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Interest Crediting Policy Review

P. Interest Crediting Policy Review. October 6, 2005. Outline. Basic Concepts and Terminology Reviewing Current Policy Objectives General Concepts Adoption & Amendments Mechanism Review. Crediting Interest.

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Interest Crediting Policy Review

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  1. P Interest Crediting Policy Review October 6, 2005

  2. Outline • Basic Concepts and Terminology • Reviewing Current Policy • Objectives • General Concepts • Adoption & Amendments • Mechanism • Review

  3. Crediting Interest • 31591 (a) Regular interest shall be credited semiannually on June 30th and December 31st to all contributions in the retirement fund which have been on deposit for six months immediately prior to that date. …

  4. Interest Crediting Policy • How much gets credited? • Which reserves get credited? • In what order? • Is it different if there is lots of money? • Is it different if there is little money? No money? Losses?

  5. Reserves • What they are • How they work

  6. FCERA Reserves • Basic Valuation Reserves • Member Accumulated Contributions • Employer Contributions • Cost of Living Reserves • Member Accumulated Contributions • Employer Contributions • Settlement Reserves • Member Accumulated Contributions • Employer Contributions • Non-Valuation Reserves • Contingency Reserve • Nonvested Retiree Health • Purchasing Power COLA • Undistributed Earnings

  7. Rough Balances – 6/30/2004 • Member Contributions • Basic $ 167.4 • COL $ 36.2 • Settlement $ 10.3 • Total $ 214.0

  8. Rough Balances – 6/30/2004 • Other Valuation Reserves • Basic $ 1,112.6 • COL $ 453.7 • Settlement $ 463.7 • Total $ 2,030.0

  9. Rough Balances – 6/30/2004 • Non Valuation Reserves • Contingency ($ 55.1) • Purch Pwr COLA $ 2.2 • Nonvested Health $ 74.4 • Market Stabilization ($ 124.7) • Total ($ 103.3)

  10. Cash Flow Member Contributions Employer Contributions 1937 Act Pension Fund Supplemental Benefits COLA Benefits Basic Benefits Settlement Benefits

  11. Reserves Member Contributions Employer Contributions M E M B E R B A S I C COLA S E T T L E M E N T CONTINGENCY N O N V A L U N D I S T R I B U T E D Supplemental Benefits COLA Benefits Basic Benefits Settlement Benefits

  12. Valuation Reserves M E M B E R B A S I C COLA S E T T L E M E N T CONTINGENCY N O N V A L U N D I S T R I B U T E D

  13. Contingency Reserve M E M B E R B A S I C COLA S E T T L E M E N T CONTINGENCY N O N V A L U N D I S T R I B U T E D

  14. Non-Valuation Reserve M E M B E R B A S I C COLA S E T T L E M E N T CONTINGENCY N O N V A L U N D I S T R I B U T E D

  15. Undistributed Earnings M E M B E R B A S I C COLA S E T T L E M E N T CONTINGENCY N O N V A L U N D I S T R I B U T E D

  16. Affects Member Contributions M E M B E R B A S I C COLA S E T T L E M E N T CONTINGENCY N O N V A L U N D I S T R I B U T E D

  17. Affects Member Refunds M E M B E R B A S I C COLA S E T T L E M E N T CONTINGENCY N O N V A L U N D I S T R I B U T E D

  18. Affects Regular Benefits M E M B E R B A S I C COLA S E T T L E M E N T CONTINGENCY N O N V A L U N D I S T R I B U T E D

  19. Affects Supplemental Benefits M E M B E R B A S I C COLA S E T T L E M E N T CONTINGENCY N O N V A L U N D I S T R I B U T E D

  20. Affects Employer Contributions M E M B E R B A S I C COLA S E T T L E M E N T CONTINGENCY N O N V A L U N D I S T R I B U T E D

  21. Objectives • Comply with requirements • Consistency between Reserves & Valuation • Match reserves to Market Value of Assets • Limit interest volatility • Limit charging of losses

  22. General Concepts • 2 Rates • Actual Return (Interest Assumption) • No-Risk Savings Rate (COLA)

  23. General Concepts • Valuation & Non-Valuation Reserves • Credit with Assumed Interest Rate

  24. General Concepts

  25. General Concepts • Contingency Reserve • Target = 3% • Use if needed • Can drop below 0% • Contingency Reserve + Non Valuation Reserve > 1%

  26. Crediting Mechanism

  27. Steps 1 & 2 (Big Picture) VALUATION CONTINGENCY N O N V A L U N D I S T R I B U T E D Investment Return Assumption

  28. Step 1 VALUATION M E M B E R CONTINGENCY N O N V A L U N D I S T R I B U T E D COLA Inflation Assumption

  29. Step 2 (details) Basic COLA Settlement VALUATION M E M B E R CONTINGENCY N O N V A L U N D I S T R I B U T E D Current Service - Settlement Current Service - Regular COLA COLA Inflation Assumption

  30. Allocating Earnings • Two Scenarios 1. Earnings greater than investment assumption rate 2. Earnings less than investment assumption rate

  31. Scenario 1 • Earnings more than the investment assumption rate

  32. Steps 3 VALUATION CONTINGENCY N O N V A L U N D I S T R I B U T E D COLA Up to 3%

  33. Steps 4 VALUATION CONTINGENCY N O N V A L U N D I S T R I B U T E D COLA Up to 3%

  34. Scenario 2 • Earnings less than the investment assumption rate

  35. Steps 3 VALUATION N O N V A L U N D I S T R I B U T E D CONTINGENCY COLA

  36. Every two years under normal circumstances If Contingency gets very low Review

  37. Questions

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