November 2017 Board Meeting SummaryNovember 08, 2017
On November 2, 2017, the Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS) Board of Trustees held a working session, which convened at 3 p.m. at the Retirement Systems office in Jefferson City, Missouri. In attendance were Board members Aaron Zalis, Yvonne Heath, Beth Knes, Jason Hoffman, Scott Hunt and Jason Steliga. Also present were Executive Director, M. Steve Yoakum; Assistant Executive Director, Investments, Craig Husting; Assistant Executive Director, Operations, Dearld Snider; General Counsel, Alan Thompson; Chief Financial Officer, Anita Brand; Director of Retirement Services, Omar Davis; Director of Legislation and Policy, Maria Walden; Internal Auditor, Jeff Hyman; Chief Technology Officer, Bill Betts; Director of Administrative Planning and Design, Nicole Hamler; and various other PSRS/PEERS staff members.
Board Working Session
Funding Policy Report from the Actuary
Mr. Yoakum opened the working session with a focus on two critical elements; the Board's fiduciary responsibility and PSRS/PEERS' ongoing goals.
Fiduciary responsibility includes the duties of loyalty and impartiality. The duty of loyalty requires the operation of the Retirement Systems for the exclusive benefit of the members and retirees of those Systems, and must supersede the interests of all other parties. The duty of impartiality requires that the Board not favor any one type of plan participant over another (e.g. active, inactive, retired members). The Board has a fiduciary duty to: 1. Effectively collect contributions, 2. Prudently invest the assets to obtain optimum returns, 3. Equitably provide benefits, 4. Impartially and in accordance with applicable law, administer the benefit program, and 5. Set contribution rates that are adequate to fund promised benefits.
Mr. Yoakum reviewed PSRS/PEERS' ongoing goals: 1. Provide for the security and financial stability of the Systems, including maintaining at least an 80% pre-funded ratio, continuing to amortize the unfunded liability until PSRS/PEERS is 100% pre-funded, and allowing for a reasonable assumed rate of return given capital market estimates, 2. Maintain the contribution rates of both Systems at or below current levels, 3. Provide a consistent cost-of-living adjustment (COLA) for PSRS/PEERS benefit recipients to maintain their purchasing power, noting COLAs should be dependable and affordable without harming the financial stability of the Systems, and 4. Require no statutory action.
Annually, the Board sets the COLA for benefit recipients and contribution rates for employers and active members. The COLA and contribution rates are set based on the recommendation of the Systems' external actuaries, PricewaterhouseCoopers (PwC), as part of the annual actuarial valuations. The Board evaluates a large amount of information each year prior to setting the COLA or the contribution rates. This year, the Board asked PwC to calculate the financial impacts of the following COLA scenarios:
- Scenario A (Current Policy)
- CPI-U between 0-2% = 0% COLA, CPI-U between 2-5% = 2% COLA, CPI-U 5% or more = 5% COLA
- CPI-U between 0-2% = Actual % COLA, CPI-U between 2-5% = 2% COLA , CPI-U 5% or more = 5% COLA
- CPI-U between 0-5% = 2% COLA, CPI-U 5% or more = 5% COLA
- CPI-U between 0-5% = Actual % COLA, CPI-U 5% or more = 5% COLA
- CPI-U between 0-2% =1% COLA, CPI-U between 2-5% = 2% COLA, CPI-U 5% or more = 5% COLA
- 2% COLA when CPI-U is between 0%-2% and cumulatively 2% or more, CPI-U between 2-5% = 2% COLA, CPI-U 5% or more = 5% COLA
- Resets cumulative calculation to zero after a 2% COLA is provided
- Same as Scenario F, however cumulative period would start with fiscal year 2017 CPI-U.
The Board analyzed all these scenarios at the following assumed rates of investment return: 7.75%, 7.6%, 7.5% and 7.25%.
Mr. Brandon Robertson, Ms. Cindy Fraterrigo and Ms. Kelly Stolyar from PwC presented the results of the requested analyses. Mr. Robertson noted the calculations were based on final June 30, 2017 investment returns, assets and census data. He provided background information on the common COLA features and current national trends, as well as the Systems' regulatory framework for the COLA. He further indicated the changes to the PSRS/PEERS' policy for granting COLAs has been an equitable way to stabilize costs. This is because active member and employer contribution rates cover the cost of the unfunded actuarial accrued liability (UAAL), which includes improved longevity of retired members. Additionally, the impact of changes to the COLA assumptions affects the active and retiree liabilities in similar proportions (approximately 60% retiree and 40% active).
Mr. Robertson provided the Board of Trustees the following key considerations while reviewing the analyses:
- Generally, the biggest risks of future contribution rate increases stem from investment returns, payroll growth/UAAL amortization policy and longevity of retired members.
- Given the level of sensitivity to investment return involved in meeting the ongoing goals of PSRS/PEERS, reducing investment return risk should be considered when determining future contribution rates and the ability to enhance the current COLA policy.
He also provided an overview of the sensitivity to changes in actual and expected COLAs and investment returns.
Mr. Robertson, Ms. Fraterrigo and Ms. Stolyar reviewed the results of each scenario analyzed. The Board discussed the results of the analyses presented by PwC in detail. The Board's discussions focused on the results of the scenario analyses in relation to PSRS/PEERS' ongoing goals. The Board further discussed the significance of the assumed rate of return on the Systems' ability to meet such goals. The Board noted the need to evaluate the assumed rate of return as well as the COLA policy.
The Board sought input from members of the public in attendance at the working session and specifically asked if the Missouri Retired Teachers Association (MRTA) had a position on any of the scenarios. Mr. Kreider indicated MRTA supported Scenario B, which provides the actual COLA when the CPI-U is between 0% and 2%.
Mr. Yoakum and PwC summarized the results of the working session. They noted, given the improved funded position and the current contribution rates in relation to the actuarially determined contribution rates, that reducing the risk profile of the Systems should be considered. It was further noted that less risk equals greater stability of contribution rates and ability to provide COLAs in the future. Less risk improves the Systems' ability to continue to meet the goals outlined by the Board.
The following table summarizes which scenarios meet PSRS/PEERS' ongoing goals discussed earlier.
Assumed Rate of Return
|7.6% Assumed Rate of Return||7.5% Assumed Rate of Return||7.25% Assumed Rate of Return|
|Scenario A - Baseline (Current Policy)||Y||Y||Y||N|
|Scenario B - (Actual CPI-U Between 0%-2%)||Y||N||N||N|
|Scenario C - (2011 Funding Stabilization Policy)||N||N||N||N|
|Scenario D - (Pre-2011 COLA Policy)||N||N||N||N|
|Scenario E - (1% COLA Between 0%-2%)||Y||N||N||N|
|Scenario F - (2% when Cumulative 2%, Cumulative period starts 7/1/2015)||Y||Y||N||N|
|Scenario G (2% when Cumulative 2%, Cumulative period starts 7/1/2016)||Y||Y||N||N|
|*The above chart is a summary of significant analysis and calculations prepared by the Systems' external actuaries based on data as of June 30, 2017. For a full understanding it is imperative that the above information be evaluated in conjunction with the full analysis provided by the independent external actuaries.|
The working session did not include any action items for the Board. The Board set the Funding Policy assumptions, purchase interest rate, contribution rates and January 2018 COLA during the Board of Trustees meeting that occurred on the following day. A summary of that meeting and the Board of Trustees' action items are included below.
Mr. Jim Pohl, president of Missouri Retired Teachers Association (MRTA), stated that the COLA issue is a big concern. He indicated that he has visited every corner of the state and can verify that this is important to retirees.
Dr. Aaron Zalis, Board Chair, thanked Mr. Pohl for his comments and stated that he believes the Board has fulfilled the promise to review the COLA policy, which is demonstrated in all the work being done by the Board, staff and advisors.
Mr. Jim Kreider, executive director, MRTA, stated that he believes the investment market will be positive and will mimic the Roaring 20's as shown this year in the market.
The Board adjourned at 6 p.m.
REGULAR BOARD MEETING
The November 3, 2017 Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS) Board of Trustees meeting convened at 9 a.m. at the Retirement Systems office in Jefferson City, Missouri. In attendance were Board members Aaron Zalis, Yvonne Heath, Beth Knes, Jason Hoffman, Scott Hunt and Jason Steliga. Also present were Executive Director, M. Steve Yoakum; Assistant Executive Director, Investments, Craig Husting; Assistant Executive Director, Operations, Dearld Snider; General Counsel, Alan Thompson; Chief Financial Officer, Anita Brand; Director of Retirement Services, Omar Davis; Director of Legislation and Policy, Maria Walden; Internal Auditor, Jeff Hyman; Director of Administrative Planning and Design, Nicole Hamler; and various other PSRS/PEERS staff members.
The open session minutes from the August 28, 2017 Board meeting were approved by a unanimous vote.
Order of Business
Dr. Aaron Zalis changed the order of items on the agenda during the report of the actuary. He switched item B, subset a: Set COLA Policy and Item B, subset b: Set Assumed Rate of Return.
Mr. Yoakum presented a plaque to Mary Ann Bax recognizing her recent retirement from PSRS/PEERS.
Ongoing Investment Activity
Mr. Craig Husting and Mr. Jim Neill from Willis Towers Watson reviewed ongoing investment activities, which included estimated investment performance through September 30, 2017. The estimated return for the first quarter of fiscal year 2018 (July 1, 2017 through September 30, 2017) was approximately 3.1%. Mr. Husting discussed the current asset allocation of the PSRS/PEERS portfolio, during which he reviewed the long-term strategy, portfolio themes and the broad portfolio expectations. Mr. Husting also reviewed the tentative Board investment calendar.
Proxy Voting Policy
Mr. Husting reviewed the Systems' proxy voting policy. The Systems' active public equity investment managers are each responsible for voting proxies in the best interests of the members of the Systems. The managers are required to provide an annual report to the investment staff detailing how their proxies were voted during the year on behalf of PSRS/PEERS. Mr. Husting reported that the Systems received proxy voting reports from all public equity managers for fiscal year 2017. The internal PSRS/PEERS staff has not identified any operational issues with the proxy voting process during the review that was conducted this year and all investment managers are in compliance with the policy.
Public Credit Program Review
Mr. Frank Aten and Mrs. Jessica Wilbers from the PSRS/PEERS investment staff reviewed the Systems' Credit portfolio including program objectives, guidelines and long-term results. The five-year annualized return for the Credit composite for the period ended September 30, 2017 was 2.6%.
Non-U.S. Equity Program Review
Mr. Frank Aten and Mrs. Jessica Wilbers from the PSRS/PEERS investment staff reviewed the Systems' Non-U.S. Equity portfolio including program objectives, guidelines and long-term results. The five-year annualized return for the Non-U.S. Equity composite for the period ended September 30, 2017 was 9.6%.
Real Estate Annual Review
Mr. Jack Koch and Mr. Seth Marcus from Townsend (the Systems' real estate consultant), presented a number of items to the Board, including Aon's recent acquisition of Townsend. Mr. Koch and Mr. Marcus also provided a real estate market overview and then discussed the PSRS/PEERS real estate portfolio. Townsend reported that the PSRS/PEERS' Real Estate portfolio had produced an annualized return of 11.8% (net of all fees) for the five-year period ended June 30, 2017.
REPORT OF THE ACTUARY
June 30, 2017 Actuarial Valuation
Mr. Brandon Robertson, Ms. Cindy Fraterrigo and Ms. Kelly Stolyar from PricewaterhouseCoopers (PwC) were present to discuss the results of the June 30, 2017 actuarial valuations for the systems. Ms. Fraterrigo provided an introduction to the valuation process and the key metrics to be considered. She also noted the information being presented was based on no changes to the Systems' current funding policies and therefore is noted to be preliminary. Ms. Stolyar reviewed the changes in membership, assets, liabilities and the pre-funded status of each System. She reported that the June 30, 2017, preliminary pre-funded status based on the actuarial value of assets of PSRS was 87.2% and PEERS was 88.7%. The current market value of assets is only slightly lower than the actuarial value of assets because there are losses still to be recognized due to the smoothing method used. Mr. Robertson discussed projections of contribution rates, funded status and the sensitivities of both to the overall investment returns for the plans. Mr. Robertson provided a summary of the results of the COLA scenarios that were discussed in detail with the Board during the working session the previous day. Mr. Robertson also discussed PwC's recommendation to maintain the contribution rates for the 2018-2019 school year at the current levels He indicated their recommendation applied to any combination of assumed rate of return assumption and COLA scenario that met the ongoing goals established by the Board and presented during the Board meeting and working session.
Set Funding Policy Assumptions
Based on the information presented by PwC during the working session the previous day and the information presented during the June 30, 2017 valuation presentation; the Board reviewed the current Funding Policy Assumptions:
Set Assumed Rate of Investment Return
The Board discussed reducing the assumed rate of investment return effective July 1, 2017. The Board indicated a reduction in the assumed rate of investment return was the prudent action to take. After much discussion, the motion was made to lower the assumed rate of investment return from 7.75% to 7.60%. The assumed rate of investment return was approved by unanimous vote.
Set COLA Policy
The Board discussed the various scenarios that were presented during the work session and the presentation by PwC. After an in-depth debate about the various options a motion was made to grant a one-time, 1.63% COLA for January 2018 (which equaled the fiscal year CPI-U) and change the current COLA assumption in the Funding Policy to Scenario F effective with the January 2019 COLA. Scenario F states the following:
- 2% COLA for eligible retirees when CPI-U is between 0%-2% and cumulatively 2% or more, CPI-U between 2-5% = 2% COLA, CPI-U 5% or more = 5% COLA
- Resets cumulative calculation after a 2% COLA is provided
The new policy changes the actuarial COLA assumption from an ultimate assumption of 1.5% to 1.65%. The COLA policy was approved by a 5 to 2 vote.
Set Purchase Interest Rate
Mr. Yoakum presented information to the Board of Trustees on the purchase interest rate. The purchase interest rate applies to any amount due for the reinstatement of service or for the purchase of service except as otherwise specified by law. Staff recommended the purchase interest rate be set at the current assumed rate of return, which was approved by the Board at 7.60%. The Board of Trustees approved staff's recommendation of the purchase interest rate of 7.60% by unanimous vote.
Set Contribution Rates for 2018-2019
The Board voted unanimously to keep the contribution rate for PSRS at 29% and PEERS at 13.72% as recommended by the actuary.
Set January 2018 COLA
The Board voted that the COLA be set at 1.63% for eligible benefit recipients effective January 1, 2018, in accordance with the Board's most recent Funding Policy.
Schedule for Board Election
The upcoming election schedule for 2018 was approved by unanimous vote. The two Board seats up for election are PSRS active member and PEERS active member.
Mr. John Pohl, president of MRTA, thanked the Board on behalf of the 27,000 MRTA retirees, for the COLA decision.
Dr. Aaron Zalis, Board chair, thanked Mr. Pohl for his comments and stated that the Board does not deserve a thank you, just as they did not deserve the unfounded criticism over the last year. The Board is simply doing their job as fiduciaries and fulfilling the promises they made last year. Dr. Zalis stated that he hopes the education associations can bring everyone together instead of being divisive, not only on this issue but on all issues for the good of public education.
Carol Weatherford, who regularly attends meetings as a representative of MNEA and MNEA-Retired, expressed her personal appreciation to the Board of Trustees. She noted the Board's intensely serious discussion and respectful differences of opinion as they considered the COLA options. She stated that while she joins other retirees in anticipating the 2018 COLA, she is most appreciative of the trustees' professionalism and courtesy in making their decision.
Ms. William Walker, PSRS retiree, stated that he found the process very interesting and believed the Board was very informed. He appreciated all the work the Board does and how they do it.
The Board went into closed session at 12:30 p.m.
The Board adjourned at 2 p.m.
This summary is not official minutes of the PSRS/PEERS Board of Trustees Meeting. The official minutes will be approved at the next PSRS/PEERS Board of Trustees meeting and will posted to our website at that time.