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Economic Assumption Study

Economic Assumption Study. Norm Jones, FSA Brian Murphy, FSA Mark Buis, FSA March 10, 2011. Actuarial Assumptions. Demographic – Things that happen to people Economic – Things that happen to money. This report focuses on economic issues. Economic Assumptions. Inflation

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Economic Assumption Study

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  1. Economic Assumption Study Norm Jones, FSA Brian Murphy, FSA Mark Buis, FSA March 10, 2011

  2. Actuarial Assumptions • Demographic – Things that happen to people • Economic – Things that happen to money This report focuses on economic issues.

  3. Economic Assumptions • Inflation • Investment Return • Payroll Growth

  4. Current Economic Assumptions

  5. Historical Price and Wage Inflation

  6. Price Inflation • Average assumption for 10 investment consulting firms is 2.56% -- range is 2.00% to 3.25% • Average of last 10 years is 2.3% • 2010 annual report of the Social Security Trustees uses 2.80% as the intermediate assumption • Reasonable long term range would be 2.0 to 3.2% - recommend 2.8% assumption

  7. Real Wage Growth • National Average Earnings as published by SSA is a useful proxy for general wage changes • NAE has exceeded CPI in most years • A 1% gap may be difficult to maintain in the present economy • A reasonable range would be 0.2% to 0.8%

  8. Total Wage Growth • Total Wage Growth is equal to inflation plus real wage growth (currently 4.0%) • Results in a reasonable range of 2.5% to 3.7% • Average Salaries for WRS have increased approximately 3.4% over the last 25 years, and 3.0% over the last 10 years • Recommend lowering wage growth to 3.2%

  9. Investment Return • By statute, the actuary recommends the investment return assumption • Board approves recommendation with advice from actuary and investment professionals • Best estimate range – the range in which results are more than likely as not to fall • Affected by investment policy and market outlook

  10. Actual and Target Allocation

  11. Capital Market Assumption • GRS does not provide investment advice • Took capital market assumptions from ten different investment consulting firms • Based on history but incorporates forward looking assumptions • Shorter term horizon than actuaries • May be a little biased by current conditions

  12. Expectations by Consultant

  13. Comments • Consultants not in agreement • Significant range of results (5.6% to 9.0%) • Arithmetic average of 7.7% is slightly below current WRS assumption

  14. Geometric Results over 20 Years

  15. Comments • Based on average forecasts of all consultants (with a 2.8% inflation assumption), it is unlikely to achieve the current interest rate assumption of 7.8% • Level contribution rate objective achieved by selecting the approximate median interest rate • There is a lot of subjectivity here (averages of averages) and the expectations change frequently • Recommend lowering of return assumption to 7.2%

  16. Impact on Actuarially Determined Contributions • Impact on General group is approximately cost neutral • Impact on other groups will vary slightly • Contribution rate expected to increase in 2010 valuation due to phase-in of asset losses • Pending legislation will also impact contribution rates

  17. Recent Changes by Other Systems • Colorado PERA, 8.5 to 8.0 • Pennsylvania PSRS, 8.5 to 8.25 effective 6/30/08, then to 8.0 effective 6/30/09 • Pennsylvania SERS, 8.5 to 8.0 • San Francisco City & County, 8.0 to 7.75 • Virginia RS, 7.5 to 7.0 • NY Common, 8.0 to 7.5 • Indiana TRF, 7.5 to 7.0 • Indiana PERF, 7.25 to 7.0 • District of Columbia Retirement Board, 7.5 to 7.0 • Illinois SERS and SURS, 8.5 to 7.75 • Arizona Public Safety, 8.5 to 8.0 over 2 years

  18. Comments • Typically would recommend smaller incremental changes in assumptions • Market events from 2008 have changed forecasts significantly • Final Recommendation • Interest rate: 7.2% • Wage Inflation: 3.2% • Would impact rates in calendar year 2012 • Assumptions reviewed again in 2 years

  19. Limitations • Circular 230 Notice: Pursuant to regulations issued by the IRS, to the extent this presentation concerns tax matters, it is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) marketing or recommending to another party any tax-related matter addressed within. Each taxpayer should seek advice based on the individual’s circumstances from an independent tax advisor. • This presentation shall not be construed to provide tax advice, legal advice or investment advice.

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