This analysis was prepared solely for the Pennsylvania Public Employee Retirement Commission and may not be appropriate for other purposes.

Milliman does not intend to benefit and assumes no duty or liability to other parties who receive this work.

Milliman



Mr. Glen

R.

Grell

December 14, 2015

Page

c. Class T G: new members on and after July 1, 2017 - Defined Benefit Plan

Provisions

• New members on and after July 1, 2017, would become Class T-G members.

x rox

• Benefits would accrue at the rate of 1.00% of final average salary per year of service.

• T-G members would contribute 4.00% of pay.

• The benefit would be based on a 5-year final average salary.

• T-G members would be subject to the same risk/gain sharing provisions as T-C, T-D,

T-E and T-F members, as outlined above.

• Employer-provided benefits would vest after completion of five years o f service.

• T-G members would be eligible for health care premium assistance.

• Option 4 member contribution (with interest) withdrawals would be available on a

cost-neutral basis to the Plan.

d. New participants on and after

July

1, 2017 - Defined Contribution (DC) Plan

Provisions

• Employees hired on and after July

1

2017 would be automatically enrolled in the DC

plan.

• Participant contributions to the DC plan

of

3.50%

of

compensation would be

mandatory. At their option, participants would be able to contribute additional

amounts up to IRS limits. The mandatory participant contributions would be pre-tax

pickup contributions, but voluntary additional contributions would not.

• The DC plan employer contribution rate would be 2.50% of compensation.

• Participant contributions to the DC plan would vest immediately. Employer

contributions to the DC plan would be 100% vested after 3 years.

• Each DC participant would have an individual investment account, where all

participant and employer contributions are accumulated and investment experience,

fees and costs are credited

or

charged.

• Upon termination, benefits from the plan can be paid out as a lump sum or annuity.

• DC plan benefits can be taken at a different time from the DB benefit.

PSERS Funding changes

• Effective with the June 30, 2015 actuarial valuation, the 10-year asset averaging

method would be constrained to differ from the market value of assets by not more

than 30%.

The results reported in this cost note are based on the following assumptions for SB-1082:

1.

100%

of

Classes T-E, T-F and T-G members are assumed to elect to withdraw their

member contributions (with interest) under Option 4.

2.

The effect of the benefit changes made by the legislation on the System's accrued

liability would be measured initially in the June 30, 2015 valuation.

3.

The proposed reform to current member benefits would decrease the System's unfunded

accrued liability. Act 120 did not specify an amortization method for such decreases due

to legislation. For purposes of this analysis, we have assumed that such decrease will be

amortized using a 24-year level percent

of

pay amortization method.

In reviewing the results, the reader should note that the portion of the benefits provided to Class T-G

members by the DC plan is subject to investment risk that would be fully borne by participants. Under

PSERS, only Class T-E and T-F members currently share responsibility for the fund's investment risk

through the Act 120 shared-risk additional member contributions. Also, participants would bear the

full cost associated with longevity risk (i.e., the risk

of

fully depleting account balances) for benefits



Mr. Glen R Grell

December 14, 2015

Page 3

x rox

provided by the DC plan, while under PSERS, longevity risk is covered by the System. In addition,

the 2.50% employer contribution under the DC plan does not reflect an offset for forfeitures for

terminating participants prior to three years of service.

Estimates of the potential financial impact of SB-1082 are presented in the attached tables.

These results may be used as estimates

of

the likely pattern

of

emerging costs and liabilities

resulting from the proposed changes but should not be viewed as a guarantee of actual

costs. Actual future funding obligations will be determined by actuarial valuations made on

future valuation dates, which will likely differ from the estimates provided in these analyses.

Table 1 compares projected employer contribution obligations under the current benefit and

funding provisions of PSERS with those projected to arise under SB-1082.

Table 2 allocates the total projected cost/(savings) among the components

of

SB-1082 that

affect System cost. The Table 2 cost allocation is dependent on the order in which the

changes are implemented. If a different order is utilized, individual results will vary but the

total cost/(savings) will remain unchanged.

The savings due to some of the benefit changes included in SB-1082 are attributable to

reductions in current members' prospective benefit entitlements. We recommend consultation

with legal counsel to review the proposed changes for current active members for

consistency with applicable law.

Table 3 consists

of

six benefit comparisons between the estimated current benefits provided

under PSERS for hypothetical Class T-E members and the proposed DB/DC combined

benefits that would be provided under SB-1082 for the same members.

Table 4 is a comparison

of

benefits for a hypothetical Class TD member, who will be age 62

with 29 years of service at retirement, with and without the cost neutral option 4 provision

provided for future service on or after July 1, 2016. The hypothetical Class TD member is

based on the projected average

of

the total Class TD membership age

of

46 and service of

13 years as

of

June 30, 2016.

Also included as part of the Appendix are four graphs comparing the contribution amounts,

the contribution rates, the unfunded accrued liabilities and the funded percentage for the

current plan provisions and the provisions under SB-1082.

The Appendix also includes two schedules showing the effect

of

the proposed shared-risk

provisions on member contributions should the trust assets earn 6.5% per year for the entire

32 years

of

the projection (Appendix

V),

or alternatively, the reduction in member

contributions to the System should the trust earn 8.50% per year for the entire

3

years of the

projection (Appendix VI). Please note that column 1

of

Appendix V is the cost

of

the current

PSERS system assuming a return on assets

of

6.50% for all years

of

the projection. Then,

columns 2 and 3 reflect the cost of the System assuming the provisions

of

SB-1082 are

already in effect, assuming a 7.50% asset return for all years and a 6.50% asset return for all

years, respectively. As outlined in the note at the bottom of Appendix V, the additional

reduction in employer contributions due to the Class T-G members' DB/DC plan design under

SB-1082 assuming an annual return on assets

of6.50

is, approximately, 1.1 billion when

compared to current law. Columns 1 and 2 on Appendix VI reflect the cost

of

the System

assuming the provisions

of

SB-1082 are already in effect. The other assumptions used in

these projections are those upon which the June 30, 2014, actuarial valuation of System was

based. The rate-of-return scenarios upon which these projections are based are not ones

that are likely to develop over the projection period, and accordingly these projections must

be viewed as an indication of the range

of

possible outcomes rather than as predictions that

are likely to be fulfilled .



Mr. Glen R. Grell

December 14, 2015

Page

x rox

In accordance with PERC's instructions, the calculations and projections presented here are

based

on

the data, methods and assumptions used in the June 30, 2014 actuarial valuation

of

PSERS and the following assumptions vis-a-vis future valuations :

a. The active workforce size is assumed to remain constant over the projection

period; and

b.

Future new employees are assumed to be Class T-E members (before July

1 2017) or T-G members (after June 30, 2017) and have similar

characteristics (age/gender/salary) to new employees who entered the

System in the period July 1 2011 through June 30, 2014.

As such, the information provided in this cost note does not reflect the most recent actuarial

valuation of PSERS, which was performed as of June 30, 2015. The results

of

the June 30,

2015 actuarial valuation have been presented to and approved by the PSERS Board

of

Trustees during its December

8

2015 meeting.

In this context, i t should be noted that one difficulty in the estimation of liabilities arising under

SB-1082 is that we would expect a change in retirement patterns to result

if

the benefit

entitlement is reduced. In general, decreasing benefits may postpone member retirements,

since members may need to remain in service longer to earn sufficient benefits to meet their

financial needs in retirement. However, the nature and extent

of

such postponements will not

be identified until affected members retire under the new benefit design and a formal

experience study is prepared. Therefore, for our cost estimates, we have assumed that there

would be no immediate changes in members' retirement patterns.

The following are additional funding concerns that would have to be addressed if SB-1082

were to move forward:

1. This analysis is based on an assumed 7.50 annual discount rate. However, under

SB-1082, i t is possible that liquidity considerations may arise due to the shift in

liability towards retirees and the PSERS Board may change the asset allocation to

reduce the risk of the portfolio and reflect the need to hold a growing proportion of its

assets in more liquid, less volatile asset classes. In general, lowering the risk

of

the

portfolio lowers the discount rate used in the System's valuation. This increases the

accrued liabilities and contribution requirements

of

the System. Therefore, the cost

analysis presented will change, potentially significantly,

if

there is a change in the

asset allocation and expected asset return. However, due to time constraints, an

analysis incorporating such changes has not been performed for this cost note.

2. The projected contributions for future fiscal years may di ffer from those to be

determined in actual future actuarial valuations due to demographic and financial

experience different from those assumed. This will certainly be the case

if

the

workforce and/or payroll continue to decrease over the next few years.

In

addition, it

is outside the scope of this assignment to determine

if

the assumptions used in the

June 30, 2014, actuarial valuation will remain reasonable for use in future valuations .

Accordingly, these results should not be used for any purpose other than providing

an estimate of future employer pension cost obligations under SB-1082.

This analysis only provides information with regard to future funding contributions of the

System. It does not provide any information with regard to the impact any changes may have

on financial disclosure and expense reportable under applicable GASB standards.



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t

Public School Employeet' R«ltement System of Pennaytvanl1

Pio)lcUon

of

COlltrtbutlionk. tn Md 'Yftdlid

l tflkt•

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Curl'Wlt PSlkS vs. Sii 10l'2 PN 14IO (Sldlt-by.SkM

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12.

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f71S . '- 1 .521



Benefit Refonns

TABLE2

Publlc School Employees

Retirement

System

of

Pennsylvania

Allocatlon of the Total Potentlal Projected Cost/(Savlngs)

Due

to

SB 1082 PN 1460 (Side-by-Side

Hybrid

DC Plan)

(Amounts In mllllons)

New

PSERS Members

after

June

30, 2017

Class T-G and DC participants

Cash Flow

§

PSERS benefit refonns for employees hired after June 30, 2017

- 4.00 member rate

9,246

- 1.00 annual benefit accrual

- Cost-neutral Option 4

- Five year vesting

- Five year final average salary

Total PSERS benefit reforms for employees hired after June 30, 2017

DC plan membership for employees hired after June 30, 2017

Total New Member Benefit Reforms (Class T-G

&

DC participants)

Current PSERS Members as

of

June 30, 2016


Total SB 1082 PN 1460 Cost/(Savlngs) - Table 1

(14,581)

20

130

(319)

s (5,504)

9456

3,952

s

(4,668)

(716)

Present Value

As of June 30, 2015

1,767

(2,805)

5

27

(61)

(1,067)

1 917

850

(1,760)

(910)

Estimated cost/(savings) are presented on two bases : a cash flow basis and a present value basis. Cost/(savings) shown on a cash flow basis

are the sums

of

the dol lar amounts of (reductions)/increases in the projected contributions the employers would have to make in future years if

the proposed changes in System provisions are enacted . The calculation of cost/(savings) on this basis makes no distinction between a dollar of

projected cost/(savings)

in

one future year and a dollar of cost/( savings) in some other year in the nearer or more distant future. The calculation f

cost/(savings) on a present value basis, on the other hand, involves discounting projected reductions in contributions from the times they are

expected to occur

to

June 30, 2015, at a rate of 7.50 (the assumed interest rate presently used

in

the annual actuarial valuations of the System)

to

reflect the time value

of

money. It is useful to compare cost/(savings) measured on a present value basis

wit

those measured on a cash flow

basis because a dollar of cost/(savings) in future years has a lower value in today's dollars than a dollar that must be paid today.

This is an attachment to Buck s December 14 2015 cost note on SB 1082. Please refer to that cost note for

mote informat10n

.



TABLE 3

Public School Employees' Retirement System

of

Pennsylvania

Comparison

of

enefits

PSERS Class T-E members vs. SB 1082 PN 1460 (Side-by-Side Hybrid DC Plan)

mployee

etirement Age

alary at Termination

SERS Benefit

ide by Side DB/DC Hybrid Plan Benefit

I

PSERS Benefit

r Contribution

A

B

c

30 30 30

65 65 65

65

65

65

31,111 51,852 72,592

21,000 35,000

49,000

15,300 25,501 35,700

73 73 73

Defined Contrib ution Design:

4.00 Member Contribution

1.00 Employer Credit

5 years Assumed Rate

of

Return

5 Year Cliff Assumed Conversion Rate

Earlier

of

Age 65 Mortality Table for Conversion

and 3 years of service Vesting

or Rule of 92 with

35

years of service

his is an attachment to Buck s December

14

2015 cost note on SB 1082. Please refer to that cost note or more information.

D

30

65

65

93,333

63,000

45,901

73

E

40

65

65

51,852

25,000

18,099

72

3.50

2.50

6.00

3.00

F

23

57

57

57,00

28,39

20,21

71

RP-2014 White Colla r (75 female, 25 male)

3 Year Cliff



35

30

25

20

15

10

5

Appendix II

Public School Employees' Retirement System of Pennsylvania

Due

to

SB 1082

PN

1460 (Side-by-Side Hybrid

DC

Plan)

Market Returns: Projected annual returns of 7.50

Pro ection of Total

Em

plover Contribution Rate

The employer cost under the

Hybrid Plan

Is

greater than that

of the current Plan und er Act

120.

0 l

1()

:\

'b

q,

( I " r\. rJ -> ' \ lb q, - ' " - '

'

_.,

:.\ _,,,

9>

C\

" j ' '

:.\

b

§

V

V

T

- -Current under Act 120 Side·by·Side Hybrid

This is an attachment to Buck s December 14 2015 cost note on SB 1082. Please refer to that cost note for more information.



120%

100%

80%

60%

40%

20%

0%

Appendix IV


Due

to

SB

1082 PN 1460

(Side-by-Side Hybrid

DC

Plan)

Market Returns: Projected annual returns of 7.50%

Pro ection

of Sytem

Funded

Ratio Actuarial Value of

Assets)

' 'b ' s: " f\.

o

i:i "' \ 'b ' s:::

[\, -" '

:> _., -"'

"'

s:

:\. :>

"'

b

Cur rent under Act 120 -Side-by-Side Hybrid

This is an attachment to Buck s December 14 2015 cost note on SB 1082. Please refer to that cost note for

more

information.



Appendix V


o

Pennsylvania

Addltlon1I

Member

and Employer Contributions Assuming a 6.50 Investment Return (1.00

below

the aaaumed annual discount rate)

Addttlonal

AddlUonal

(•1,000) (•1 ,000)

Addlllo""I

T<tr-Frr.o T<tr-Frr.O

(•1,000)

(•1,000)

(•1,000) (•1,000)

Addltlonal Additional (•1,000)

T-OM•mber

Act 120 Member Act 120 Member

Fisc•i

Current Plan Employer

SB 1082 Employer SB 1082 Employer Additionol T-0 Member T CIT FFT G

Total Additional Contributions Contributions

Contributions 11 a %

Year Contribution• Contributions

Contributions

Employer

Contributions

Act 120 Member

Contributions

as

a

of Total

as

a

of Tota1

ol

Employer

Addtt1o

016.5% 1 7.5%

f 6

.5 Nlum

Contributions (Proposed) Contributions Addttlonol Contributions Additional Contributions

Contributions

2015

s

2,885,148

s

2,885,148

s

2,885,148

s

$

NIA

NIA

NIA

2016

3,456,100

3,456,100

3,456,100

-

NIA

NIA

NIA

2017 4,083,317 3,991 264 3,994,012 2,748

-

2,748

NIA

NIA

NIA

2018 4,327,871 4, 189,764 4,199,632 9,868

-

9.868

000

000%

0.00%

201 9

4 592 ,404 4,455,471 4,478,635

23 .165

23 ,165 0.00%

0.00%

0.00%

2020

4,836 ,106

4,680

,527 4,722,179 41 ,652 41 ,652 000 0.00%

0.00%

2021 4,

958

,

593

4,776,

966

4,841,145 64,179

-

64,179

000

000% 0.00%

2022

5 099 ,230

4,886,496

4,980,636

94.140

94,140 0.00%

0.00% 0.00%

2023 5,280,119 5,032,323

5,162,836

130,513

130,513

OOOAo

0.00%

0.00%

2024 5,451 ,972 5,156,999

5,332,335

175 ,336

175,336 0.00% 000%

0.00%

2025

5,634,049

5,282,641

5,510 ,176

227 ,535

227 .535

0.00% 0.

00%

0.00%

2026 5,844 ,891 5,434,745

5,723,855

289 ,110

289 ,110

0.00%

0.00%

0.00%

2027

6,066 ,199 5,589,787

5,944,942

355,156

-

-

355,156 0.00%

0.00%

0.00%

2028

6,

295

,136 5,744,556 6,172,150

427

,

594

47,813 37,824 513 ,231

9.32%

7.37%

8.85%

2029

6,529,001

5,903,427

6,408,247 504,820 46,060

41,444 592,

324

7.78%

7.00%

8.21%

2030

6 ,771,666

6 ,064 ,518

6 ,647 ,788 583 ,270 44 ,125

45 ,261 672 .655 6.56%

6.73%

7.76%

2031

7,022 ,991 6,231 ,526

6 ,898,241 666,715 84,024 98,533

849,272 9.89%

11

.60%

14.78%

2032

7,

286

,

927

6,404,

423

7,161,688 757.265

79,488

106,935 943 ,687 8.42%

11.33%

14.12%

2033 7,554.936

6,580,369

7,427,518 847, 149 74,667

115,746 1,037,562 7.20%

11.16%

13.66%

2034

7,838 ,469

6,760.299

7,702,834 942,535

104,325 187,426

1,234,285 8.45% 15.18%

19.89%

2035

8,131,

828

6,946.037

7,

994

,

206

1,048,169

96,186 201,854

1,346,208 7.14'.lo

14

.99%

19.26%

2036

5,156,301 3,861 ,067 5,012,474 1,151,407 87,689

216 ,876

1,455,972 6.02%

14 .90%

18.84%

20

37 4,510,000

3,096,691 4,357,623 1,260 ,932 105.188

310 ,039

1,676,159 6.28%

18 .

50

%

24.59%

2038

4,299,919 2,763,

802

4, 145,594 1,381 ,792

93,178

331,669 1,806,639

5.16%

18

.36%

24 .00%

2039

4,027.613

2,364,000 3,862,160 1,498,160

81,008

353,907 1,933,076 4

19'.lo

18 .31%

23.62%

2040

3,835,663

2,036,143 3,660,659 1,624,516

68,801 376,838

2,070,155 3.32% 18

.2

0%

23.20%

2041

3,657 ,728 1,928,896

3,678,

772

1,749,877 56,896

400 ,512 2.207,284

2.58% 18.1 5%

22.89%

2042

3,507,302 1,652 ,061

3,523,949 1,871 ,889 45,680

424

,890 2,342,

459

1.95%

18.

14%

22 .70%

2043

3,331 ,

632

1,353,813

3,345,134 1,991 ,320 35,509

449,927

2,476,757 1.43%

18.17% 22

.59%

2044

3,223,055 1,293,932

3,234,583 1.940,652

26,726 475,394

2,442,772 1.09%

19.46%

24

.50%

2045

3,421 ,987 1,303,271

3,424 471 2, 121,200

19,494 501 ,111

2,641,806

0.74%

18.97%

23.62%

2046

3,597,

023

1.315,

242

3,593,635 2 278,393

13,938

528,220 2,820,551

0.49%

18.73%

23.18%

2047

3,690,701 1,336 ,984

3,685,612 2,348,

628

10 ,027

556,795 2,915,450

0.34%

19.10% 23 .71%

2048

3,825,166 1,366,455

3,828,868 2,462.413

7,343 586,916 3,056,

672

0.24%

19.20%

23.83%

Total s

170,031,044 s

136,125,740

s

166,997,836

s

30,872,097 s 1,228,165 s

6,348,115 s

38,448,377 3.19%

16.51%

20.56%

Note :

Ul QQQ

a.

Cumulative

Employer contributions under S 1082

assumin11

6.50 return $

166,997,836

b. Cumulative Employer contributions under the current

PSERS

plan assumln1 a 6.50 return

170,031,044

c.

Reduction in

cumulative

Employer

contributions due to SB 1082 assumin1 a 6.50 return= a • b $

(3,033,208)

d. Cumulative Employer cost/(savinas) under

S

1082 assumln a 7 50% return• Table 1

(715,582)

e. Net reduction in cumulative Empk>yer contributions due to 581082 assumlnt a 6.50 return • c • d $

(2,317,

626)

f

Cumulative

dass T D members

risk shire

contributions

under

58 1082

assumln1

a 6.50 return

(1,228,165)

g.

Net reduction

In cumulattve Employer

contributions due to

Class

T-G members'

OB/DC

pl•n

desi1n =

e • f

$

(1,089,461)

Thi•

is

an

•tt• hment

t

Buck s December

14

, 2015 cost nole on SB 1082. Pree5tt refer

t

lhat cost no/a formotW /nfonne6on



Appendix

VI


of

Pennsylvania

Reduction In Member and Employer ContrtbuUons Assuming an 8.50% Investment Return (1.00% above the assumed annual discount rate)

(X1,000)

Addltlon11UfRoductlon)

Addltlon1U(Reductlon) AddltloftllU(Reductlon)

(x1,000)

Addltlonal/(Reductlon)

(x1,000)

T-0 Member f.l:IT-1'/T G T-E/T-1'/T.G

(x1,000) (x1,000) (x1,000) Addltlonal/(Re ductlon)

T

0

E/T°F/T-G

Total

Contributions Act

120 Member

Act 120 Member

Flscal SB 1082 Employer SB 1082 Employer Addltlonal/( Reductlon)

T·DMember

Act

120 Member Addltlonal/(ReducUon) as1 %o Total

Contributions a• a of Tobi Contributions a a of

Year Contrtbutlons ContrtbuUons Employer Contrtbutlons Contrtbutlons Contrtbutlons

Addltlon1U(Roducllon) Addlllon11UfReductlon1)

Employer Addlllon1U(Roductlon1)

@7.5% @8.5%retum Contrtbutlons (Proposed) (Proposed

Contributions Contributions

Contributions

2015 2.885,148 2,885,148

$

s

NIA NIA

NIA

2016

3,456,100 3,456,100 NIA NIA

NIA

2017 3,991.264 3,987,142

(4,122) (4,122)

NIA NIA

NIA

2018

4,189,764 4,178,486 (11,278)

(11,278)

0.00%

0.00%

0.00%

2019

4,455,471 4,430,8 58 (24,613) (12,060) (36,672) 0.00%

32.89o/o

49.00%

2020 4,680,527 4,638,875

(41

.652) (14,507) (56,160) 0.00% 25.83% 34.83%

2021 4,776,966 4,711,259 (65,707) (16,995)

(82,702) 0.00% 20.55%

25.86%

2022 4,886,496 4,790,788 (95,709) (54.688)

(39,067) (189,463) 28.86% 20.62%

40.82%

2023

5,032,323 4,898,588 (133,735) (53,954) (44.409) (232,099) 23.25%

19.13%

33.21%

2024 5,156,999 4,986,625 (170,374) (53,078)

(50,010) (273,462) 19.41%

18.29%

29.35%

2025 5,282,641 5,068,689 (213,951) (104,052)

(83,952) (401,956) 25.89%

20.89%

39.24%

2026

5,434,745

5,164,794

(269,952) (101,598) (93,303) (464,853) 21.86%

20.07%

34.56%

2027

5,589.787 5,268,541 (321 .246) (98,786) (103,140)

(523,172) 18.88% 19.71%

32.11%

2028

5,744,556

5,364,472

(380,064) (143,440) (151,295) (674,818) 21.26%

22.42%

39.81%

2029 5,9 3,427 5,460,308

(443.119)

(138,180) (165,776) (747,076) 18.50%

22.19%

37.41%

2030 6,064 ,518 5,557,743 (506,775) (132,374) (181,042) (820,191)

16.14% 22.07%

35.72%

2031 6,231 ,526 5,654,749 (576,777) (168,048) (197,066) (941,891) 17.84%

20.92%

34.17%

2032

6,404,423

5,749,059

(655,364) (158,976) (213,869) (1,028,209 ) 15.46% 20.80%

32.63%

2033

6,580,369 5,845,492 (734,876) (149,335) (231,491) (1,115,702) 13.38%

20.75%

31.50%

2034 6,760,299 5.926 ,197

(834,101) (139,100) (249,901) (1,223, 102) 11.37% 20.43%

29.96%

2035

6,946,037 6,006,520 (939,517) (128,248) (269,138) (1,336,903) 9.59%

20.13%

28.65%

2036

3,881 ,067 2,803,253 (1,057,814) (116,919) (289,167) (1,463,900)

7.99% 19.75%

27.34%

2 37 3,096,691 1.902,475 (1,194,216) (105,188)

(310,039) (1,609,44 3) 6.54% 19.26%

25.96%

2038 2,763,802

1,420,646

(1,343,156) (93,178) (331,669) (1,768,004) 5.27%

18.76%

24.69%

2 39 2,364,000 1,309,481 (1 ,054,519) (81,008) (353,907)

(1,489,435)

5.44%

23

.76

33 .56%

2 4 2,036,143 1,302,260 (733,882) (68,801) (376,838)

(1, 179,522) 5.83% 31 .

95

51.35%

2041 1,928,896 1,296,996 (631,900) (56,896) (400,512) (1,089,308) 5.22% 36

.77

63.38%

2042 1,652,061 1,293 ,614 (358,447) (45,680) (424.890)

(829,017) 5.51% 5125%

118.54%

2043 1,353,813 1,292,542 (61,271) (35,509) (449,927)

(546,708) 6.50%

82 30

'

734.32%

2044 1,293,932

1,293.932

.

(26,726) (475,394) (502,120) 5.32%

9468

%

NIA

2045 1,303,271 1,303,271 (19,494) (501,111) (520,605) 3.74% 96.26% NIA

2046 1,315,242 1,315 ,242

(13,938) (528,220) (542,158) 2.57%

97.43%

NIA

2047 1,336,964

1,

336

,

984

.

(10,027) (556,795) (566,822) 1.77%

9823% NIA

2048 1,366,455 1,366,455 (7,343)

(586,916) (594,259) 1.24%

98

Yo

NIA

Total 136, 125,740 123,287,581

(12,858,159) (2,304,582) (7,702,408) (22,865,129)

10.08%

33.89%

59.90%

Note: The above analysis is based on the SB 1082 benefit end funding reforms.

This

is

an attaehment to Buck s December

14,

2015 cost note on SB 1082 Please

r f r

to that cost note

for

more

infonn

ation



December

1

2015

Mr. Glen R Grell

Executive Director

Pennsylvania Public School Employees' Retirement System

5 North 5th Street

Harrisburg, PA 17101

Dear Glen:

Re: Side by Side Hybrid Proposal

x rox

David L. Driscoll, FSA

Principal Consulti

n

Actuary

Buck Consultants, LLC

101 Federal Street, Suite 900

Boston, MA 02110

[email protected]

tel 617.275.8028

tel: 310.226.1480

fax 201 .633.5168

As requested,

we

have reviewed a benefit and funding reform proposal (hereinafter referred

to as the Side by Side Hybrid proposal), which would establish a new tier (Class T-G) in the

Pennsylvania Public School Employees' Retirement System (PSERS) and a defined

contribution (DC) plan for school employees hired on or after July

1

2017, as well as make

certain benefit changes for PSERS members who are active as of June 30, 2016.

This analysis is based on the Side by Side Design Memo received November

30th

together

with discussions with PSERS staff.

Our understanding of the Side by Side Hybrid proposal is summarized as follows:

PSERS Benefit Changes

a. Class T

C

and T 0 active members as

of

July

1 2016

• Option 4 member contribution (with interest) withdrawals would be provided on a

cost-neutral basis for service on and after July 1, 2016.

• T-C and T-D members would be subject to a shared risk/gain provision under which

the member's contribution rate would be no more than 2 below nor 2 above the

member's basic contribution rate.

b. Class T-E and T-F members as

of

July 1,

2016

• Effective July 1 2016, Option 4 member contribution (with interest) withdrawals

would be provided on a cost-neutral basis for all service

• Members would be subject to a shared risk/gain provision under which the member's

rate would be no more than 2 below nor 2 above the member's basic contribution

rate.

c.

Class T-G: new members on and after July 1 2017 - Defined Benefit Plan

Provisions

• New members on and after July

1

2017, would become Class T-G members.

• Benefits would accrue at the rate of

1.

00 of final average salary per year of service.

• T-G members would contribute 4.00 of pay.

• The benefit would be based on a 5-year final average salary.

• T-G members would be subject

to

the same risk/gain sharing provisions as T-C, T-D,

T-E and T-F members, as outlined above.

• Employer-provided benefits would vest after completion of five years of service.

• T-G members would be eligible for health care premium assistance.

• Option 4 member contribution (with interest) withdrawals would be available on a

cost-neutral basis to the Plan.



Mr. Glen R Grell

December 1 2015

Page

d. New participants on and after July 1 2017 - Defined Contribution (DC) Plan

Provisions

x rox

• Employees hired

on

and after July 1, 2017 would be automatically enrolled in the DC

plan.

• Participant contributions to the DC plan of 3.50% of compensation would be

mandatory.

At

their option, participants would be able to contribute additional

amounts up to IRS limits. The mandatory participant contributions would be pre-tax

pickup contributions, but voluntary additional contributions would not.

• The DC plan employer contribution rate would be 2.50% of compensation.

• Participant contributions to the DC plan would vest immediately. Employer

contributions to the DC plan would be 100% vested after 3 years.

• Each DC participant would have an individual investment account, where all

participant and employer contributions are accumulated and investment experience,

fees and costs are credited or charged.

• Upon termination , benefits from the plan can be paid out as a lump sum or annuity.

• DC plan benefits can be taken at a different time from the DB benefit.

PSERS Funding changes

• Effective with the June 30, 2015 actuarial valuation, the 10-year asset averaging

method would be constrained to differ from the market value of assets by not more

than 30%.

• The Act 120 pension contribution collar schedule would be changed to the following:

Fiscal Year 2015/2016: 4.50% plus the prior year's pension rate

Fiscal Year 2016/2017: 2.25% plus the prior year's pension rate

Fiscal Year 2017/2018 and later: 4.50% plus prior year's pension rate

The results reported in this cost note are based on the following assumptions on the

proposed Side by Side Hybrid provisions:

1. 100% of Classes T-E, T-F and T-G members are assumed to elect to withdraw their

member contributions (with interest) under Option 4.

2. The effect of the benefit changes made by the legislation on the System's accrued

liability would be measured initially in the June 30 , 2015 valuation.

3.

The proposed reform to current member benefits would decrease the System's unfunded

accrued liability. Act 120 did not specify an amortization method for such decreases due

to legislation. For purposes

of

this analysis, we have assumed that such decrease will be

amortized using a 24-year level percent of pay amortization method.

In

reviewing the results, the reader should note that the portion of the benefits provided to Class T-G

members by the DC plan is subject to investment risk that would be fully borne by participants. Under

PSERS, only Class T-E and T-F members currently share responsibility for the fund's investment risk

through the Act 120 shared-risk additional member contributions. Also, participants would bear the

full cost associated with longevity risk (i.e., the risk

of

fully depleting account balances) for benefits

provided by the DC plan, while under PSERS, longevity risk is covered by the System. In addition ,

the 2.50% employer contribution under the DC plan does not reflect an offset for forfeitures for

terminating participants prior to three years of service.



Mr. Glen R. Grell

December 1, 2015

Page

x rox

Estimates of the potential financial impact of the Side by Side Hybrid proposal are presented

in the attached tables. These results may be used as estimates of the likely pattern

of

emerging costs and liabilities resulting from the proposed changes but should not be viewed

as a guarantee of actual costs. Actual future funding obligations will be determined by

actuarial valuations made on future valuation dates, which will likely dif fer from the estimates

provided in these analyses.

Table 1 compares projected employer contribution obligations under the current benefit and

funding provisions of PSERS with those projected to arise under the Side by Side Hybrid

proposal.

Table 2 allocates the total projected cost/(savings) among the components

of

the Side by

Side Hybrid proposal that affect System cost. The Table 2 cost allocation is dependent on the

order in which the changes are implemented. If a different order is utilized, individual results

will vary but the total cost/(savings) will remain unchanged.

The savings due to some

of

the benefit changes included

in

the Side by Side Hybrid proposal

are attributable to reductions in current members' prospective benefit entitlements.

We

recommend consultation with legal counsel to review the proposed changes for current active

members for consistency with applicable law.

Table 3 consists of six benefit comparisons between the estimated current benefits provided

under PSERS for hypothetical Class T-E members and the proposed DB/DC combined

benefits that would be provided under the Side by Side Hybrid proposal for the same

members.

Table 4 is a comparison

of

benefits for a hypothetical Class TD member, who will be age 62

with 29 years of service at retirement, with and without the cost neutral option 4 provision

provided for future service on

or

after July 1 2016. The hypothetical Class TD member is

based on the projected average

of

the total Class TD membership age of 46 and service of

13 years as of June 30, 2016.

Also included as part of the Appendix are four graphs comparing the contribution dollars, the

contribution rates, the unfunded accrued liabilities and the funded percentage for the current

plan provisions and the provisions under the proposed Side by Side Hybrid plan.

The Appendix also includes two charts showing the effect

of

the proposed shared-risk

provisions on member contributions should the trust assets earn 6.5 per year for the entire

32 years of the projection, or alternatively, the reduction in member contributions to the

System should the trust earn 8.50 per year for the entire 32 years

of

the projection. For

these two charts, the effect of TC members has not been reflected since the effect would be

negligible due to the small and declining number of members in the group. The other

assumptions used in these projections are those upon which the June 30, 2014, actuarial

valuation

of

System was based. The rate-of-return scenarios upon which these projections

are based are not ones that are likely to develop over the projection period, and accordingly

these projections must be viewed as an indication

of

the range

of

possible outcomes rather

than as predictions that are likely to be fulfilled.



Mr. Glen R. Grell

December 1 2015

Page

The calculations and projections presented here are based on the data, methods and

assumptions used in the June 30, 2014, actuarial valuation of PSERS and the following

assumptions vis-a-vis future valuations:

x rox

a

The active workforce size is assumed to remain constant over the projection

period; and

b. Future new employees are assumed to be Class T-E members (before July

1, 2017)

or

T-G members (after June 30, 2017) and have similar

characteristics (age/gender/salary) to new employees who entered the

System in the period July

1

2011 through June 30, 2014.

In this context, it should be noted that one difficulty in the estimation of liabilities arising under

the Side by Side Hybrid proposal is that we would expect a change in retirement patterns to

result if the benefit entitlement is reduced. In general, decreasing benefits may postpone

member retirements, since members may need to remain in service longer to earn sufficient

benefits to meet their financial needs in retirement. However, the nature and extent

of

such

postponements will not be identified until affected members retire under the new benefit

design and a formal experience study is prepared. Therefore, for our cost estimates,

we

have

assumed that there would be no immediate changes

in

members' retirement patterns.

The following are additional funding concerns that would have to be addressed

if

the Side by

Side Hybrid proposal were to move forward:

1. This analysis is based on an assumed 7.50 annual discount rate. However, under

the Side by Side Hybrid proposal, it is possible that liquidity considerations may arise

due to the shift in liability towards retirees and the PSERS Board may change the

asset allocation to reduce the risk of the portfolio and reflect the need to hold a

growing proportion of its assets in more liquid, less volatile asset classes. In general,

lowering the risk of the portfolio lowers the discount rate used in the System's

valuation. This increases the accrued liabilities and contribution requirements

of

the

System. Therefore, the cost analysis presented will change, potentially significantly, if

there is a change in the asset allocation and expected asset return . However, due to

time constraints, an analysis incorporating such changes has not been performed for

this cost note.

2. The projected contributions for future fiscal years may differ from those to be

determined in actual future actuarial valuations due to demographic and financial

experience different from those assumed. This will certainly be the case if the

workforce and/or payroll continue to decrease over the next few years. In addition, it

is outside the scope

of

this assignment to determine if the assumptions used in the

June 30, 2014, actuarial valuation will remain reasonable for use in future valuations.

Accordingly, these results should not be used for any purpose other than providing

an estimate of future employer pension cost obligations under the Side by Side

Hybrid proposal.

This analysis only provides information with regard to future funding contributions of the

System. It does not provide any information with regard to the impact any changes may have

on financial disclosure and expense reportable under applicable GASS standards.



r. Glen R Grell

December 1 2015

Pages

x rox

This analysis was prepared by and under my supervision. I am a Fellow of the Society

of

Actuaries and a Member of the American Academy of Actuaries. I meet the Academy's

qualification Standards to issue this Statement

of

Actuarial Opinion. This report has been

prepared in accordance with all applicable Actuarial Standards

of

Practice and I am available

to answer questions about

it.

Finally, care should be exercised in using the projections and communicating any results to

third parties to ensure that the above caveats and underlying bases of the projections are

clearly communicated to any possible recipients.

Please let me know if you have any questions.

Respectfully submitted,

David L. Driscoll, FSA, MAAA, EA

Principal, Consulting Actuary

DLD:sn

R:\TOBIN\2015\December\PSERS12012015DD_Side by Side Cos Note.docx

•



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TABLE 2


Allocation of

the

Total Potential Projected Cost/(Savlngs)

Due to Side-by-Side

Hybrid Plan

Proposal

(Nov

20

Version

with 1.0°4 DB accrual, 2.5%

Employer DC

Credit)

(Amounts

In m

il lions)

Benefit Reforms

New PSERS Members after June 30, 2017

Class

T -G

and

DC

participants

PSERS benefrt reforms for employees hired after June 30.

2017

• 4.00% member rate

• 1.00% annual benefrt accrual

• Cost-neutral Option 4

• Five year vesting

• Five year final average salary

Total PSERS benefrt reforms for employees hired after June 30, 2017

DC plan membership for employees hired after June 30, 2017

Total New

Member

Benefrt Reforms (Class T·G &DC participants)

Current PSERS Members as of June 30, 2016


Funding

Reforms

Revised Act 120 fiscal year 2016-2017 pension collar

of

2.25%

Total Side-by.Side

Hybrid

Plan Proposal Cost/(Savlngs). Table 1

Cash Flow

Basis

9,246

(14,581)

20

130

(319)

(5,504)

9456

3,952

(4,668)

232

(484)

Present Value

As of

June

30, 2015

1,767

(2,805)

5

27

(61)

(1,067)

1.917

SO

(1,760)

6

(904)

Estimated cost/(savings)

are

presented on two bases: a cash How basis and a prese nt value basis. Cost/(savings) shown

on

a cash How basis

are the sums of

the

dollar amounts of (reductions)/increases in

the

projected contributions he employers would

have

to make in future years if

the proposed changes in System provisions are enacted. The calculation of cost/(savings) on his basis makes no distinction between a dollar of

projected cost/( savings) in on e future yea r and a dol lar

of

cost/( savings) in some o ther year in he nearer

or more

distant future.

The

calculation

of

cost/( savings) on a present valu e basis, on he other hand, Involves discounting projected reductions In contributions from he limes hey are

expected to

occur

to June 30, 2015,

at

a rate

of

7 50% ( he assumed interest rate presently used in he annual actuarial valuations

of the

System)

lo reHect

the

time value

of

money. II is useful to compare cost/( savings) measured on a present value basis wtth those measured on a cash How

basis because a dollar of cost/( savings) in future years has a lo wer value in today's dollars than a dollar

hat must

be paid today.



Employee

Age at Hire

Age at Termination

Retirement Age

Salary at Termination

TABLE


Comparison of Benefits

PSERS Class T-D members vs. Class T-D member with Cost Neutral Option 4 for Service on or after 7/1/2016

Current Plan Cost Neutral after 6/30/2016

33 33

62 62

62

62

75,000

75,000

Option Election - Option 4 with 100 payout of EEC

PSERS Annuity Benefit

PSERS Lump Sum payout

Defined Benefit Design:

Member Contribution

Benefit Accrual

Final Average Salary

Vesting

Option 4

Superannuation

7.50

2.50

3 years

5 YearCllff

4

Age

62,

Age

60

and

30,

or 35 years of service

41,989

156,670

7.50

2.50

3 years

5 Year

Cliff

39,452

156,670

4 and Cost Neutral

7.5

after 6/30/2016

Age 62, Age 60 and 30,

or 35

years of service

Note: The analyisis is based on a Class TD member with age 46 and 13 years of service

as

of July 1, 2016. The age and service were selected since it represented the

average age and service of all Claa TD members as of the June 30, 2014 valuation. Analysis for individual members will vary based on actual age, service and compensation .

Side by Side DB/DC

Hybrid Plan Benefit

PSERS Benefit

94

100



ppendix



8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

Appendix

I


Due to Side-by-Side Hybrid Plan Proposal (Nov 20 Version with 1.0 DB accrual, 2.5 Employer DC Credit & Impact on Current Members)

Market Returns: Projected annual returns of7.50%

Projection

of

Emplover Contribution Dollars In Millions)


Hybrid Plan is greater than

that of the current Plan under

Act 120.

0 -

' .(\

.._q

.._q,

n,

n,1- n, > ti n,> r

n,ll

(§:'

~ q ,

.<::. ,. _ ,..,, - ' ,.ro ,.b

current under Act 120 Side -by-Side Hybrid



35%

30%

25%

20%

15%

10%

5%

Appendix

II


Due to Side-by-Side Hybrid Plan Proposal (Nov 20 Version with 1.0% DB accrual, 2.5% Empl oyer

DC

Credit & Impact on Current Members)

Market Returns: Projected annual returns

of

7.50 /o

Pro ectlon of Total Employer Contribution Rate


Hybrid Plan

Is

greater than that

of

the current Plan

under

Act

120.

0%

+ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

~ ~ ~ ~ ~ ~ § $ ~ ~ £ ~ ~ ~ ~

V V ••

. •

• V

Current under Act 120 Side·by·SideHybrid



50,000

45,000

40,000

35,000

30,000

25,000

20,000

15,000 .

10.000

I

5,000

0

Appendix Ill


Due

to Side-by-Side Hybrid Plan Proposal (Nov

20

Version with

1.0 DB

accrual, 2.5 Employer

DC

Credit & Impact on Current Members)

Market Returns: Projected annua l returns of7.50'Yo

Pro ectlon of Unfunded Liability in Millions)

0 .\ 'O Cl) ... fJ, rJ

I> I\

'O

C) ...

r§

>

...

$ $ $ $ ~ ~ ~ ~ ~

-5,000

Current under Act 120 Side by Side Hybrid



120%

100%

Appendix IV


of

Pennsylvania

Due

to

Side-by-Side Hybrid Plan Proposal (Nov 20 Version with 1.0% DB accrual, 2.5 Employer

DC

Credit & I mpact on Current Members)

Market Returns: Projected annual returns

of

7.50%

Projection of Sytem Funded Ratio (Actuarial Value

of

Assets

80%

so I a -. ,__ -

40%

20%

0% -

___

Current under Act 120 - S

de

·bv·

Side

Hybrid



AppendixV

Public School Employees Retirement System o Pennsylvania

Additional Member and Employer

Contributions

Assuming a 6.50% Investment Return (1 .00% below the assumed annual discount rate)

Additional Additional

(x1,000) (x1,000)

Additional

T-CIT

·Ffr-G

T·EIT·Ffr-G

(x1,000) (x1,000)

(x1,000) Additional

Additional

(x1,000)

T..IJ

Member

Act

120

Member

Act 120 Member

Fiscal

Employer

Employer Additional

T·D Member T-E/T-F/T-G Total Additional

Contributions Contributions Contributions

as

a %

Year

Contributions Contributions Employer

Contributions Act 120 Member Contributions a&a%ofTotal as a ofTotal

of Employer Additional

@7

.5 @6.5% return

Contributions (Proposed)

Contributions

AddlUonal Contributions Addi

ti

onal Contributions Contribution s

2015 2,885,148 2,885,148

NI

NI

NI

2016

3,456,100

3,456,100 NI NI NI

2017 3,859,367 3,859,367 NI

NI

NI

2018 4,189,764 4,199,632

9,868

9,868 0.00% 0.00%

0.00

2019 4,465,605 4,488,770 23,165 23,165 0.00% 0.00%

0.00

2020 4,690,940

4,732,592 41,652

41,652 0.00%

0.00% 0.00%

2021 4,787,663

4,851,842 64,179

64,179 0.00%

0.00% 0.

00

2022 4,897,479 4,991,619 94,140

94,140

0.00%

0.00%

0.00

2023 5,043,602 5,174,114 130,513 130,513

0.00%

0.00% 0.00%

2024 5,168,578 5,343,914 175,336

175,336 0.00%

0.00% 0.00%

2025 5,296,225 5,522,062 225,837

225,837 0.00%

0.00% 0.00%

2026

5,446,937 5,736,046

289,110

289,110 0.00%

0.00% 0.00%

2027

5,602,280 5,957,435

355,156

355,156 0.00%

0.00% 0.00

2028 5,757,347 6,184,942

427,594 47,813

37,824 513,231 9.32%

7.37% 8.85%

2029 5,918,385

6,423,204 504,820 46,060

41,444 592,324

7.78%

7.00%

8.21

2030

6,077,905 6,661,175 583,270 44,125

45,261 672,655 6.56%

6.73%

7.

76

2031 6,247,167 6,911,927 664,760

84,024 98,533

847,317 9.92%

1

1.

63%

14.82%

2032 6,420,408 7,175,675 755,267

79,488 106,935

941,689 8.44%

11.36%

14.16%

2033 6,596,699

7,441,807 845,108

74,667 115,746

1,035,521 7.21%

11.18% 13.

70

2034

6,774,896 7,719,516 944,620

104,325

187,426 1,236,370

8.44%

15.16% 19.84%

2035

6,965,211 8,011,249 1,046,038

96,186

201,854 1,344,078 7.16%

15.02% 19.30%

2036

3,878,480

5,027,710 1,149,230 87,689

216,876

1,453,795 6.03%

14.92%

18.87%

2037 3,114,482 4,375,414 1,260,932

105,188

310,039

1,676,159 6.28%

18.50%

24.59%

2038

2,784,256 4,161,503 1,377,247

93,178

331,669

1,802,094 5.17%

18.40% 24.08%

2039

2,382,582 3,880,742 1,498,160

81,008

353,907

1,933,076 4.19%

18.31% 23 .62%

2040

2,057,518 3,679,659

1,622,141 68,801

376,838

2,067,780 3.33%

18 .22% 23.23%

2041 1,948,339 3,695,785

1,747,446 56,896

400,512

2,204,854

2.58%

18.17%

22.92%

2042

1,674,464 3,543,863

1,869,399 45,680

424,

890

2,339,970

1.95%

18

.16%

22

.73%

2043 1,353,813

3,342,581 1,988,767

35,509

449,927

2,474,204

1.44%

18.18% 22.62%

2044

1,293,932 3,229,338 1,935,407

26,726

475,394

2,437,527

1.10%

19.50% 24.56%

2045 1,303,271

3,421,772 2,11 8,501

19,494

501,111

2,639,107

0.74%

18.99% 23.65

2046

1,315,242 3,588,071

2,272,829

13,938

528,220

2,814,987 0.50%

18.76%

23 .24

2047

1,336,984

3,682,744 2,345,760

10,027

556,795

2,912,582

0.34%

19.12% 23.74

2048

1,366,455

3,825,912

2,459,457

7,343

586,916

3,053,716

0.24%

19.22%

23.86%

Total

136,357,519

167,183,229 30,825,710

1,228,165

6,348,115

38,401,990

3.20%

16.53%

20.59%



Appendix VI


of

Pennsylvania

Reduction In Member and Employer Contrlbutlons Assuming an 8.60% Investment Return (1.00% above the assumed annu1I discount rate)

(x1,000)

AddltlonoU(Raductlon)

Addttlon1U(Raductlon1 AddltlonoU(R•ductlonl

(x1 ,000I

AddHlonaU(Reductlon)

(x1,000I

T 11

Mmbor

T E/T f T G

T·EIT.f/T-G

(x1,000)

(x1,000) (x1,000)

AddlUonaU(Reductlon)

T-E/T-F/T- 0 Total Conlrlbutlons Act

120

Mombor Act

120

Mmbor

Fla cal Employer

Employer Addltlon1ll(Reducllon)

T-DMember

Act

120 Member AddlUonaU(Reductlon) Hl 01Total Conlrlbut lons u 1 % or Total

orttrtbutlona

as

of

Year

Contrfbu11ons

Contributions

Employer Contrfbu11ons Contrlbu11ons Contrfbu11ons

AddltlonoU(Raductlon( Addttlonol/(Roductlons)

Employer AddltlonoU(Raductlons)

@7.5

ll lB.5% return Contributions (Proposed) (Proposed)

ontrtbutlons ontrtbutlons ontributions

2015

2,885.148 2,885,148

NIA

NI

NI

2016

3,456,100

3.456,100

NI NI

NI

2017 3,859,367 3,859,367

NI NI NI

2018

4,189,764

4,178,486 (11,278)

(11,278)

0.00%

O.Cl0 0.

00

2019 4,465,605 4,440,993

(24,6131 (12,060) (36,672)

0.00% 32.89%

49.

0°

2020 4,690,940 4,647,800 (43,140) (14,507) (57,647) 0.00% 25.17%

33.63

2021 4,787,663 4,721,956 (65,707)

(16,995) (82,702)

0.00% 20.55% 25.86

2022 4,897,479

4,800,202 (97,278) (54,688) (39,067)

(191,032)

28 .63

20.45% 40.16

2023 5,043,602

4,909,867 (133,735) (53,954) (44,409)

(232,099) 23.25% 19.13%

33.21%

2024 5,168,578 4,998,204

(170,3741

(53,078) (50,010)

(273,462)

19.41

18

.29%

29.35

2025 5,296,225

5,080,576 (215,649) (104,052) (83,952) (403,654) 25.78

20

.80% 38.93

2026 5,446,937 5,178,727 (268,210) (101,598) (93,303)

(463,111) 21.94% 20.15%

34.79

2027 5,602,280

5,281,034

(321,246)

(98,786) (103,140) (523,172)

18

.

88

19.71%

32.11

2028 5,757,347 5,379,091 (378,256)

(143,440) (151,295) (672,991) 21.31%

2248%

40.0°

2029

5,918,385

5,473,395 (444,989) (138,180) (165,776) (748,945)

18.45

22.13% 37.25%

2030 6,077,905 5,573,042 (504,863)

(132,374) (181,042) (818,279) 16.18% 22.12% 35.86%

2031 6,247,167 5,670,391 (576,777) (168,048) (197,066)

(941,891)

17.84

2092%

34.17

2032 6,420,408 5,765,044 (655,364)

(158,976) (213,869) (1 ,028,209) 15.46%

2080%

32.63%

2033 6,596,699 5,863,864 (732,835) (149,335) (231,491) (l ,113,661)

13.41%

20.79%

31.59

2034 6,774,896 5,944,965

(829,931) (139,100) (249,901) (1,218,932)

11.41

2050%

30.11

2035 6,965,211 6,025,694 (939,517)

(128,248) (269,138)

(l,336,903)

9.

59

20.13%

28.65%

2036

3,878,480 2,822,842 (1,055,638) (116,919) (289,167) (l ,461, 724)

8.00%

19.78% 27.39

2037 3,114,482 l,922,490 (l,191,992)

(105 ,188) (310,039) (1 ,607,219) 6.54 19.29%

26.

01

2038 2,784,256

1,443,373 (1,340,884) (93,178) (331,669) (1,765,731)

5.28%

18.78%

24.74

2039 2,382,582 1,309,481 (1 ,073,101) (81,008) (353,907)

(1,508,016)

5.37

23.47%

32.

98

2040

2,057,518

l,302, 260 (755,257) (68,801) (376,838) (1,200,897) 5.73 31 .38%

49.9°

2041 1,948,339 1,296,996 (651,343) (56,896)

(400,512) (1,108, 751) 5.13%

36

.12%

61.49

2042

1,674,464

1,293,614 (380,850) (45,680) (424,8

90

) (851,420)

5.37

49.90%

111.56%

2043 1,353,813

1,292,542 (61 ,271) ( 35,509) (449,927) (546,708)

6.5°

8230%

734.32%

2044 1,293,932 1,293,932

(26,726) (475,394) (502,120) 5.32 94.68%

NI

2045

1,303,271

1,303,271 (19,494) (501,111)

(520,605) 3.

74

96.26%

NI

2046 1,315,242 1,315,242 (13,938)

(528,220) (542,158) 2.57%

9743% NI

2047 1,336,984 1,336,984

(10,027) (556,795) (566,822)

1.77

9823% NI

2048 1,366,455 1,366,455 (7,343)

(586,916) (594,259)

1.24%

98.76% NI

Total

s

138,357,519

s

123,433,421

s

(12,924,098)

s

(2,304,682) s (7,702,408) s

(22,931,068)

10.05% 33.59%

59.60%



December 14 2015

PUBLICEMPLOYEE

DE 1 4 2 15

Mr. David E. Durbin RETIREMENTCOMMISSION

Executive Director

State Employees Retirement System

30 North Third Street - Suite 150

Harrisburg, PA 17101-1716

Re: Official Cost Estimates for Senate Bill (SB) 1082

Printer s Number (PN) 1460 Variations Thereon

Dear Dave:

Hay Group, Inc.

Suite 600

4301 North Fairfax Drive

Arl ington,

V

22203-1653

US

tel +1.703.84 .3100

fax +1.703.841 .3108

www.hayg roup.com

This letter

is in

response

to

requests for Hay Group s official cost estimates relating to the

following three pieces of proposed legislation:

I. SB 1082, PN 1460

2. SB I 082, PN 1460, as amended by Amendment A04826

3. SB 1082, PN 1460, as amended by Amendment A05049

On December

3

2015, Hay Group issued an actuarial cost note

in

connection with a Consensus

Side-by-Side Hybrid design proposed

on

December I, 2015. This cost note, a copy of which

is

enclosed with this letter, included detailed information concerning the cost impact of several

vruiations of a proposed new pension design for the Pennsylvania State Employees Retirement

System (SERS), one of which

is

very similar to all three of the designs proposed in the above

listed legislative proposals. The variation

of

the Consensus Side-by-Side Hybrid design described

in

our December 3rd note that greatly resembles the above legislative proposals

is

the one under

which the decrease

in

the unfunded accrued liability (UAL) that results from the legislation would

be funded using a 30-year, level dollar amortization. Therefore, also enclosed with this letter are

the following schedules:

• Our projection table showing projected SERS costs through the end of FY 2052 under the 30-

year, level dollar amortization version of he Consensus Side-by-Side Hybrid proposal and

• Our Summary Table showing a breakdown

of

the long-term cumulative savings/cost

of

each

of he key components of the Consensus Side-by-Side Hybrid proposal.

Clarifications Relating to Enclosed ctuarial Cost Note

• Shortly after the issuance of our December 3rd actuarial cost note, a question was raised

in

connection with the Public Employee Retirement Commission s (PERC s) review of this

actuarial cost note and related schedules. This question pertained to Hay Group s handling of

one particular provision

of

the Consensus Side-by-Side Hybrid design proposal, which was not

addressed

in

our December 3rd cost note. Specifically, we were asked

if

we were aware of his

provision

of

he proposal and if we had considered the cost implications of it.

-

.



Mr. David E. Durbin

December

14, 2015

Page2

Below, we describe the specific provision that was questioned and Hay Group s handling

of

it.

Proposed Change 10 Benefit Provisions Applicable to Class A 3 Class A 4 Members

Under the Consensus Side-by-Side Hybrid proposal, in addition to the legacy Defined

Benefit

DB)

system

member

changes fully described on pages

2

and 3

of

Hay Group s

December 3, 2015 actuarial cost note, there would be a change, effective July I 2016,

to make an actuarially cost neutral Option 4 lump sum withdrawal

(of

member

contributions and statutory interest) available to Class A-3 and

Class

A-4 members of

SERS

upon their retirement. This option is not currently available to A-3 and A-4

members. For these two classes of members, the cost neutral Option 4 calculation

would be applicable to all member contributions and statutory interest thereon, whether

they occurred before

or

after the July I 2016 effoctive date.

As you know, from our communications on this matter the day after the issuance of our

cost note, although this provision was not included in our cost note discussion of the

specific elements

of

the proposed legislation,

we

were fully aware of this provision while

performing

our

cost analyses,

we

confirmed

that

this provision,

if

enacted, would have no

future cost impact on SERS and, as a resu It

we

stand

by

our December 3, 2015 actuarial

cost note and related schedules as issued.

• More recently, another aspect of our December

3rd

actuarial cost note was identified as

requiring clarification, as follows: While the second bullet on page

3

of our note indicated that

the proposal would extend the

new

Shared-Risk and Shared-Gain provisions to members of

Class AA and Class D-4, in fact, the proposal would extend both of these provisions to

members of Classes A,

El

and E2 as well. This broad applicability of the Shared-Risk and

Shared-Gain provisions whereby both are extended to all SERS legacy DB member classes) is

also included in all three versions ofSenate Bill I082 being addressed in this letter.

SB 1082,

PN

1460

(hereafter,

SB

l082)

SB I 082 differs from the Consensus Side-by-Side Hybrid proposal covered

by

our enclosed

December 3,

2015

actuarial cost note with respect to

one

aspect:



Mr. David E. Durbin

December 14, 2015

Page3

Whereas under the Consensus Side-by-Side Hybrid proposal, current Elected Officials would

be mandatorily enrolled

in

the new side-by-side hybrid (DB system and DC plan) upon

reelection on

or

after January

1

2018, under SB 1082, current Elected Officials wou

Id

have a

one-time oppo11unity to petition

for

reinstatement into their current (pre-SB l 082) SERS DB

system membership class upon reelection on or after January 1 2018.

Hay

Group has concluded that, based upon the small percentage

of

Elected Officials currently

in the SERS active membership (about 0.25%, i.e., about 260 out

of

approximately 04,000)

and

our

expectation that most

of

the affected Elected Officials will not opt in to their current

membership class upon re-election, this opt-in provision would have no material impact on

our overall cost estimates issued on December 3, 2015.

Therefore, the two enclosed cost estimate schedules are our official cost estimates for SB 1082,

and they show the same cost estimate results as the schedules referenced in our December

3,

2015 actuarial cost note. That is, we estimate that, if SB 1082 were to become law, it would

result in a cumulative savings relative to SERS' current plan baseline projected costs through

the end of

Y

2052

of

$2,099.7 million (or $2.0997 billion).

SB

1082,

PN

1460,

as

amended

hv

Amendment

A04826 (hc1·caftcr,

SB

1082, A04826)

SB 1082, A04826 differs from SB l 082 with respect to one aspect:

Whereas under SB l 082, it is proposed that the Act 120 employer contribution collar of 4.5

for

Y

2016-17 be revised to 2.25%, SB I 082, A04826 proposes no change in any of the Act

120 employer contribution collars. Hay Group has prepared cost estimates for a variation of the

Consensus Side-by-Side Hybrid proposal that called for no change to the Act 120 employer

contribution collars and these estimates also serve as our official cost estimates

of

SB 1082,

A04826.

The

details of hese estimates are attached, as follows:

• Our projection table showing projected SERS costs through the end of FY 2052 under the 30-

year, level dollar amortization, with

No

Change to the Act 120 Collars, version

of

this Side-by

Side Hybrid proposal and

• Our Summary Table showing a breakdown

of

the long-term cumulative savings/cost of each

of the key components of his version

of

he Side-by-Side Hybrid proposal.

-



Mr. David E. Durbin

December 14, 2015

Page4

That is, we estimate that,

i

SB 1082, A04826 were to become law, it would result in a

cumulative savings relative to SERS' current plan baseline projected costs through the end

of

FY 2052 of $2,275.4 million (or $2.2754 billion).

SR 1082, PN 1460, as

amended by Amendment

A05049 (hcrcancr, SH 1082, A05049)

SB 082, A05049 differs from SB I 082, A04826 with respect to one aspect:

Whereas under SB I 082, A04826, current Elected Officials would have a one-time opportunity

to petition for reinstatement into their current (pre-SB I 082) SERS DB system membership

class upon reelection on

or

after January

l,

2018, under SB 1082, AOS049, current Elected

Officials would be mandatorily enrolled in the new side-by-side hybrid (DB system and DC

plan) upon reelection on or after January I, 2018.

Since Hay Group concluded (as described above) that this opt-in provision would have no

material impact on our overall cost estimates, our official cost estimates of SB I 082, AOS049

are approximately the same as those presented above for SB 1082, A04826. That is, we

estimate that,

if

SB I 082, A05049 were to become law,

t

would have approximately the same

cost impact as

if

SB I 082, A04826 were to become law; namely, it would result

n

a cumulative

savings relative to SERS' current plan baseline projected costs through the end

of

FY 2052 of

$2,275.4 million (or $2.2754 billion).

Importan t Notes

Please note the following regarding

our

handling

of

the attached funding projections:

I. In performing our cost analyses and preparing the attachments to this letter, Hay Group has

applied the proposed changes to current law as presented to us. We have not reviewed or

opined on the legality of any aspect of these proposals.

2. Hay

Group s

past convention

of

showing results for employer cost projections such as these

as percentages

of

payroll to two decimal places may be somewhat misleading. This level

of

precision is not really possible for estimates

of

this nature.

3. All

of

these projections are based upon the expectation that (i) for all years after 2014, the

actual economic and demographic experience

of

SERS will be consistent with the

~

-1



Mr. David E. Durbin

December 14 2015

Page 5

_

Hay rou

underlying actuarial valuation assumptions and

(ii)

all employer contribution amounts shown

in

the Expected FY Contribution columns will, in fact, be contributed.

4. The attached projection schedules include a particularly important column of information

that may warrant further explanation: Cumulative (Savings) I Cost Relative to Baseline

shows the projected cumulative cost or savings

in

employer contributions (in millions

of

dollars) that would result under the stated legislative proposal versus under the current law

(Baseline).

5. The cost estimates included herein were based upon our December 31, 2014 actuarial

valuation results, including the underlying census data, assets and actuarial assumptions.

Actuarial Certification

To the best of our knowledge, the information w are presenting herein is complete and

accurate and all costs and liabilities have been determined

in

conformance with generally

accepted actuarial principles and on the basis of actuarial assumptions and methods which arc

reasonable (taking into account the past experience

of

SERS and reasonable expectations) and

which represent our best estimate of anticipated experience under the plan.

The actuaries certifying to these valuations and related actuarial projections are members of the

Society

of

Actuaries or other professional actuarial organizations, and meet the General

Qualification Standards

of

the American Academy ofActuaries for purposes of issuing

Statements

of

Actuarial Opinion.

Please let us know if you have any questions on any of this.


Hay Group, Inc.

B y ~ ~

Brent M. Mowery, F.S.A.

Member American Academy ofActuaries

Enrolled Actuary No. 14-3885

c

J

, ~

By == -

Craig R. Graby

Member American Academy ofActuaries


1



PU LIC

EMPLOYEE

DEC 1 4 2 15

RETIREMENT COMMISSION

Actuarial Cost Note -

Projected

Impact of

Consensus Side-by-Side

Hybrid

Pension Design

Proposed on December 1, 2015

As requested, in connection wi

th

the Consensus Side-by-Side Hybrid pension design proposed

on December I, 20 J5 we have performed cost projections to approximate the impact on the

future fond ing

of

the Pennsylvania State Employees' Retirement System (SERS)

if

this

proposal were to become law. This proposal calls for a hybrid defined benefit (DB)/defined

contribution (DC) plan design for SERS, to take the place of the current DB only system. That

is

under this proposal (hereafter referred to as the Consensus Hybrid proposal ), most

employees who join SERS on or atler January

I,

2018 would no longer be covered by SERS'

current DB only design, but rather would be covered by a hybrid DB/DC plan design including

key features as described in the pages that follow.

This Consensus Hybrid proposal also calls for revisions to several of the current SERS DB

provisions that would be applied

on

a prospective basis to virtually all current (pre-2017) SERS

members. These changes are also described below.

Under the Consensus Hybrid proposal, on multiple different effective dates, various significant

changes would occur to the current provisions

of

both

of

Pennsylvania's statewide retirement

systems. This note addresses only the changes applicable to SERS.

Exemption

for Most Hazardous uty

Employees

Under this Consensus Hybrid proposal, most hazardous duty employees (including

Pennsylvania State Police, correction officers, enforcement officers and all other hazardous

duty employees other than psychiatric security aides) would be exempt from certain provisions

of the proposed new plan design. That is, (a) hazardous duty members hired after 2017 would

be exempt from the Consensus Hybrid proposal provision that requires all post-2017 hires to

join the new defined contribution (DC) plan and revised DB system; rather, they would

continue to become members of the current SERS DB system only. On the other hand, (b)

hazardous duty members who are active after July

I

2016, regardless

of

their hire date, would

be subject to the same Consensus Hybrid proposal legacy DB changes that will become

applicable to virtually all active legacy DB system members.

References hereafter in this note to all employees hired after the hybrid plan start date being

subject to the proposed new hybrid DB/DC plan provisions should be understood,

if

not

specifically excepted, to exclude most hazardous duty employees.

Summary

The Consensus Hybrid proposal calls for a combination of changes to occur, primarily on three

different effective dates, as follows:

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• Effective July I, 2016 and January

l

2017, changes wi occur to the future benefit

rights

ofvirtually all current (pre-2017) active SERS DB members. These changes

(described fully

in

the pages that follow) will only affect benefits relating to future

(post-effective date) service. Benefits relating to service prior to the effective date will

continue as-is and not be impacted.

• A new SERS Defined Contribution (DC) plan and a revised version of the SERS

Defined Benefit D.B) system will be implemented for those hired after December 31,

2017. As well, effective January I, 2018, all active SERS members who are elected

officers (regardless of their membership class) will not

be

allowed

to

continue

membership

in

the current SERS DB system but instead, will be required to join the

new DC plan and revised DB syslem upon election or re-election.

Descriptions

of

he key features ofeach of these changes proposed under the Consensus Hybrid

proposal follow.

Changes in Benefit Provisions Applicahlc to Legacy

DB

Svstcm Members

Under the Consensus Hybrid proposal, changes would occur, some effective July

1,

2016 and

some effective January

1,

2017, to the future benefit rights of vi11ually all active legacy DB

(pre-2017) system members. These changes will not affect benefits relating to service prior to

the effective date

of

each change. That is, pre-change accrued benefits will continue as-is.

Our brief descriptions

of

the two primary types of benefit provision changes follow.

(1) Actuarially Neutral Option 4 Relating to Post-July 1, 2016

Member

Contributions

The Consensus Hybrid proposal calls for a change to become applicable to all legacy DB

members who, as

of

June 30, 2016, remain eligible for the actuarially favorable (to the

member) Option 4 withdrawal. Specifically, all member contributions made on or after July I,

2016 and all statutory interest on those contributions, if withdrawn under Oplion 4, will be

subject to an actuarially neutral Option 4 calculation (which is less favorable to the member

than the calculation relating to the pre-July I, 2016 contributions and statutory interest thereon).

(2) Revised Final Average Salary for Post-2016 Service

The Consensus Hybrid proposal calls for changes effective January

l

2017 to the current

(generally three-year) Final Average Salary calculation applicable to all legacy

DB

members

other than state police who qualify for the DiLauro Award (who will continue to have their

benefits based upon their highest year salary, incJusive

of overtime). The new FAS will be the

higher of (a) or (b) below, where:

(a) =Current 3-Year Final Average Salary, but excluding post-12/31/2016 overtime and

(b) =New 5-Year Final Average Salary, including post-12/31/2016 overtime

219

www

haygroup.com



Two other changes in the post-July 1, 2016 benefit provisions applicable to legacy DB system

members that are included in the Consensus Hybrid proposal are worthy

o

mention here:

• For Class A-3 and Class A-4 members, for whom a new Shared-Risk provision became

applicable under Act 120 (subjecting them to a potential increase in their employee

contribution rate by as much as 2.0%

in

the event o underperformance o SERS

investments), the Consensus Hybrid proposal has introduced a new Shared-Gain

provision. This Shared-Gain provision mirrors the Shared-Risk provision, in that it

subjects these same classes o members to a potential decrease in their employee

contribution rate by as much as 2%,

in

the event

o

over performance

o

SERS

investments.

• For Class AA and Class D-4, the Consensus Hybrid proposal has also introduced new

Shared-Risk and Shared-Gain provisions similar to those discussed above for Class A-3

and Class A-4 members. Under these provisions, the performance o SERS investments

would be measured every three years. Jn the event o over performance during this

period, the Shared-Gain provision could result

in

the employee contribution rate being

reduced. The downward-adjusted rate would then be in effect for the following three

years, after which new performance measurements would govern contribution rate

levels.

Given that the assumption used in our Consensus Hybrid proposal cost analyses is that the

SERS fund will consistently earn 7.5% annual investment returns in all years after December

31, 2014 (consistent with our current actuarial valuation assumptions), neither the Shared-Gain

nor the Shared-Risk provisions have any cost implications ofrelevance for this Cost Note.

Transition to the Consensus Hybrid Design

Most, but not all, non-hazardous duty employees who join SERS on or after January I, 2018,

would be covered by the proposed new hybrid DB/DC design, and therefore, upon hire, would

become members

o

the hybrid DB system and participants

o

the hybrid DC plan. For elected

officers (including: ( 1 newly elected or re-elected governor, lieutenant governor, treasurer,

auditor general, attomey general, and legislators and (2) members

o

he judiciary who are

elected to a new judicial position), the hybrid design would become applicable coincident with

their assuming office, but not prior to January

1,

2018.

The Consensus Hybrid proposal would mandate that, with the exceptions as noted herein, all

employees hired after the hybrid plan start date (January

1,

2018) become participants

in

a new

SERS hybrid DC plan, which would be separate from the SERS DB system. t is anticipated

that each hybrid DC participant would have established for him/her an individual investment

account within a SERS hybrid DC trust fund, which would be separate from the SERS DB

fund.

The Consensus Hybrid proposed legislation would create a new class

o

DB membership, Class

A-5, applicable to all SERS employees who are hired after the hybrid plan start date. This class

would

be

a new tier within the existent SERS DB system; the new structure would not be a

3 9

w w w h y g r o u p



separate plan and would not have a separate fund. Under this proposal, SERS would not be

closed to new members; SERS would remain open into the future to members who join the

SERS DB system via the new hybrid membership class. Note: Current SERS members (hired

prior to 2018) would not have an option to leave their existing classes of service and join the

hybrid plan.

Specifics

of the

Consensus

Hybrid Proposed

Design

This summarizes our understanding of the key features of this proposed hybrid DB/DC design:

4/9

I. Formula for Single Life Annuity at Superannuation for New Hybrid DB members:

I

X 5-Year Final Average Salary (including overtime) X Total Credited Service

No buy-up to a higher benefit accrual rate would be available, as under Act 120.

The Final Average Salary (FAS) would generally be calculated by averaging the

five highest calendar years

of

compensation, including overtime pay as applicable .

Note: While State Police hired January

l,

2018 and after are generally exempt from

the Consensus Hybrid DB/DC design, including the 5-Year FAS described above,

they ARE subject

to

the same (greater of) FAS provision generally applicable to the

post-2016 service

of legacy DB members if they separate from service prior to

becoming eligible for the DiLauro award. If they reach DiLauro eligibility, the

current DiLauro award provisions would continue to apply. New State Police will

need at least 20 years

of

State Police service to be eligible since non-State Police

service will no longer count toward the Dilauro eligibility. Non-State Police

service will provide a benefit

in

addition to the DiLauro award.

2. Contribution Rates under Consensus Hybrid Design; .See table that follows for

a summary of the Consensus Hybrid proposed contribution rates, expressed as a

percentage of payroll.

Consensus

Hybrid

Defined Benefit (DB)/

Defined Contribution (DC) Design

Mandatory Contribution Rates As

%

of Payroll)

Defined Benefit

<DB)

·

Employee

·

- ..

3.00%

Employer

Actuarially Determined

Defined Contribution <DC)

Employee .

..

3.25%

Employer

2.50%

3. Hybrid DB Superannuation

i

.e., Normal Retirement Age): Eligibility and benefits

would generally

be

consistent with the Act

120

provisions applicable to members of

the same class and category.

www.haygroup .com



4. Hybrid

DB

Early Retirement: Eligibility and benefits would generally

be

consistent

with the Act 120 provisions applicable to members of the same class and category.

5. Hybrid DB Vesting: 10-year cliff. Refund of accumulated deductions (member

contributions+

4 statutory interest) would

be

available, upon non-vested

tennination.

6 Hybrid OB Disability and Death Benefitc;: Eligibility and benefits would generally

be consistent with the Act 120 provisions applicable to members of the same class

and catego1y.

7. Hybrid

DB

Shared-Risk/Gain Provision: f DB fund investment returns are low/high

relative to actuarial assumptions, hybrid DB members could be subject to

higher/lower employee contribution rates, with the potential maximum deviation

from the usual mandatory contribution rate

being+

or - 2 of pay. Projections

attached to this note are based on

an

assumption that

the

target investment returns

(of 7.5 annually) are earned in all future years; therefore, for purposes

of

this cost

note, this provision would not impact fi.tture SERS costs.

8 Hybrid DB Option 4: Upon retirement,_hybrid DB members will be eligible for an

actuarially cost neutral Option 4 full withdrawal

of heir

accumulated deductions.

9. Hybrid

DC

Vesting: 3-year

cliff

for employer

contributions and related

earnings/losses; immediate vesting for employee contributions and related

earn

in

gs/losses.

10. Hybrid DC Disability and Death Benefits: Vested account balances would generally

be

available.

Changes to Current SERS Financing rrovisions

Under

the

Consensus

Hybrid Proposal

In accordance with our interpretation

of

the draft provisions

of he

Consensus Hybrid proposal:

5/9

•

We

have changed the actuarial funding method being utilized for the determination

of

the SERS normal cost rate from the current funding method a variation of the Entry

Age Actuarial Cost Method) to the traditional Entry-Age Actuarial Cost Method.

The

significant difference between

the

method currently used for SERS and the method

proposed under the Consensus Hybrid proposal is that the normal cost is currently based

upon the benefits

and

contributions for

the

average

new

employee whereas, under the

proposed method, the normal cost is based upon

the

benefits and contributions for all

current covered employees from their date of entry.

• If

the

legislation resulting from this proposal causes there to be a change

in

the SERS

unfunded accrued liability (UAL) and it most certainly would), then under current law,

that change in liability would

be

funded using a 10-year, level-dollar amortization.

However, there is some uncertainty as to whether the change in UAL that would result

www h ygroup om



from this proposal would be amortized over I 0 years as prescribed by current law or

over a longer period, such as 20 to 30 years. For purposes

of

this cost note,

in

order to

be more informative to those reviewing these results, we have performed our SERS cost

calculations based upon each of three possible level-dollar amortization periods: I 0

years,

20

years and 30 years.

• Under this Consensus Hybrid proposal, a change is proposed to the employer

contribution collars that are scheduled under current law (as established under Act

2010-120). Specifically, this proposal calls for (i) the maximum employer contribution

rate for the 2016/2017 fiscal year to

be

the sum of a contribution collar

of

2.25%

of

payroll added to the final 2015/2016 fiscal year contribution requirement

of 25

.00%

of

payroll, to produce a result

of27.25 of

payroll and (ii) the use

of

a 4.5%

of

payroll

contribution collar for purposes

of

determining collared contribution rates

in

subsequent

fiscal years (fiscal 2017/2018 and beyond). Note that the only difference between the

two sets of collars is that the current law collar for the 2016/2017 fiscal year is 4.5% of

payroll whereas the proposed collar for the 2016/2017 fiscal year is 2.25% of payroll.

~ s t i m a t c d Initial Cost Impact of the Consensus Hybrid Proposal on the SERS

DU

System

f he Consensus Hybrid proposal were to become law, effective in fiscal 2016/2017, the SERS

employer normal cost rate would be based upon the new traditional Entry-Age Actuarial Cost

Method (as described in the first bullet above). Under this new method the resulting normal

cost rate

is

9.72% of payroll, a considerably higher rate than the 4.95%

of

payroll normal cost

rate

in

fiscal 2015/2016. This change results

in

significantly increased normal cost rates

(versus the prior year rate

of

4.95%) over our entire cost projection period, and

we

have

determined that the present value of those future normal cost dollar increases is approximately

3.5 billion. Therefore, in conjunction with our projected December 3 J 2015 actuarial

valuation, approximately 3.5 billion of SERS liability, previously scheduled to be funded via

UAL amortization payments, would instead be funded via future employer normal cost

payments. The net effect

of

the higher normal cost funding pattern and the lower UAL

amortization funding pattern over our cost projection period is a cost, since the increase in

future normal cost payments is of greater magnitude than the decrease in future UAL

amortization payments.

It

should be noted that this decrease

in

UAL would cause the SERS

funded status to increase by more than 5 percent. These changes are reflected (though masked

by the impact of other changes) in our Consensus Hybrid proposal funding projections attached

to this note.

Projection ofFuture Costs

Under

the Consensus Hvbrid Proposal

Starting with the census data, asset data and actuarial assumptions underlying our December

31, 2014 actuarial valuation (including

an

assumed investment return

of

7.5 percent per year,

compounded annually) and projecting our December 31, 2014 valuation results forward to

December 31, 2015 and implementing the new traditional Entry-Age Actuarial Cost Method for

the December 31, 2015 and all subsequent actuarial valuations and incorporating the new

benefit provisions (effective either July I, 2016 or January I, 2017) to legacy DB members of

6/9 www haygroup com



SERS as described above and incorporating the new Hybrid DB plan design outlined above for

new hires on or after January I, 2018 and incorporating the new Hybrid DC plan design

outlined above for new entrants to SERS on or after January l, 2018 and reflecting the two

changes to the current SERS financing provisions as described in the second and third bullets

above, Hay Group has projected the future employer contributions required to fund SERS and

the new DC plan in accordance with the Consensus Hybrid proposal.

Schedules Attached to This Cost Note

We have attached to this note the results

of

our funding projections and other relevant cost

information, as follows:

•

Three

Consensus

Hybrid

Projection

Results: These three one-page cost projections

show our projected annual funding of SERS if the Consensus Side-by-Side Hybrid

design proposal including the benefit and contribution provisions described previously)

were to be enacted, including the revision to the traditional Entry-Age Actuarial Cost

Method, and the change in Unfunded Actuarial Liabil ity UAL) resulting from this

proposal were amortized on a level dollar basis over

• O years,

• 20 years or

• 30 years respectively,

including the savings)/cost relative to baseline funding. Note that these three tables

present our projections of future SERS fonding through fiscal year 2051/2052, all of

which reflect the impact

of

the Consensus Hybrid proposal.

• Baseline

Projection

This table presents, for purposes

of

comparison, the resu

ts

of

our

December 31, 2014 actuarial valuation and our projection

of

future funding through

fiscal year 2051/2052, assuming

no

changes to any

of

the current SERS benefit

provisions or financing methodologies.

Also attached are the following:

• Three Summary Tables, which provide breakdowns of the long-term cumulative

savings)/cost by the key components

of

the proposal, including, in the last four steps,

the estimated impact

of

each of the proposed financing changes being considered in this

proposal, including:

o A change to the traditional Entry-Age Actuarial Cost Method or, a revised

normal cost approach)

o Continuing with the current law 10-year level dollar amortization of the decrease

in UAL due to this proposed legislation or

o Changing from the current law 10-year level dollar amortization of the decrease

in UAL due to this proposed legislation to, possibly, a 20-year level dollar

amortization or

o Changing from the current law l 0-year level dollar amortization

of

the decrease

in UAL due to this proposed legislation to, possibly, a 30-year level dollar

amortization) and

o A possible change in contribution collars,

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h ygroup om



• One last one-page attachment that we have included herein to provide further

information for those reviewing the details

of

these cost analyses: A schedule of Net

Present Values of the net Cost/(Savings) that would result if the Consensus Hybrid

proposal became law.

Our

Cost Results in Brief

As shown n our attached cost projections for this proposed Consensus Hybrid design, if this

proposal were to become law, we estimate that it would result

n

a cumulative cost/savings

relative to our current plan baseline projected costs through the end

of

FY 2052 as follows:

• Cumulative cost

of

1,171 .0 million (or 1.1710 billion),

if

the decrease

n

UAL were

amortized over 10 years,

• Cumulative savings of 740.3 million (or 0.7403 billion),

if

the decrease n UAL were

amortized over 20 years and

• Cumulative savings of 2,099.7 million (or 2.0997 billion), if the decrease n UAL

were amortized over 30 years.

t

should be noted that the proposed financing change to reduce employer contribution collars

had the following cost/savings impact:

• Based upon a I 0-year UAL amortization, the reduced collars had

no

impact. That is,

the fiscal 2016/2017 projected employer contribution rate (26. 79%) was lower than the

27.25% of payroll collared contribution level, thereby ending the applicability

of

contribution collars to subsequent years.

• Based upon a 20-year UAL amortization, the reduced collars increased costs by about

208 million. This was due to the fact that the fiscal 2016/2017 projected employer

contribution rate was higher than the 27.25% of payroll collared contribution level;

however, the fiscal 2017/2018 projected employer contribution rate was lower than the

31. 75% of payroll collared contribution level, thereby ending the applicability of

contribution collars to subsequent years.

• Based upon a 30-year UAL amortization, the reduced collars increased costs by about

176 million. This was due to the fact that the fiscal 2016/2017 projected employer

contribution rate was higher than the 27.25% of payroll collared contribution level;

however, the fiscal 2017/2018 projected employer contribution rate was lower than the

31.75% of payroll collared contribution level, thereby ending the applicability of

contribution collars to subsequent years

mportant

Notes

Please note the following regarding our handling of the attached funding projections:

8 9

w w w h a y g r o u ~



-1 lfiwGroup

1 In perfonning our cost analyses and preparing this cost note and the attachments hereto, Hay Group

has applied the proposed changes to current law as presented to us We have not reviewed or opined

on

the

legality

o any

aspect o this proposal.

2.

Hay Group's past convention

o

showing results for employer cost projections such as these

as percentages o payroll to two decimal places may be somewhat misleading. This level o

precision is not really possible for estimates o this nature.

3.

All o these projections are based upon the expectation that i) for all years after

2014,

the

actual economic and demographic experience o SERS will be consistent with the

underlying actuarial valuation assumptions and (ii) all employer contribution amounts shown

in

the Expected FY Contribution columns will,

in

fact, be contributed.

4

The attached projection schedules include a particularly impmtant column o information

that may warrant further explanation: Cumulat ive (Savings) I Cost Relative to Baseline

shows the projected cumulative cost

or

savings in employer contributions (in millions o

dollars) that would result under the Consensus Hybrid proposal versus under the current law

(Baseline).

5 The cost estimates included herein were based upon our December

31, 2014

actuarial

valuation results, including the underlying census data, assets and actuarial assumptions.

ctuarial Certification

To the best o our knowledge, the information we are presenting herein is complete and

accurate and all costs and liabilities have been determined in conformance with generally

accepted actuarial principles and on the basis o actuarial assumptions and methods which are

reasonable (taking into account the past experience o SERS and reasonable expectations) and

which represent our best estimate o anticipated experience under the plan.

The actuaries certifying to this valuation are members o the Society o Actuaries or other

professional actuarial organizations, and meet the General Qualification Standards o the

American Academy

o

Actuaries for purposes o issuing Statements

o

Actuarial Opinion.

Please let us know i you have any questions on any o this.


Hay Group, Inc.

By:

< A N r ~ /

Brent M. Mowery, F.S.A.

Member American Academy

o

Actuaries


December 3, 2015

919

By: C _

7

/ i :

Craig R. Graby

Member American Academy o Actuaries


www haygroup. om



Summary

Table - Using 30-Year Amortization Financing

PUBLIC EMPLOYEE

DE 1 2 15

Pennsylvania State Employees' Retirement System

Allocation

of

Potential Projected (Savings)/Cost

Through

FY 2052

RETIREMENT

COMM SS ON

Due to Consensus Side-By-Side Hybrid Design 12/01/2015, Including Changes to

urrent

DB

(Amounts in millions)

Benefit Changes

Amendment -

1.00%

DB Accrual (Ee

3.00%)

for most hires after December

31, 2017

Amendment - D Plan (Ee

3.25%;

Er

2.5%)

for most hires after December

31,

2 17

Amendment - Prospective Cost Neutral Option

4

for Pre-Act 12 Members

Amendment - Greater of FAS 3 with No

OT

and FAS 5 on Future DB Accruals for

Current DB Members Other Than State Police with

20

or more years

of

service; FAS

5

for Hybrid DB Members

Sub-total Benefit Changes

Total Hybrid Plan and urrent

DB

Changes: (Savings)/Cost through FY 2052

without Financing Changes

Financing Changes

New Entry Age Normal Cost Approach

Revised Amortization Period for Plan Changes From

I

to

30

Years

Revised Contribution Collars

Sub-total Financing Changes

Total Hybrid Plan

and

urrent

DB

Changes: (Savings)/Cost through

FY

2052

with Both Benefit

and

Financing Changes

Notes:

The potential (savings)/cost was valued in the following order:

1.00%

accrual

DB

design generally effective after December 31,

2017

(2,672.3)

4,986.4

(358.4)

{1,301.4)

654.3

654.3

516.7

(3,446.4)

175.7

(2,754.0)

(2,099.7)

- State Police and most other hazardous duty employees exempt from both new DB and DC plans

Hay Group

-

DB employee contribution rate:

3.00%

- Elected Officials: Includes change to lower accrual upon election/reelection

- Does not include impact

of

changes to FAS 5 in Hybrid DB until later FAS step

DC Plan (Ee

3.25%;

Er 2.5%) generally effective after December

31, 2017

- State Police and most other hazardous duty employees exempt from both new DB and D plans

Current Member DB changes:

- Prospective Cost Neutral Option 4 effective after June

30, 2016

- Prospective Greater of FAS 3 No OT and FAS 5 for all except State Police with

20

or

more years of service effective after December

31, 2016

Entry Age Normal Cost Method Changes

Revised Amortization Period for Decrease

in

UAL due to Legislated Plan Changes

- From I 0 Years to 30 Years

Revised Employer Contribution Collars

lfa different order is used, the cost impact will vary from what is shown above.

12/3/2015



SERS Projected Employer Contributions (Based Upon Final December 31, 2014 Valuation) Under

Senate Bill 1082, Printer's Number 1460

12/14/2015

Consensus Side

By

Side Hybrid DB/DC Design 12101/2015

=

Legacy

DB

Plan Wilh New Provisions, Including New 1.00% Accrual Defined Benefrt Tier, Plus New

DC

Plan

(DC/OB) Wrlh Er Conlrib@ 2.5%; Slate Police, Corr edio n Officers, and Othe r Hazardo us Duty O'llL Y Remain in Current DB Plan; No Fresh Start,

No

Legacy

Con1ribut'on/Accrual Rate C'tanoes Tradaional En Age Normal CoS1

1

Cost of lc9lstatlon

Amo1111:ed

Ovor 30 Years, Reduced ollar FY2016-17 ' 2.25%1

I

Baser.no

Total

Expected DB Expected FY

Expeded

Expected FY

Total

DB+DC/OB

Annual

Cumulalive

Projected

Plan

FY

DB

DC

/

DB

Plan

DCiDB

DB+DC/DB

Con:ril:JU:ion as

(Savings)

I

(Savings) I Cost Funded

UAL

Funded

Investment

Fiscal

Floor

DB

Percen1

Payron

Contnbutton

FY Payroll

Contribution

Contn

b11tion

a%of

Cost Relative

Relative to

Relic

( in

Ratio

Baseltne Baselines

Yea·

Return

Year

Contribution

Cantribt.r.ion

(S

In

milllOI\ )

( In

mm:ons)

(S

in

m1DionsJ {

in mill

ions)

(S m1lltons)

DB+DCIDB Pay

to Baseline

Baseline

(AV%)

bilfons)

(MV )

Percent

(Sin

millions)

2011

2.70%

201212013

5.10%

11

.50

5.890.7

6n.4

.

.

677.4

11.50

65 3

14.69

5i 6

11.50

677.4

2012

12.00%

2013/2014

5.01%

16.00

5.836.4

933 8

.

.

933.8

16.00

58.7 17.78

58.9 16.00

933.8

2013

13.60%

2014/2015

5.00%

20.50 5,897.6

1,209.0

1,209.0

20.50

59.2 17.90

62.4

20.50

1,209.0

2014

5.40%

201512016

4.95%

25.00

6.021.7

1.505.4

.

.

1,505.4

25.00

.

59.4

18.17

61.1

25.00

1 5 0 ~ . 4

2015

7.50%

2016/2017

9.72%

27.25

6,205.3

1.690.9

.

.

1,690.9

27.25 (139.7)

( 139.71

65.4 14.43

67.1

29.50

1,830.6

2016 7.50%

201712018

9.57%

29.74

6,277.3

1,890 .6

117.3

14 2

1,904.8

29 .

79

(39.7) (179.4)

57.1 14.06

87.7 30.41

1,944.5

2017 7.50%

2018/2019

9.34%

28:66 6,233.5

1,655.1

356.1

42.2

1,897.3

26.79 (39.8)

(219.3) 68.i

13.52

68.i

29.40 1,937.i

2018

7.50%

2019/2020

9.11

27.93

6, 173.5

1,840.2

617.1

71 7

1,911.9

28.15 (45.1)

(264.4)

69.8

13.42 69.9

28.82 1,957.0

2019 7.50

2020/2021

8.90%

27.13

6,130.2

1,821.2

867.5

98.9 1,920, 1

27.44

(49.9) (314.3)

71.0

13.13 71.0

28.15

1,970.0

2020 7.50% 2021/2022 8.70% 26.37 6,088.0 1,803.9 1,123.2 125 8

1,929.7

26.76 (54.7)

(369.0)

72.1

12.82

72.2

27.52

1,984.4

2021

7.50%

2022/2023 8.51%

25.65

6,046.0

1,788.1

1,385.i

152.5

1,940.6

26.11

(59.6)

i428.5) 73.3

12.50 73.3

26.92

2,000.2

2022 7.50%

202312024

8.32%

24.95

6,001.4

1,772.9 1,656.4

179.2

1,952.1

25.49

(64.8)

(493.4)

74.4

12.17

74.4

26 34

2,016.9

2023

7.50%

2024/2025

8.13%

24.27

5,953.3 1,757.8

1,938.0

206.1

1,953.9

24.89 (70.1)

(563.5)

75.5 11.80

75.5

25.78 2,034.0

2024

7.50%

2025/2026

7.95%

23.61

5,902.1

1,742.9

2.229.9 233.1

1,976.0

24.30 (75.7)

(639.3)

76.6 11.41

75.6

25.23 2,051.7

2025

7.50% 2026/2027

7.78%

22.97 5,848.8

1,728.3

2,531.4

260.1

1,988.4

23.73 (81.6)

(720.8)

77.8 11.00 77 8

24.70

2,070.0

2026 7.50%

2027/2028 7.61

22.35 5,794.6

1,714.3

2,841.0

287.1

2,001.4

23.19 (87.6)

(808.4)

78.9

10.55 78.9

24.19 2,089.0

2027

7.50%

2028/2029

7.44%

21.75 5,741.4

1',700.8 3,157.6

3140

2,014.8

22.64

(93.7)

(902.1)

80.1 10.07 80.1

23.69

2,106.5

2028 7.50%

2029/2030

7.29%

21.17

5,687.3

t,687.8

3.483.1

340.8

2,028.6

22.12 (100.0) (1,002.1)

81.3

9 55 81.3

23.21 2,128.6

2029

7.50% 2030/2031

7.13%

20.61 .5,631.7

1,675.1

3,818.4

367.8 2,042.9

21.62

(106.4)

(1,108.5)

82.6 8.99

82.6

22.74 2.i49 3

2030

7.50% 2031/2032

6.98%

20.08

• 5,574,5

1,662.8

4,163.9 3949

2,057.7

21.13 (113.0)

(1,221.5)

83.9

8.39 83.9

22.29 2.170.7

2031 7.50% 2032/2033

6.84%

19;53

5,514.5 1,650.6

4,520,9

422.2 2,072.8

2065

(120.0)

(1,341.5)

85.3

7.75

85.3

21.85 2.192.8

2032 7.50%

2033/2034

8.70%

19.01

5,453.9 1,638.8

4,887.6

449.6 2,088.4

20.19 (127.2)

(1,468.7)

85.8 7.05

86.8 21.42 2,215.6

2033 7.50%

2034/2035

6.57o/o

18.52 5,395.8

1,627.8

5,261.1

477 0

2,104.8

19.75 (134.2) (1,603.0)

88.3 5.31

88.3 21.01

2,239.0

2034

7.50%

2035/2036 6.44%

16.04

5,340.5

1,617.4 5.641.4

504 3

2, 121.7

19.32 (141.5) (1,744.5)

89.8 5.51

89.8 20.61

2,263.2

2035 7.50%

2035/2037

6.32% 17.57

5,287.0

1,607.S 6,029.9

531.7

2, 139.2

16.90 (149.0)

(1.893.4) 91.5

4.65 91.5

20.22

2,288.2

2036 7.50%

203712038

6.20%

17.12

5,233.4 1,596.1 6,428.6

559.4

2,157.5

16.50 (156.5) (2,049.9)

93.3

3.72 93.3 19.84

2,314.0

2037 7 50%

2038/2039

6 09%

16.69 5,179.3

1,586.9

6,838.4 587.4

2,176.3

18.11 (164.2) (2,214.1)

95.1 2.73 95.1

19.49

2,340.5

2038 7.50%

2039/2040

5.98%

t6.26 5, 126.3 1,580.1

7,258.0

615.6

2.195.7 17.73 (172.2)

(2.386.3) 97.1

1.66 97.1

19.12 2,357.9

2039

7.50% 2040/2041

5.88%

12.14

5,075.4 1,097.5

7,686.6

644.1 1,741.6

13.65

(180.2)

(2.566.6)

99. 1

99.1 15.05 1,921.8

2040

7.50% 2041/2042

5.78%

9.16

5,027.9

734.6 8,123.3

672.8 1,407.4

10.70 (188 3)

(2,754.9) 100.4

(0.25i 100.4 12.13

1,595.7

2041 7.50%

2042/2043

5.69%

5.83 4,984.3

302.6 8,568.0

701.7 1,004.3

7.41 (196.5) (2.951.4)

101.2 (0.71) 101.2

B.85 1.200.8

2042 7.50%

2043/2044

5.60%

5.60 4,945.7

m 1

9,020 0

731.0

1.008.1

7.22 51.0 (2,900.4)

101.3

(0.76)

101.3

6.85 957.1

2043 7.50% 2044/2045

5.52%

5.52

4,913.7

271.4 9.477.9

760.5

1,031.9 7.17

72 0

(2,828 4)

101.0

(0.59i 101 0 6.67

959 9

2044 7.50% 2045/2046

5.45%

5.45 4,889.4

266.4 9,941.2

790.3

1,056.7

7.12 104.5 (2 .723.9) 101.0 (0.62)

101.0 6.42 952.1

2045 7.50%

2046/2047

5.38%

5.38 4,874.9

262.3 10,408.0

820.3 1,082.6

7.08 138.0

(2

,585.8)

101.0 (0.64) 1

01

0

6.18

944.6

2046

7.50%

2047/2048

5.32%

5.32 4,871.5

259.2 10,877.5

850.7

1, 109.9

7.05 117.5 (2 .468.3) 101.3 (0.83)

101.3 6.30 992.4

2047

7.50% 2048/2049

5.27%

5.27 4,881.5

257.1 11,347.9

881 4

1,138,5

7.01

93.0

(2375

4)

101.4

(0.89)

101 4 6.44 1,045 5

2048

7.50%

2049/2050

5.22%

5.22

4,907.8

256.2 11,816.8 912 3

1,

168.5

8.99 95.6 (2 279.8) 101.4 (0.96)

iO 4 6 42 1,072.9

2049

7.50% 205012051

5.18%

5.18 4,950.0

256.5 12,284.5

943.6 1.200.1

6.98 91 5

(2188

.3)

101.5

(1

.03)

6.43 1,108.6

2050 7.50%

2051/2052

5.15% 515

5,006 8

257.7 12 753 .3

975 3 1,233.0

6.94

88 .6

(2,099.7)

101.6

(1.10) 1016

644

1,144.4

PUBUC EMPLOYEE

DE 1 4 2 15

RETIREMENT

OMMISSION



PUBLIC EMPLOYEE

DE 2 15

Summary

Table SB

1082, PN 1460

RETIREMENTCOMMISS

Using 30-Year Amortization Financing & Reduced Collar (FY2016-17: 2.25%)

O

Pennsylvania State Employees' Retirement System

Allocation

of

Potential Projected (Savings)/Cost Through FY 2052

Due to Side-By-Side Hybrid Design, Including Changes to Current DB

(Amounts

in

millions)

Benefit Changes

Amendment - 1.00% DB Accrual (Ee 3.00%) for most hires after December 31, 2017

Amendment - DC Plan (Ee 3.25%; Er 2.5%) for most hires after December 31, 2017

Amendment - Prospective Cost Neutral Option 4 for Pre-Act

12

Members

Amendment- Greater of FAS 3 with No

OT

and FAS on Future DB Accruals for

Current DB Members Other Than State Police with 20 or more years of service; FAS

5 for Hybrid

DB

Members


Total Hybrid Plan and

Current

DB Changes: (Savings)/Cost through FY 2052


Financing Changes


Revised Amortization Period for Plan

Changes=

From I 0 to 30 Years

Reduced Contribution Collar (FY2016-17: 2.25%)


Total Hybrid Plan and

Current

DB Changes: (Savings)/Cost through FY 2052

with Both Benefit and Financing Changes

(2,672 .3)

4,986.4

s

(358.4)

{l

1

JOl.4)

654.3

654.3

516.7

(3,446.4)

175.7

(2,754.0)

(2,099.7)

Notes:

Hay Group

The potential (savings)/cost was valued

in

the following order:

1.00% accrual DB design generally effective after December 31, 2017


- DB employee contribution rate: 3.00%

- Elected Officials: Includes change to lower accrual upon election/reelection;

however, current Elected Officials would have one-time oppo11unity to opt in to

their current membership class upon post-2017 reelection

- Does not include impact of changes to FAS 5 in Hybrid DB until later FAS step

DC Plan (Ee 3.25%; Er 2.5%) generally effective after December 31, 2017


Current Member DB changes:

- Prospective

Cost Neutral Option 4 effective after June 30, 2016

- Prospective Greater

of

FAS 3

No

OT and FAS 5 for all except State Police with 20 or

more years of service effective after December 31, 2016

Entry Age Normal Cost Method Changes

Revised Amortization Period for Decrease

in

UAL due to Legislated Plan Changes

- From

1

lo 30 Years

Reduced Employer Contribution

Collar (FY2016- I

7:

2.25%)

lfa

different order

is

used, the cost impact will vary from what is shown above.

12/14/2015



SERS Projected Employer Contributions (Based Upon Final December 31, 2014 Valuation) Under:

Either SB 1082,

PN

1460, A04826 Or SB 1082,

PN

1460, A05049

12/14/2015

~ a c y

DB Plan

Wilh

New Provisions,

lnclud1nil

N ~ w 1.00% Accrual Defined Benefil T>er . Plus New DC Plan (DC/DB) Wi1h Er Conlrib@ 2.

5

; Slate Police, Correction

Officers. and Olher Hazarcous Duly ONLY Remain in Current DB Plan;

No

Fresh S art,

No legacy

Conlr bu1ion/Accrual Rate Changes ; Traditional Entry Age Normal Cost·

Coal c le lsla'Jon A<"ortlzed Over 30 Ye s•s

11 o

Chan e lo Act

120

Cellars ' Baseline

Total

Exp&e:ed 03

Expected FY

Expeeled

Expecled FY

Total

DB+OC/DB

Annual

Cumulaliveroiected

Plan FY

DB

DC/OB

Plan

DC/DB

DB+DC/DB

Contribution

as

(Savings) I

(Savings) I Cos Funded

UAL

Funded

Investment

Fiscal

Floor

DB Pe·C1:nt

Pay101t

Conlribution

FY Pay'Oll Conlributi on Contribu ion a % of

Cosl Reio ve

Relative lo

Ra:io

(Sin

Year

Return

Year

Conl:ibution

Contribu lon

(S In

mmlons) ($in milllons)

(S

In millions) (Si n Millions) ($ 'n m'lhons) OB+DC/DB

Pay

Ra o

Ba eline

Baselin

011

2.iOo/o

201212013

5.10% to Baseline

Baseline

(AV )

billions)

(MV )

Percenl

(S

1n

mnl

i.SO S,890.7 677.4 677.4 11.50

65 3

14 69

57.6

11.50

5

2012

12.00%

2013/2014

5.01o/,

16.00

5,8.36 4.

933.8

.

933.8

16 .00

.

58.7

17 78

58.9

16.00

9

2013

13.60o/,

201412015

5.00%

2050

5,897.6

1,209.0

.

1.209.0

20 50

.

59 2

17.90

52.4

20.50

1,2

2014

6.40%

2015/2016

4.95%

2500

6,021.7

1,505.4

1,505.4

25.

00

.

.

59 4

18.17

51.1

25.00

1,5

2015

7.50%

201612017

9.72%

29 so

6,205.3

1,830.6

1,830.6

29.50

.

65.4

14.43

5i.1

29.50

1,8

016

7 50%

2017/2018

9.57%

l

29 65

6,277.l

1,884.S

117.3

14 2

1,898.7

29 .69

(45.8)

(45.8i

67 2

13.98

67 9

30.41

1.9

2017

7.50%

2018/2019

9.34%

211 .47

6 .233,5

1.842.7

356 ,1

42.2

1,884.9

28.60

(52.2)

(98.i)

69,1

13.47

69.0

29.40

1.9

018

7.50

2019/2020

9.11o/o

27.75

6,173.5

1.827.8

617.1

71

.7

1.899.5

27.97

(57.5)

(155.6)

70.1

13.28

70.2

28.82

1,9

019

7.50%

202012021

8.90%

2695

6.130.2

1 808.8

867.5

98.9

1,907,7

27.26

(62.3)

(217.9j

71 .3

12.93

71.3

28.15 1.9

020

7.50%

2021/2022

8.70%

26

20

s oes

o

1791 .5 1,123.2 125.8 1.917.3

26

.59 (57.1) (285.0) 72.5 12 .68

72.5

27 52

1,9021

7.50

202212023

8.51%

5 ~ 9

6,046.0

1,775.7

1,385.1

152 5

1,928.2

25.95

(72.0)

(357.0)

73.6

12.36

73,5

25.92

2 00

022

7.50%

2023/2024

8.32%

24 ,i&

6,001.4

1.760.5

1,656 4

179.2

1,939.7

25.33

(77.2)

(434.21

74.7

12 .03

74.7

26.3.(

'01

023

7.50%

202412025

8.13

24.12

5,953.3

1,745.4

1,938.0

206.1

1,951.5

24.73

(82.5)

(516.7)

75,8

11.67

75.n

25.78

2 0

024

7.50%

2025/2026

7.95%

23."5

5,902.1

1.730.5

2.229.9

233 1

1,953.6

24

.15

88 1)

(604 ,

9)

76.9

11.28

78.9

25.23

2

05

025

7.50

2026/2027

7.78

2233

5,848 6

1 715.9

?..531.'

250.1

1,976.0

23.56

(94 0)

(698.8)

78.0

10.87

78.0

24.70

2,07

026

7.50

2C27/2028

i.61%

22

21

5,794.6

1,701.9

2,841.0

287.1

1,989.0

23.03

(100.0)

(798.8)

79.2

10.42

79.2

24.19

2,0

027

7.50¥.

2029/2029

7 44%

2161

5,741.4

1,688.5

3.157.6

314.0

2,002.5

22.50

(106.0)

(904.8)

o

4

9 94

80.4

23.69

2 10

028

7.50%

2029/2030

7.29%

21.04

5,687.3

1,675.5

3,483. i

340.8

2,016.3

21.99

(1123)

(1.017

1)

51 6 9.

43

81 6

23

.21

2.12

029

7.50%

2030/2031

7.13%

20.<18

5,631.7

1,882.8

3,818.4

367.8

2.030.6

21.49 (118

7)

(1, 135.8)

62.9

8.87

82.9

22 74

2,

1

030

7.50%

203112032

6.98%

19 93

5,574.5

1.650.4

4, 163.9

394.9

2,045.3

21 .00

(125.4)

~ . 2 6 1 2)

64.2

B28

84 2

22.29

217

2031

7.50'/o

203212033

6.84%

19

"1

5.514.5

1,638.2

4.520.9

422.2

2,060.4

20.53

(132.4)

(1.393 6)

85.5 7.64

5

21 .85

2 19

032

7.50

203312034

6.70%

1e 89

5.453.9

1,626.S

4,887 .6

449.6

2,076.1

20.08

(139 5)

(1

533. 1)

i 0

6.95

87.0

21.42

2.21

033

7.50%

2034/2035

6.57%

1840

5,395.8

1,615.4

5,261 .1

477.0

2,092.4

19,63

(146.6j

(1 .679.8)

88.5

6.21

88 5

21 .

01

2.23

034

7.50%

2035/2036

6.44%

1792

5,340.5

1.605.0

5,641.4

504.3

2,109.3

19 .

21

(153 9)

(1,833.7)

90.0 5 41

90.0

20

2.£6035

7.50

2036/2037

6.32%

17 ,48

5,287.0

1,595.2

6,029.9

531.7

2.126.9

18.79

(161

3)

(1,994 9)

91.7 4 56

91.i

2022

2.2e

2035

7.50%

2037/2038

6.20%

17.

02

5,233.4

1.585.7

6 428.6

559.4

2,145.1

18.39

(168

9)

(2,1&3.6)

93 4

3.64 g3.4

'9 .84

2,31

037

7.50%

203612039

6.09%

~ 6 . . 5 8

5,179,3

1,576.5

6 838.4

587.4

2.163.9

18.01

(176 6)

(2,340 4)

95.3 2 65

95.3 •9

48

2.34

038

7.50

2039/2040

5.98%

16 17 5,126.3

1.567.8

7 258.0

615.6

2,183.4

17,63

(184.5)

(2.524.9)

97.2 1.59

97 2

1912

2 3

039

7.50%

2040/2041

5.88%

•2.04

5,075.4

1,0SS 2

7 686.6

644.1

1,729.3

13.55

(192 5)

(2,717.5)

99.2

0.44

99.2

15.06

1.92

040

7.50

2041/2042

5.78%

906

5,027.9

722 2

8. 123.3 672 8

1,395.0

10.61

(200.7)

(2.918.2) 100,5

(0.31)

100.5

12.13

1,59

2041

7.50%

2042/2043

5.69%

5.74

4,984.3

290.2

8.558.0

701.7

991.9

7.32

(208.9)

(3.'27.1)

101

.3 (0.77)

101

3

ass

1.2

2042

7 50

2043/2044

5.60%

5.60 4,945.7

277.1

9.020 0

731.0

1.008.1

7.

22

51.0

(3,076.1)

1014

(0.83)

1014

6.85

95

2043 7.50% 2044/2045 5.52% 5.52 4,913.7

2714

9.477.9 760.5 1,031.9 7.17 72.0 (3,004.1) 101.0 (0.62) 101.0 5.67 95

2044

7.50% 2045/2046

5.45%

5.45

4,889.4

256 '

9,941 2

790.3

1,056.7

7.12

104.6

(2,899,6)

101.1

(0 66)

101.1

6.42. 95

2045

7.50%

204612047

5.38%

5.38

<1,874.9

26U 10,408.0

820.3

1,082.6

7.08 138.0

(2.751 .5)

101.1 (0.68)

101.1

6.18

94

2046

7.50%

2047/2048

5.32%

5,32

4,871.5

2592 10,877.5

850 7

1,109.9

7.05 117.5

(2.644.0) 101.4

(0.87)

101.4

5.30

99

2047

7.50%

204812049

5.27%

5.27 4,881.5

257.1

11,347.9

88' 4

1,13e.5

7.01

93.0

(2.551 .1)

101.4

(0.94)

101.4 6.44

1,04

2048 7.50%

2049/2050

5.22%

522

4,907 6

256 2

11,816.8

912.3

1, 168.S

6.99

95.6

(2.455.5)

101

,5

(1 .02) 101.5

642

1,07

2049

i 50'

205012051

5.18%

5.18

4,950.0

256.5 12,284.5

943 6

1.200 1

8.98

91 .5

(2.364.0)

101.6 (1.09) 101.6

6.43

1 1

2050

7.50%

2051/2052

5.15%

5.15 5,008.8

257.7

12,753.3

975 3

1,233.0

6.94

88.5 (2 275.4)

101.i

(1.

17)

101.7 6.44 114

PUBLIC EMPLOYEE

DE

1 4 2015

RETIREMENT COMMISSION



summary

Table

- For Either SB 1os2, A04826 Or

SB

1082, AOS049 PUBLIC

M P L o v ~ e

Using

30-Ycar Amorlization Financing &

No Changes to Act 120

Collars i;

Pennsylvania State

Employees'

Reliremcnt

System DEC 4 2

Allocation of Potential

Projected

(Savings)/Cost Through FY 2052

15

Due

to

Side-By-Side Hybrid Design, Including Changes to Current n@ErtREMt NTCQ

(Amounts

in millions)

MMJSSION

Benefit

Changes

Amendment- 1.00% DB Accrual Ee 3.00%) for

most

hires after December 31, 2017

Amendment-

DC Plan

(Ee

3.25%; Er 2.5%) for most hires after December 31, 2017

Amendment-

Prospective Cost Neutral Option

4

for Pre-Act 120 Members

Amendment-

Greater

of

FAS 3 with

No OT

and FAS on Future D Accruals for

Current

DB

Members Other Than State Police with 20 or more years of service; FAS

for Hybrid

DB

Members


Total Hybrid

Plan

and

Current

DB Changes:

(Savings)/Cost through

FY

2052


Financing Changes


Revised Amortization Period for Plan Changes From l 0 to 30 Y cars


Total Hybrid Plan and Current

DB Chimges:

(Savings)/Cost through

FY 2052

with Both Benefit and

Financing Changes

Notes:

The polential (savings)/cost was valued in the following order:

1.00% accrual DB design generally effective after December 31, 2017

(2,672.3)

4,986.4

(358.4)

(1.301.4)

654.3

654.3

516.7

(3,446.4)

(2,929.7)

(2,275.4)

- State Police and most other hazardous duty employees exempt from both new DB and

DC

plans

D employee contribution rate: 3.00

- Elected Officials: Includes change to lower accrual upon election/reelection:

under SB I 082, A04826, current Elected Officia ls would have one-time opportunity to opl

in

to their current membership c lass upon post-20 I 7 reelection; under SB I 082, A05049,

no such opportunity would be available

,_

perc note sb 1082 & 1071, december 2015

Documents