1. Wisconsin Retirement System 2000-2002 Experience Study Gabriel, Roeder, Smith & Company December 11, 2003

2. 2 Introduction Each year the actuarial liabilities of WRS are valued. Each year the actuarial liabilities of WRS are valued. In the valuation, assumptions are made regarding the future experience of the system with regard to various risk areas… In the valuation, assumptions are made regarding the future experience of the system with regard to various risk areas…

3. 3 Risk Areas Active members Active members Rates of withdrawal Rates of disability Patterns of salary increases Rates of retirement Rates of mortality

4. 4 Risk Areas (Continued) Retirees Retirees -Rates of mortality - normal -Rates of mortality - disabled lives Economic Economic -Rates of investment return -Inflation Statutes provide for an in-depth study of assumptions every 3 years.

5. 5 Assumptions should be carefully chosen and continually monitored. Continued use of outdated assumptions can lead to... Introduction

6. 6 Understated costs resulting in either an inability to pay benefits when due, or sharp increases in required contributions at some point in the future. Understated costs resulting in either an inability to pay benefits when due, or sharp increases in required contributions at some point in the future. Introduction

7. 7 Overstated costs resulting in either benefit levels that are kept below the level that could be supported by the computed rate, or Overstated costs resulting in either benefit levels that are kept below the level that could be supported by the computed rate, or An unnecessarily large burden on the current generation of members, employers and taxpayers. An unnecessarily large burden on the current generation of members, employers and taxpayers. Introduction

8. 8 A single set of assumptions will not be suitable indefinitely. A single set of assumptions will not be suitable indefinitely. Things change, and our understanding of things (whether or not they are changing) also changes. Things change, and our understanding of things (whether or not they are changing) also changes. Introduction

9. 9 In recognition of this, assumptions are periodically studied in depth. In recognition of this, assumptions are periodically studied in depth. Assumptions are then adjusted to reflect experience trends -- but not random year to year fluctuations. Assumptions are then adjusted to reflect experience trends -- but not random year to year fluctuations. Introduction

10. 10 Basics of an Experience Study Decrements relate to things that happen to people. Decrements relate to things that happen to people. Start by counting people (easy, right?). Start by counting people (easy, right?). Divide number who actually decremented by number eligible to decrement to get the crude rate. Divide number who actually decremented by number eligible to decrement to get the crude rate.

11. 11 Basics of an Experience Study Examine crude rates for consistency with known human behavior patterns, prior observation, etc. Examine crude rates for consistency with known human behavior patterns, prior observation, etc. Assign a credibility factor to the crude rates based upon the group size and upon whatever external factors may have biased the observations. Assign a credibility factor to the crude rates based upon the group size and upon whatever external factors may have biased the observations.

12. 12 Basics of an Experience Study Develop trial rates, which are a weighted average of crude rates, and prior assumptions, where the weight is the credibility factor. Develop trial rates, which are a weighted average of crude rates, and prior assumptions, where the weight is the credibility factor. Smooth the trial rates and test for reasonableness and consistency with WRS data and other known data sources. Smooth the trial rates and test for reasonableness and consistency with WRS data and other known data sources.

13. 13 Credibility Factors Credibility factors in this study ranged from under 10% to over 90% Credibility factors in this study ranged from under 10% to over 90% Most factors were between 50% and 90% Most factors were between 50% and 90%

14. 14 2000 – 2002 Experience Study Larger sample size - - 60% - 90% credibility factor was often applied to the 2000 – 2002 findings Smaller sample size -50 -50% - 60% credibility factor was typically applied to the 2000 – 2002 findings More on Credibility

15. 15 Understanding Impact of Changes

16. 16 Summary of Decrement Experience Withdrawal - - General - - Less than 5 – Decreased for Males, Increased for Females - - More than 5 – Approximately same - - Schools - - Less than 5 – Increased for Public Schools, Decreased for University - - More than 5 – Approximately same for Public Schools, Decreased for University - - Protective - - Less than 5 – Decreased - - More than 5 –Approximately same - - Executive & Elected - - Less than 5 – Increased - - More than 5 – Decreased

17. 17 Disability - - Varies by group Retirement Normal Early - - General Decreased Decreased - - Schools Increased Increased - - ProtectiveDecreased N/A - - Executive & Elect.Decreased Decreased Mortality - - Males – Decreased - - Females – Approximately the same Summary of Decrement Experience

18. 18 Male General Participants Comparison of Aggregate Withdrawal Rates

19. 19 Female General Participants Comparison of Aggregate Withdrawal Rates

20. 20 Male General Withdrawal Experience Up to 5 Years of Service at Assumed Termination

21. 21 Male General Withdrawal Experience More than 5 Years of Service at Assumed Termination

22. 22 Male General Participants Rates of Withdrawal with Less than 5 Years of Service

23. 23 Male General Participants Rates of Withdrawal with 5 or More Years of Service

24. 24 Female General Participants Rates of Withdrawal with Less than 5 Years of Service

25. 25 Female General Participants Rates of Withdrawal with 5 or More Years of Service

26. 26 Male General Participants Rates of Normal Retirement

27. 27 Male General Participants Rates of Early Retirement

28. 28 Female General Participants Rates of Normal Retirement

29. 29 Female General Participants Rates of Early Retirement

30. 30 General Members - Merit and Longevity Pay Increase Assumptions Gross Salary Increases - Correlation by Age

31. 31 Gross Salary Increases - Correlation by Service General Members - Merit and Longevity Pay Increase Assumptions

32. 32 General Members - Merit and Longevity Pay Increase Assumptions

33. 33 Summary of Withdrawal Experience

34. 34 # Actual figures based on Adjusted Experience. Summary of Disability Experience

35. 35 Summary of Early Retirement Experience

36. 36 * Includes Early Retirements. ** Figures shown are for people below age 70. Summary of Normal Retirement Experience

37. 37 Summary of Mortality Experience

38. 38 Male Retired Life Mortality Study Normal Retirement, Original Annuitants Only

39. 39 Female Retired Life Mortality Study Normal Retirement, Original Annuitants Only

40. Economic Assumptions

41. 41 Historical Patterns of Investment Return, Pay Increases and Inflation * Includes Early Retirements. ** Figures shown are for people below age 70. # Actual figures based on Adjusted Experience.

42. 42 Historical Patterns of Investment Return, Pay Increases and Inflation * Includes Early Retirements. ** Figures shown are for people below age 70. # Actual figures based on Adjusted Experience.

43. 43 Historical Patterns of Investment Return, Pay Increases and Inflation

44. 44 Wage Inflation The present assumptions is 4.5%. The present assumptions is 4.5%. WRS has averaged 4.1% a year. WRS has averaged 4.1% a year. Longer term national averages are higher due to excess inflation during the 1970s. Longer term national averages are higher due to excess inflation during the 1970s. Recommendation: 4.1% Recommendation: 4.1%

45. 45 Real Investment Return The present assumption is 3.5%. The present assumption is 3.5%. Markets have produced net real returns for balanced funds in the 4.3% area since 1960. Markets have produced net real returns for balanced funds in the 4.3% area since 1960. A larger real return assumption would also be in line with contemporary practice among large public systems. A larger real return assumption would also be in line with contemporary practice among large public systems. Recommendation: 3.7% Recommendation: 3.7%

46. 46 Economic Assumptions Nominal Investment Return is the sum of the inflation base plus the net real return. Nominal Investment Return is the sum of the inflation base plus the net real return. Current assumption is 8.0%. Current assumption is 8.0%. Recommendation: 7.8% Recommendation: 7.8%

47. 47 Hypothetical Valuation Results December 31, 2002

48. 48 Hypothetical Valuation Results December 31, 2002

49. 49 Implementation Schedule Active and Inactive Lives Valuation: 12/31/2003 Retired Lives Valuation: 12/31/2003 Option Factors: 10/01/2004