1. Virginia Retirement System Update Virginia Association of School Business Officials Barry C. Faison, Chief Financial Officer October 3, 2014

2. 2 Agenda VRS Overview Investments Modernization & Pension Reform GASB Changes

3. VRS Overview

4. 4 VRS Total Membership Plan 1Plan 2HybridTotal Teachers 100,43842,6551,281144,374 Political Subdivisions 66,08135,2463,487104,814 State Employees 52,35622,8562,94678,158 State Police Officers’ Retirement System (SPORS) 1,513484-1,997 Virginia Law Officers’ Retirement System (VaLORS) 5,5153,877-9,392 Judicial Retirement System (JRS) 31369-382 Total Active Members 226,216105,1877,714339,117 As of August 31, 2014 Total Active Members Retirees/ Beneficiaries Inactive/ Deferred Members VRS Total Population 339,117181,660115,962636,739

5. 5 Active Members As of June 30, 2014 Fiscal Year Totals

6. 6 Retirees As of June 30, 2014 Fiscal Year Totals

7. 7 Benefit Comparison StateTeachersLocal Actives: Average Age48.345.246.3 Average Service12.811.911.1 Average Salary$48,972$48,994$41,287 Retirees: (in FY 2013) Avg. Age @ Retirement63.061.862.1 Avg. Service @ Retirement22.623.319.9 Avg. AFC @ Retirement$53,203$58,358$44,240 Avg. Benefit @ Retirement38.4%39.6%34.7% Avg. Annual Benefit$20,441$23,116$15,367 Avg. Social Security Benefit at Age 62$18,252$17,640$14,640 Information above obtained from the June 30, 2013, Actuarial Valuation.

8. 8 Funds Flow Beginning Balance – July 1, 2013$58.4 Contributions$3.1 Net Investment Income$9.1 Total Additions $12.2 Total Deductions ($4.4) Net Additions$7.8 Ending Balance – June 30, 2014$66.2 Cash Flow (contributions minus deductions) $(1.3) For the Fiscal Year Ended June 30, 2014

9. 9 Net Fiduciary Position Fiscal Year

10. 10 Estimated VRS Employer Contribution Rates Estimated Contribution Rates by Fiscal Year 2013-142015 & 20162017 & 20182019 & 2020 State8.76%12.33%12.04%11.96% Teachers11.66%14.50%14.58%15.00% Added cost to achieve the 2015/2016 contribution rate increases is approximately $315.0 million for the biennium in General Funds. Fiscal Year 2014 investment return was 15.7%. Above contribution rates are net of employee contributions. General Assembly committed to phase-in contribution rates for the teacher and state plans to the VRS board-certified rates as follows: July 1, 2012July 1, 2014July 1, 2016July 1, 2018 State67.02%78.02%89.01%100% Teachers69.53%79.69%89.84%100%

11. Investments

12. 12 VRS Fiscal Year Returns Fiscal Year

13. 13 Fund Performance VRS Return (As of June 30, 2014) 1-year15.7% 3-year9.5% 5-year12.3% 10-year7.4% 15-year6.1% 20-year8.8% 25-year8.7%

14. 14 VRS Investment Allocation as of June 30, 2014 (Dollar Amounts in Billions / Percent of Total Fund)

15. 15 Funded Status: Teachers Assumptions: Fiscal Year 2014 investment return was 15.7%. Other projected years’ investment returns assume 7.0% with 2.5% inflation rate. Assets estimated at actuarial value of assets (five-year smoothing). Projected Funded Status using Market Value of Assets (New GASB Standard) Projected Funded Status using Actuarial Value of Assets (Funding Standard) New GASB Accounting Rules will compute funded status using Market Value of Assets effective 6/30/14 for Plan Reporting and 6/30/15 for Employer Reporting.

16. Modernizationand Pension Reform

17. 17 Modernization to Date New CapabilityOutcome Measure myVRS Navigator (Employer) 99.8% availability for FYE 2014 Over 97% of employers confirm by end of month due; no further processing required New data/better data being collected Data Center (Henrico County, VA) 100% availability Disaster Recovery Data Center (Raleigh, NC) 100% availability Hardware Replacement Approximately 300 virtual servers and nearly 200 terabytes of mass storage Cisco VOIP Phone System 100% availability Imaging and Content Management System 100% of workflow documents imaged within one day Security Management System 99% reduction in false positive alerts Automatically drop 200 – 600 suspicious connections monthly

18. 18 Phase 3 Changes Replaced the participant record-keeping system Redesigned member records Added job names with associated benefit attributes Captured unique employee benefit profiles Replaced contribution reporting/payment processes Direct access to member data for updates “Snapshot” process to validate changes and reconcile data Confirmation process tied to contribution payments Electronic payments instead of checks/lockbox Provided Employer Portal Expanded access for employer to data at VRS

19. 19 Pension Reform Changes Implemented Hybrid Retirement Plan Modified myVRS Navigator to account for defined contributions Added interface with ICMA-RC for data exchange of Hybrid member account activity Implemented process for apportioning member and employer contributions between DB and DC components FY 2015 Pension Reform Activity Developed a Plan Determination tool for employers Modify myVRS Navigator for VLDP Develop process for reporting and payment of employer contributions for LTD employees in VLDP or opt-out plans Begin work on PPS modifications for Hybrid employees

20. 20 Phase 4 Objectives Eliminate legacy mainframe system (RIMS) Eliminate need for staff to use two systems Eliminate VITA mainframe charges Achieve benefits inherent in myVRS Navigator Implement online customer portal for members and retirees New transactional self-service capabilities

21. 21 Phase 4 Business Functions Refunds Long-Term Care Benefit Calculations and Retirement Processing Health Insurance and Health Insurance Credit Disability Tracking Payroll and Tax Processing Benefit Account Maintenance Purchase of Prior Service (PPS) VLDP and VSDP Other (actuarial reports, locator services, death matches)

22. 22 Customer Portal Replaces all existing inquiry capabilities Members: employment and salary history, open requests, annual statements, etc. Retirees: summary of benefits payments, tax statements, life insurance reduction schedule, etc. Adds new transactional capabilities Enhanced authentication and authorization Simulate benefits Request refund Change VRS beneficiaries Retire online

23. 23 Approach VRS-managed with continuous business owner engagement “Replace” RIMS but position VRS and myVRS Navigator for future improvements Assign the right staff and carefully selected vendors NeoSpin Framework Upgrade – Rules engine proof of concept Must be managed in concert with several other significant projects – Virginia is replacing the statewide accounting system (the Cardinal Project) Work begins now for a 2016 implementation – VRS is currently competing the VSDP/VLDP third-party provider contract

24. 24 Phase 4 – Release Plan Phase 4 Release Plan Release 1Release 2Release 3Release 4 July 2015 Current State Analysis Self-Service Study Refunds November 2015 Benefit Calculation Engine Member Portal 1 September 2016 Benefit Account Maintenance Retirements and Health Insurance Member Portal 2 October 2017 Payroll and Tax Processing Disability Tracking, LTC, VSDP and VLDP Retiree Portal Member Portal 1: Authentication, DB and DC Estimates, Online Refunds Member Portal 2: Online Retirements, VRS Beneficiary Changes Member Portal 3: Retiree Functionality

25. GASB Changes

26. 26 GASB Changes  Working with VRS Actuary on required data for new Plan and employer presentations  Working with APA on additional audit steps necessary to support Pension Liability calculations  Working with employers and their auditors to meet their needs for member demographic data  Working with VRS Actuary and employers to develop all information necessary for Local Government financials  Target dates:  June 30, 2014 for VRS financials  June 30, 2015 for local government financials

27. Questions?