1. South Carolina Retirement Systems Update October 2011 SC Budget and Control Board South Carolina Retirement Systems 1

2. Plan Governance SC Budget and Control Board functions as fiduciaries/trustees of the plan The Retirement Systems is a division of the SC Budget and Control Board Assets are managed by the SC Retirement System Investment Commission, which was established in 2005 and immediately began fund diversification to allow for higher investment returns Trust pays all expenses of maintaining the plan Title 9 of the SC Code of Laws governs most plan provisions 2

3. About the Retirement Systems Five defined benefit retirement plans South Carolina Retirement System (SCRS) Police Officers Retirement System (PORS) General Assembly Retirement System (GARS) Judges and Solicitors Retirement System (JSRS) National Guard Retirement System (NGRS) One defined contribution retirement plan More than 458,000 members Approximately 850 participating employers 3

4. Who Participates in the Plans SCRS is largest plan with more than 190,000 active members, 106,000 annuitants, and 157,000 inactive members. PORS is second largest plan with more than 26,000 active members, 12,000 annuitants, and 12,000 inactive members. Member data as of June 30, 2010, actuarial valuation. 4

5. Participating Employers Participating employers include: State government Public school districts Higher education institutions Local/political subdivisions of government Quasi-governmental organizations 5

6. Employer Contribution Sources 6

7. Benefit Formulas SCRS Benefit Formula – Years of service multiplied by average final compensation multiplied by 1.82 percent benefit multiplier – Example (28 years x $50,000) x 1.82% = $25,480 (annual retirement benefit) PORS Benefit Formula – Years of service multiplied by average final compensation multiplied by 2.14 percent benefit multiplier – Example (25 years x $50,000) x 2.14% = $26,750 (annual retirement benefit) 7

8. Benefit Eligibility Vesting Period – Member must have five years of earned service to be eligible to apply for benefits Retirement Age (for unreduced benefits) SCRS – Age 65 with at least five years of earned service or at any age with 28 years of service PORS – Age 55 with at least five years of earned service or at any age with 25 years of service 8

9. SCRS and SS Disability Plans’ Disability Protection Occupational disability – Member may apply for disability retirement if he becomes physically or mentally incapable of performing the regular duties of his job and the disability is likely to be permanent (occupational disability). Must have at least 5 years of earned service Social Security Disability Total and permanent disability – Person must prove that disability has lasted at least 12 months and prevents them from performing any substantial gainful activity Must also have enough work credits to qualify for payments 9

10. Cost-of-living adjustments (COLAs) For both SCRS and PORS members, the plans award automatic cost-of-living adjustments (COLAs) based on Consumer Price Index for Wage Earners and Clerical Workers (CPI-W) up to 2 percent No COLA awarded if CPI-W is negative 10

11. Actuarial Accrued Liability Calculation 11 First - Project all future benefit payments due.Second - Discount the projected benefits to present value. Finally - Allocate the present value of benefit payments to past and future service periods. The part attributable to prior service is the actuarially accrued liability.

12. Actuarial Accrued Liability Calculation $23 billion (attributable to members already retired) +$16 billion (attributable to active members) $39 billion (total actuarial accrued liability) 12

13. Unfunded Liability – SCRS Market Value basis – Calculated as total actuarial accrued liability ($38.774 billion at FYE2010) less market value of assets ($19.681 billion at FYE2010) = $19.093 billion Actuarial Value of Assets Basis – Actuarial accrued liability ($38.774 billion) – Actuarial value of assets ($25.400 billion) equals $13.4 billion. This number is the Unfunded Actuarial Accrued liability or UAAL. 13

14. Unfunded Liability – PORS Market Value basis – Calculated as total actuarial accrued liability ($4.850 billion at FYE2010) less market value of assets ($2.851 billion at FYE2010) = $1.999 billion Actuarial Value of asset basis – Total Actuarial Accrued Liability ($4.850 billion) less actuarial value of assets ($3.613 billion) = $1.238 billion. Again, This is commonly called the UAAL. 14

15. Funded Ratio The funded ratio of a pension plan is the: Actuarial Value of Assets Actuarial Accrued Liability 15

16. Funded Ratio of SCRS and PORS As of the 2010 actuarial valuation the funded ratio of the SCRS system is: 65.5 percent The funded ratio of PORS is 74.5 percent It is generally considered that 80 percent is a healthy funded ratio As of 2009, 31 of the 50 statewide plans were under 80 percent funded 16

17. Amortization Period Amortization period is the period of time it will take to pay down the UAAL GASB requires that the amortization period be 30 years or less Without additional contribution increases or plan changes the SCRS plan will have a 37.6 year amortization period while PORS will be at 32.8 years as of July 1, 2010 valuations. 17

18. How the Plans Are Funded Employee and employer contributions are significant sources of income to the state’s retirement plans. Employee Contribution: 6.5 percent Employer Contributions (FY 2011):  SCRS - 9.385 percent  PORS - 11.363 percent Investment income, however, is the largest component of our plans’ funding over time. 18

19. How the Plans Are Funded 19

20. 20 Additions to Pension Trust Funds

21. Major Factors in Current Situation COLAs granted that weren’t adequately funded Investment earnings less than assumed Demographic changes Benefit enhancements 21

22. Where We Are Today – SCRS 22 $ in millions

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25. SCRS Net Unfunded Liability on a Market Value Basis 25 Annual Change in UAAL by Source Fiscal Year Ended June 30199920002001200220032004200520062007200820092010 Non-COLA Benefits $ - $ 1,810 $ - $ 257 $ - COLA Improvements 182 - 353 149 278 209 2,632 457 267 2,842 (412) - Investment Gain/Loss - Recognized (130) (30) 25 215 120 228 107 190 (296) (63) 854 1,213 Liability Experience (192) 281 194 115 273 (274) 177 372 287 462 324 (176) Assumption Changes (638) - - - 399 690 239 (176) (48) (2,663) - - Other (50) (110) (26) (6) (17) 61 65 290 161 237 370 Annual Change in UAAL $ (828) $ 1,951 $ 546 $ 473 $ 1,053 $ 914 $ 3,477 $ 1,133 $ 500 $ 739 $ 1,003 $ 1,407 Cumulative Change in UAAL by Source Fiscal Year Ended June 30199920002001200220032004200520062007200820092010 UAAL Beginning Balance June 30, 1998 (MVA) $ 1,006 Non-COLA Benefits - 1,810 2,067 COLA Benefits 182 535 684 962 1,171 3,803 4,260 4,527 7,369 6,957 Investment Gains/Losses - Recognized (130) (160) (135) 80 200 428 535 725 429 366 1,220 2,433 Liability Experience (192) 89 283 398 671 397 574 946 1,233 1,695 2,019 1,843 Assumption Changes (638) (239) 451 690 514 466 (2,197) Other (50) (160) (186) (192) (209) (148) (83) 207 497 658 895 1,265 Cumulative Change in UAAL (828) 1,123 1,669 2,142 3,195 4,109 7,586 8,719 9,219 9,958 10,961 12,368 UAAL Ending Balance June 30 (AVA) 178 2,129 2,675 3,148 4,201 5,115 8,592 9,725 10,225 10,964 11,967 13,374 Investment Gains/Losses - Deferred (519) (101) (99) 859 532 13 (78) 160 (871) 1,576 7,459 5,719 UAAL Ending Balance June 30 (MVA) $ (341) $ 2,028 $ 2,576 $ 4,007 $ 4,733 $ 5,128 $ 8,514 $ 9,885 $ 9,354 $ 12,540 $ 19,426 $ 19,093

26. Where We Are Today – PORS 26 $ in millions

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29. PORS Net Unfunded Liability on a Market Value Basis 29 Annual Change in UAAL by Source Fiscal Year Ended June 30199920002001200220032004200520062007200820092010 Non-COLA Benefits $ - COLA Improvements 21 - 32 13 27 20 49 57 43 684 - - Investment Gain/Loss - Recognized (12) - - 29 13 68 15 28 (30) 5 123 167 Liability Experience (1) 41 15 14 (51) 32 (28) 55 31 16 (23) (45) Assumption Changes 4 - - - 69 26 - - - (315) - - Other (8) (5) (1) (12) (5) (9) (4) 26 34 Annual Change in UAAL $ 4 $ 33 $ 39 $ 51 $ 57 $ 134 $ 31 $ 131 $ 40 $ 386 $ 126 $ 156 Cumulative Change in UAAL by Source Fiscal Year Ended June 30199920002001200220032004200520062007200820092010 UAAL Beginning Balance June 30, 1998 (MVA) $ 49 Non-COLA Benefits - - - - - - - - - - - - COLA Benefits 21 53 66 93 113 162 219 262 946 Investment Gains/Losses - Recognized (12) 17 30 98 113 141 111 116 239 406 Liability Experience (1) 40 55 69 18 50 22 77 108 124 101 56 Assumption Changes 4 4 4 4 73 99 (216) Other (8) (16) (24) (29) (30) (42) (47) (56) (60) (64) (38) (4) Cumulative Change in UAAL 4 37 76 127 184 318 349 480 520 906 1,032 1,188 UAAL Ending Balance June 30 (AVA) 53 86 125 176 233 367 398 529 569 955 1,081 1,237 Investment Gains/Losses - Deferred (46) (1) 0 115 50 (2) 1 39 (85) 225 999 761 UAAL Ending Balance June 30 (MVA) $ 7 $ 85 $ 125 $ 291 $ 283 $ 365 $ 399 $ 568 $ 484 $ 1,180 $ 2,080 $ 1,998

30. Current COLA Legislation In 2008, the General Assembly enacted legislation based on the recommendations of the State Treasurer’s COLA Task Force. The legislation included: Increased the assumed rate of investment return to 8 percent from 7.25 percent. Increased the annual automatic COLA from 1 percent to the increase in the Consumer Price Index for Wage Earners and Clerical Workers (CPI-W) up to 2 percent. Restricted ad hoc COLAs beyond the 2 percent based on all of the conditions listed on the next slide being met. 30

31. Current Requirements for Ad Hoc COLAs The amortization period for the prior year’s unfunded liability is at 25 years or below; and The estimated funded ratio in the current year, after the granting of an additional ad hoc COLA, does not decrease; and The estimated amortization period in the current year, after granting the additional ad hoc COLA, is still reduced by at least one year; and No increase in employer contribution is required to support the granting of the additional ad hoc COLA. 31

32. Investment Earnings Assumed rate of return on investments = 8 percent FY 2011 = 18.59 percent FY 2010 = 14.62 percent FY 2009 = (19.60 percent) 10 year average return = 3.90 percent 20 year average return = 6.42 percent As of 2010 valuation $5.8 of deferred losses 32

33. SCRS Ratio of Active Members to Annuitants 33

34. SCRS Ratio of Active Members to Annuitants 34

35. SCRS Ratio of Contributions Made to Benefits Paid 35 Note: Contributions for TERI participants, working retirees and ORP participants are included in contribution amounts

36. Changes in Life Expectancy 36

37. Possible Ways to Improve Funding Increase employee contributions Increase employer contributions Increase investment earnings Reduce benefits/plan changes Appropriate additional funds 37

38. Assumed Rate of Return The assumed rate of return is used to estimate the future value of assets But, it is also used as the discount factor to determine the present value of future benefit payments So, any change in the assumed rate of return materially changes the funding of the plan Setting the assumed rate is really an exercise of setting the amount of risk the plan will accept 38

39. Change in Assumed Rate and COLAs Should the Budget and Control Board accept the actuary’s recommended assumption changes and reduce the assumed rate of return below 8 percent, the current laws providing for 2 percent automatic COLAs in PORS and SCRS would be automatically repealed and result in the reversion of the COLA laws in the statute in effect immediately prior to the passage of Act 311 of 2008. The respective COLA provisions for SCRS and PORS upon reversion will be as follows: 1) Section 9-1-1810 (SCRS) will provide for a 1 percent automatic COLA with the possibility of an ad hoc COLA up to the CPI (4 percent cap) if the increase would not result in extending the amortization period beyond 30 years, and; 2) Section 9-11-310 (PORS) will not provide for an automatic COLA, but for an ad hoc COLA of up to the increase in the CPI (4 percent cap) as long as the increase does not require an increase in the employer contribution rate. 39

40. The Future House and Senate Subcommittees are conducting meetings concerning the plans administered by the Retirement Systems Likely that legislation will be proposed to modify the plans 40

41. Possible Modifications Change COLA provisions Change retirement eligibility Actuarial cost for service purchase Longer average final compensation period Longer vesting period Eliminate TERI/RTW provisions Other benefit provision changes 41

42. Additional Future Issues - GASB GASB issued two Exposure Drafts (EDs) this July If implemented, these EDs will amend GASB Statements 25 and 27 Statement 25 deals with the financial statements of pension plans Statement 27 deals with financial statements of covered employers 42

43. GASB EDs Exposure drafts are generally the last public documents issued before the final statements Comment due on the EDs were originally due back to the GASB by Sept 30, but were extended until October 14th 43

44. Retirement Systems’ Involvement Retirement Systems commented on the Preliminary Views Document issued by GASB in 2010 We are one of 25 pension plans and employers that volunteered to participate in GASB’s Pension Field Test for the EDs We have reported the results of our Field Test experience and have also submitted a comment letter on the EDs to GASB 44

45. Current Pension Accounting The Retirement Systems is a cost-sharing multiple employer plan Currently, employers show a pension expense of the annual required contribution amount on their financial statements Current pension liability of the employer is zero unless they fail to make the required contribution Actuarially Accrued Liability is reported in notes of the Retirement Systems’ financial statements 45

46. What will the EDs change? Require employers to recognize a portion of the Unfunded Pension Liability on their balance sheet Require the pension fund to use market value of assets in calculating net pension liability Change the measure of pension expense Totally disconnect the accounting for pensions from the funding of pensions Add additional note disclosures and RSI 46

47. Reason for Change GASB decided that the employment exchange between an employee and the employer creates a future obligation for retirement benefits To the extent the pension plan has an unfunded liability GASB has determined this should be a liability of the employer 47

48. Unknowns about this Approach Is it really a liability? GASB defines liability as a “present obligation to sacrifice resources that a government has little or no ability to avoid” To be recognized in the financial statements it must also be measureable with sufficient reliability 48

49. Whose Liability is it??? SECTION 9-1-1690. Credit of State is not pledged for payments; rights in case of termination of System or discontinuance of contributions. All agreements or contracts with members of the System pursuant to any of the provisions of this chapter shall be deemed solely obligations of the Retirement System and the full faith and credit of this State and of its departments, institutions and political subdivisions and of any other employer is not, and shall not be, pledged or obligated beyond the amounts which may be hereafter annually appropriated by such employers in the annual appropriations act, county appropriation acts and other periodic appropriations for the purposes of this chapter. In case of termination of the System, or in the event of discontinuance of contributions thereunder, the rights of all members of the System to benefits accrued to the date of such termination or discontinuance of contributions, to the extent then funded, are nonforfeitable. 49

50. How is the liability allocated? GASB ED 27 paragraph 46 “ The proportion used to calculate the employer’s share of the collective totals should be a measure of the employer’s projected long-term contribution effort to the pension plan as compared to the total of all projected contributions of the employer.” What does this mean? 50

51. Employer’s Proportionate Share We are using the current annual covered payroll of the employer divided by the total covered payroll of all employers to determine an allocation percentage We then multiply the allocation percentage by the total net pension liability to determine the amount of NPL to attribute to that employer 51

52. Proportionate Share Example Employer has covered payroll of $5 million Total covered payroll of all SCRS employers equals $7.8 billion ($5m/$7.8b) X $19.1b equals: $12.2 million net pension liability to be recognized by employer 52

53. What does this mean for employers? Such a large liability may distort the employer’s financial statements Most, if not all, will appear insolvent May be difficult to explain to governing boards and taxpayers Will most likely increase audit costs Extreme volatility will result in both their proportionate share of NPL and pension expense 53

54. What it Means to the SC Retirement Systems We will need to provide information on proportionate share of NPL, pension expense, notes and RSI to each employer This needs to be done as of each employer’s FYE This requires us to obtain MV of assets and roll forward the pension liability for each FYE Will make the defined benefit plans appear much more expensive 54

55. There Is Still Hope The SC Retirement Systems, as well as numerous other plans and employers, have commented to GASB GASB is holding public hearings this month It is possible GASB may make changes or delay implementation If not, the new standards will be effective for FY beginning after June 15, 2013 55

56. Questions? Contact Info Travis Turner, CPA, CISA Deputy Director South Carolina Retirement Systems Phone 803-737-7751 email: tturner@retirement.sc.gov 56

57. Retirement Systems Overview Key Terms Annuitant – person receiving a monthly benefit Covered Employer – organization that participates in the retirement plans Active Member – employee currently working for and making retirement contributions through a covered employer Inactive Member – employee for whom regular retirement contributions have not been received for at least one fiscal year Employer Contribution Rate – the percentage of payroll that a covered employer contributes to the retirement plans Employee Contribution Rate – the percentage of earnable compensation an employee contributes to his respective retirement plan 57

58. Retirement Systems Overview Key Terms 30-Year Amortization Period – maximum number of years over which a retirement plan’s unfunded liability may be amortized Funded Ratio – the ratio of a retirement plan’s assets to liabilities Unfunded Actuarial Liability – excess of actuarial accrued liability over the actuarial value of a retirement plan’s assets Employer Normal Cost – employer's portion of total normal cost of benefits earned by active members during current fiscal year COLA – cost-of-living adjustment Investment Assumption Rate – the rate of investment return a plan expects to earn in a given year Smoothing Concept – the spreading over a period of years of a plan’s investment gains and losses to lessen volatility in rates 58

59. THE LANGUAGE USED IN THIS PRESENTATION DOES NOT CREATE ANY CONTRACTUAL RIGHTS OR ENTITLEMENTS AND DOES NOT CREATE A CONTRACT BETWEEN THE MEMBER AND THE SOUTH CAROLINA RETIREMENT SYSTEMS. THE SOUTH CAROLINA RETIREMENT SYSTEMS RESERVES THE RIGHT TO REVISE THE CONTENT OF THIS PRESENTATION. This presentation is meant to serve as a guide but does not constitute a binding representation of the South Carolina Retirement Systems. The statutes governing the South Carolina Retirement Systems are found in Title 9 of the South Carolina Code of Laws, and should there be any conflict between this presentation and the statutes or Retirement Systems’ policies, the statutes and policies will prevail. Employers covered by the South Carolina Retirement Systems are not agents of the Retirement Systems. Disclaimer 59