Missouri Department of Transportation and Highway Patrol Employees’ Retirement System (MPERS)

1. Missouri Department of Transportation andHighway Patrol Employees’ Retirement System (MPERS) Scott Simon, Executive Director Telephone: (800)-270-1271 Website: www.mpers.org Updated 05/14/2013 Board Member Orientation

2. System Overview • MPERS is a statutory defined benefit plan that was created in 1955. • MPERS covers employees of MoDOT, MSHP, and MPERS. • Benefits are set by the General Assembly and codified in Chapter 104 of the Revised Statutes of the State of Missouri (RSMo). • MPERS benefits are funded by MoDOT and MSHP primarily from fees and gas tax revenues. Some General Revenue dollars come from MSHP. • Governance Policies initiated in 2009

3. What is a Defined Benefit (DB) Plan? • The benefit is based on a formula that takes into account the member’s salary and years of service. • Benefits are paid for life. Members cannot outlive the benefit. • If the investment markets go down, it does not impact the member’s benefit. • The employers’ goal is to fund the benefit over the working career of the member.

4. What is a Defined Contribution (DC) Plan? • The benefit is based on contributions (sometimes employee and employer) and investment earnings. • The employee bears the investment risk – the account balance goes up and down depending on market performance and contributions. • DC plans were designed to be an extra source of income, not the only source. • The State’s Deferred Compensation Plan is an example of a DC plan and was designed to be a supplemental savings plan.

5. History of MPERS Funding Status

6. Our Funded Status—How did we get here? • The short answer is, we did not pre-fund all benefits until 1999. • The longer answer includes a list of oversights, changes, and distractions that resulted in the plan not being funded appropriately. • Funding benefit enhancements on a “pay as you go” basis • Conservative investment history • Changing actuarial funding methods • Extending amortization periods • Significant market downturns since 2001

7. Funding a Defined Benefit Plan • Annually, the actuary performs an actuarial valuation, which is essentially a financial check-up of the plan. • The purpose of the valuation is twofold: • To predict the cost of future pension benefits; and • To determine what level of contributions, when combined with expected investment income, is needed to provide benefits over the long term.

8. Funding Objectives • Intergenerational equity with respect to plan costs • Stable or increasing ratio of assets to liabilities • Stable pattern of contribution rates

9. Formula for Funding C + I = B + E Contribution + Investments = Benefits + Expenses (Income) = (Expenses)

10. Summary of Actuarial Assumptions and Methods *single equivalent period

11. The Actuarial Valuation Process(as of June 30, 2012, valued) Present Value of Future Benefits $3.66 billion Past Service Future Service Accrued Liability $3.30 billion Future Normal Costs $361 million • Member Portion • $1 million • Employer Portion • $360 million • Unfunded Liability • $1.87 billion • Assets • $1.43 billion

12. History of Contribution Rates

13. The IOU/Mortgage • Each year, as part of the total contribution rate, the employer is making a large catch up payment to pay off the unfunded liability. This is similar to having a mortgage that you pay off over a number of years. • MPERS is utilizing a closed amortization period, which reduces the amortization period by one year, each year. • Since FY10, the Board approved an accelerated funding policy that amortizes our retiree liabilities over a closed 15 year period and the rest of our liabilities over a closed 30 year period.

14. Breakdown of Combined Contribution Rate for FY 2014 For FY 2014, the Board’s funding plan assumes a 12-year amortization period for the retiree liability and a 27-year amortization period for the remainder of the liability.

15. History of Benefit Payments

16. The Investment Story

17. Annualized Total Return (for Periods Ended June 30)

18. Asset Allocation – Total Fund

19. Pension Reform a National View

20. 2008 Pension Reform Legislation 8 States

21. 2009 Pension Reform Legislation 11 States

22. 2010 Pension Reform Legislation 18 States

23. Pension Reform Legislation from 2009 – 2012

24. Significant Public Pension Changes Enacted in Missouri for New Employees • Changes effective for employees hired for the first time on or after January 1, 2011 • Increase in Vesting to 10 years • Increase in Eligibility to Rule of 90 or 67 with 10 years • BackDROP eliminated • Employee contributions implemented – 4%

25. Key Takeaways • The MPERS Board and the employers are taking steps to ensure that the money to pay benefits is there when it is needed. • The MPERS Board continues to look for ways to minimize risk and increase the return on assets. • The Board and the employers are committed to funding the plan appropriately. The ultimate funding goal is 100%. • Promised benefits will continue to be paid – members are not in danger of missing benefit payments. There is no immediate crisis. • The funding situation didn’t happen overnight and it will take time to correct.

26. Questions?