Effective Benefit Management and Allocation of SDRS Resources

1. South Dakota Retirement System Effective Benefit Management and Allocation of SDRS Resources September 5-6, 2012

2. Minimum SDRS Sustainability Equation

3. Ideal SDRS Sustainability Equation

4. Unsustainable Equation

5. The SDRS Sustainability Equation Contributions+ Investment Return = Benefits + Expenses • Historically in balance except for 2009-2010; Board recommended corrective actions • SDRS has frequently met ideal standard with healthy Cushion • Currently, SDRS expected to be slightly out of balance due to: • Board adopted assumption changes • Expected smaller future Investment Return and less Income • Relatively small Cushion • Fixed contributions and commitment to manage SDRS within current resources • Review of Benefits one option to restore balance

6. July 1, 2011 Funding Requirements Amortization and Interest 0.98% Expense .25% Normal Cost 11.25% Funding Policy Contribution Rate: 12.48% of Pay Total Anticipated Contribution Rate: 12.48% of Pay

7. Relative Cost of SDRS BenefitsCurrent Benefit Design and Assumptions

8. First Step in Benefit Review Identify: • Subsidies • Inequities • Inefficiencies • Higher costs than anticipated • Above/below competitive practices • Conflicts with good public policy and/or HR objectives

9. Subsidies? Board Review of the Following Potential Subsidies • Special Early Retirement • Early Retirement • Benefits for: • Married members • Large families • Young spouses • Class A/Class B • Alternate Formula • Retire/rehire • Pre-retirement Survivor and Disability Benefits .

10. Benefit Inequities? Board Review of the Following Potential Inequities • Higher benefits for married members and large families • Class A/Class B • Alternate Formula • Retire/Rehire • Final Average Pay (salary spiking) .

11. Benefit Inefficiencies? Board Review of the Following Potential Inefficiencies • Pre-retirement Survivor Benefits • Pre-retirement Disability Benefits • COLA in excess of CPI .

12. Higher Costs than Anticipated? Board Review of the Following Potential Areas of Higher Costs than Anticipated • Retire/Rehire • Final Average Pay • Alternate Formula • Class A/Class B • Lifetime benefits due to improving life expectancy .

13. Benefits Above/Below Competitive Practices

14. Conflicts with Good Public Policy and/or Human Resource Objectives? Board Review of the Following Potential Conflicts with Good Public Policy and/or Human Resource Objectives • Normal Retirement eligibility • Early Retirement incentives • COLA that exceeds inflation • Total Survivor and Disability Benefits that exceed 100% of pay • PRO benefits for non-vested members • Alternate Formula .

15. Other Issues: Varying Benefits with Funded Status or Economic Measures Why? SDRS costs would automatically reduce in bad times and increase in good times • Current examples: • COLA is indexed to Funded Status and partially to CPI • Interest on accumulated contributions indexed to T-Bill rate • Possible additional applications • Performance Account for additional benefit improvements • Index retirement age to improved life expectancy • Introduce DC component to SDRS plan design with smaller DB component

16. What Next? • Define the amounts needed to maintain actuarial balance • Determine what subsidies, inequities, inefficiencies, higher costs, and above competitive practices exist and significance • Analyze and prioritize • Consider legislative changes for 2013 Legislation