Leon F. (Rocky) Joyner, Jr. The Segal Company 678-306-3119

1. Seventeenth Annual National Pension and Institutional Investor Summit Breakout Panel 2: Defending Your Defined Benefit Plan Leon F. (Rocky) Joyner, Jr. The Segal Company 678-306-3119

2. Lets Play Truth or Scare

3. Scare

4. Truth 4. Over the past 30 years, public plans have earned over 8.0% annually. 1. Less than 4% of state budgets are spent on pension benefits. 5. Unfunded liabilities are $700 billion and will be financed over the system’s amortization period—in other words, not due today. 2. The average state employee’s and teacher’s benefit is $22,000 annually. 6. These estimates are based on flawed assumptions, such as no additional contributions and lowlong-term investment returns. Public funds hold $3 trillion in assets to pay future benefits. 3. When measured by pre-retirement replacement rates there is little correlation between collective bargaining and benefit levels. Colorado and Georgia are ranked as numbers 1 and 3 for replacing income, Wisconsin is number 6.

5. Public Fund ScorecardAn Executive Summary of the Public Fund Survey as of 11/13/2011 Source: National Association of State Retirement Administrators (NASRA)

6. Print • TV/Cable News • Internet—Blogs • Opinion Research • Pew Center • Manhattan Institute • Rauh—Kellogg • National Institute for Retirement Security • Center on Budget and Policy Priorities • Center for State & Local Government Excellence Attention Shows No Signs of Slowing

7. Principles of Retirement Security Stable Contributions Equalize Risk Committed Funding Universal Retirement Plan Coverage Replace Adequate Income Efficient and Transparent Governance When time allows, cooler heads prevail, resulting in better outcomes.

8. Defense based on: • Plan Design Efficiencies • Mission Applicability • Economic Functionality • Funding Flexibility and Resiliency • Sample System 1 • Sample System 2

9. Defense based on: • Plan Design Efficiencies

10. In the Public Sector, Pension/Retirement Plans fall into two broad categories: • Defined Benefit (DB) Plans, which focus on benefit security, • and • Defined Contribution (DC) Plans, which focus on wealth accumulation. So how do we assess which is appropriate for a given entity?

11. Assessing the Appropriateness of a Plan Design • Measure against retirement philosophy • Adequacy at retirement (replacement ratios) • Purchasing power into retirement • Talent Management • Assess risk components • Is risk in its proper place? • Can the risk be managed by the State or Locality? • Investment risk • Longevity risk • Short-term vs. long-term benefit risk (Is a short-term issue being solved at the expense of creating a long-term problem?) • Measure against funding policy • Stability • Amount • Analyze investment options • Sufficient number and variety • Sufficient safeguards 11

12. The article “A Better Bang for the Buck: The Economic Efficiencies of DB Plans” revealed that DB plans are more cost effective than DC plans at delivering retirement benefits as shown below. (Source, National Institute for Retirement Security) The illustrations below are based on 1,000 teachers retiring at age 62 after 30 years with a benefit that replaces about 83% of pay. DB Plans are intrinsically more efficient in providing benefits. 12

13. A Texas public safety DB plan provides for a benefit that replaces about 83% of final pay after 33 years of service. The normal cost is about 26% of pay and they do not participate in Social Security. The illustration on the next slide compares the replacement ratio for the DB plan compared with a DC plan with a contribution rate of 26% of pay. To provide the same level of benefit the DC plan contribution rate would have to be about 40% of pay. Cost effectiveness of a Texas F&P Plan. 13

14. DB Plan with a normal cost rate of 26% DC Plan 2 with a contribution rate of 40% DC Plan 1 with a contribution rate of 26% 14

15. Investment Return/Expense • Professionally managed DB plans earn typically earn at least 1% per year more than individually managed DC plans • Investment expenses are typically 0.5% more for DC plans • As a result, with equal contributions a DB plan is anticipated to provide greater benefits at retirement than a DC plan Leakage • Studies have shown that much of the money in DC plans is spent prior to retirement Supplemental Benefits • A DC plan death or disability benefit is the account balance • Death benefits and disability benefits would need to be provided outside the DC plan to be comparable to what the DB plan currently provides

16. Defense based on: • Mission Applicability

17. The Mission of Government is to Provide Services • DB plans provide steering mechanisms to encourage career behaviors that better mesh with the entity’s service parameters. • DC plans are often favored by younger, short-service employees who will take their balance and terminate employment, often contrary to the entity’s goals. • At the end of a career, a DC plan will often encourage an employee to stay beyond their most productive career years. • Other career/personnel incentive programs (such as early retirement windows) that are routine with DB plans are either nonexistent or greatly limited with DC plans. • Retirement plan goals and objectives should mesh with the mission of the entity. • The following slides provide context for design discussion.

18. What’s the “right” plan design? Who am I competing with for talent? Will that change? What are they doing? How do we mitigate financial risk? Are employees capable of handling risk? What are my future talent requirements? What type of retirement programs supports those needs? How do I balance perceived and real value? Are benefits—and in particular retirement benefits—important in attracting and retaining employees? Is adequacy of retirement income an issue? The “right” design requires answers to some tough questions.

19. Affiliation • Organization commitment • Culture • Citizenship • Trust The Employee Value Proposition—What do employees want? Compensation • Base salary • Incentives • Cash recognition • Premium pay • Pay process WorkContent • Variety • Challenge • Tools • Teamwork • Manager support • Plan Design Implications: • 1. Several of the most important components are the least managed • 2. Some employers are starting to turn focus from tangible (compensation and benefits) to intangible (affiliation, work content, and career) • 3. The holistic vantagepoint: Employee Engagement EmployeeValueProposition Benefits • Health • Retirement • Recognition • Perquisites Career • Advancement • Personal growth • Training • Employment security

20. Defense based on: • Economic Functionality

21. Economic Impact • Over $150 billion in benefits are paid annually from public sector plans. • This has an economic footprint that totals almost $400 billion. (Now that is economic stimulus.) • DB plans provide regular, sustainable and substantial annual economic impact. • Annuitants from these plans contribute to the economy of every state and locality in which they abide. • As indicated earlier, DC plans do not and cannot pack the economic impact possessed by DB plans.

22. Comparing DB and DC spending patterns • Since DB plans provide regular sources of income, annuitants can be active participants in the local economy. • Often with DC plans, one of two scenarios may unfold: • First is a tendency to use the DC balance to maintain one’s life style until the money runs out. • Second is to hoard the DC resources for later. • Neither scenario provides economic stimulus for local government. • A recent study indicated that as many as 75,000 jobs are supported in Texas every year due to DB plan annuity payments.

23. Defense based on: • Funding Flexibility and Resiliency • Sample System 1 • Sample System 2

24. Flexibility • Conservatively designed actuarial funding policies provide public entities great flexibility to respond to events that may stress an entity’s resources. • These events include economic and natural disasters (e.g. 2008, storms, tax base changes) Resiliency • Public sector pension plans have decades long track records of funding and supplying benefits to their participants. • These plans have endured the Great Depression, WW II, the oil crisis of the 70’s, and everything the 2000’s could throw at them and still, as shown earlier in this presentation, they are well funded and are by and large not a significant drain on public resources. • In point of fact, they greatly contribute to the public good. • The following presents two case studies of plans that are well funded.

25. Two Systems that have planned for the Future

26. Summary of Valuation Results System 1Municipal Employees, Social Security

27. Projected System 1 Contribution Rate As contributions are made and the % funded increases, the recommended contribution will approach the average Normal Cost, which is currently about 7%. The above projections assume that plan experience will match current assumptions and that the number of active employees, their age and service will remain relatively consistent from year to year.

28. Projected System 1 Funded Percentage The funding % is expected to improve over the next 10 years, then gradually approach 100%. The above projections assume that plan experience will match current assumptions and that the number of active employees, their age and service will remain relatively consistent from year to year.

29. Projected System 1 Net Amortization Period The above projections assume that plan experience will match current assumptions and that the number of active employees, their age and service will remain relatively consistent from year to year.

30. Summary of Valuation Results System 2Municipal Fire and Police, No Social Security

31. Projected System 2 Funding Percentage and Amortization Period The above projections assume that plan experience will match current assumptions and that the number of active employees, their age and service will remain relatively consistent from year to year.

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33. Leon F. (Rocky) Joyner, Jr. FCA, ASAVice President and Actuary rjoyner@segalco.com 678 306 3119 www.segalco.com