economic assumption study

Copyright © 2011 GRS – All rights reserved.

Economic Assumption Study

Norm Jones, FSABrian Murphy, FSAMark Buis, FSAMarch 10, 2011

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Actuarial Assumptions

Demographic – Things that happen to people

Economic – Things that happen to money

This report focuses on economic issues.

Economic Assumptions

Inflation Investment Return Payroll Growth

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Current Economic Assumptions

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Investment Return 7.80%Inflation 3.00%Wage Growth 4.00%

Historical Price and Wage Inflation

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Year Prices (CPI-U) Wages (NAE) Change1950-1959 2.2% 4.5% 2.3%1960-1969 2.5% 4.3% 1.8%1970-1979 7.4% 6.9% -0.5%1980-1989 5.1% 5.8% 0.7%1990-1999 2.9% 4.2% 1.3%2000-2009 2.5% 3.3% 0.8%

3-Year Avg 1.4% 2.1% 0.7%5-Year Avg 2.2% 3.1% 0.9%

10-Year Avg 2.3% 3.0% 0.7%20-Year Avg 2.7% 3.7% 1.0%30-Year Avg 3.4% 4.4% 1.0%50-Year Avg 4.0% 4.8% 0.8%

Annual Inflation Increase in

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% assumption6

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%

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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%

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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 outlook9

Actual and Target Allocation

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Asset Category Current Asset

Allocation 2012 Target Asset

AllocationPublic Equity 55.0% 43.0%

Fixed Income 26.0% 35.0%

TIPS 3.0% 20.0%

Real Estate 6.0% 7.0%

Private Equity 6.0% 7.0%

Active Risk 1.0% 4.0%

MAP 3.0% 4.0%

Cash 0.0% -20.0%

Total 100.0% 100.0%

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

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Expectations by Consultant

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(1) (2) (3) (4) (5) (6) (7) (8)

1 6.04% 3.00% 3.04% 2.80% 5.84% 0.20% 5.64%

2 6.55% 2.02% 4.53% 2.80% 7.33% 0.20% 7.13%

3 7.49% 2.75% 4.74% 2.80% 7.54% 0.20% 7.34%

4 8.37% 3.25% 5.12% 2.80% 7.92% 0.20% 7.72%

5 7.72% 2.50% 5.22% 2.80% 8.02% 0.20% 7.82%

6 7.79% 2.50% 5.29% 2.80% 8.09% 0.20% 7.89%

7 7.84% 2.50% 5.34% 2.80% 8.14% 0.20% 7.94%

8 7.47% 2.00% 5.47% 2.80% 8.27% 0.20% 8.07%

9 8.49% 2.75% 5.74% 2.80% 8.54% 0.20% 8.34%

10 8.74% 2.30% 6.44% 2.80% 9.24% 0.20% 9.04%

Average 7.65% 2.56% 5.09% 2.80% 7.89% 0.20% 7.69%

Expected Nominal

Return Net of Expenses

(6)-(7)Investment Consultant

Investment Consultant

Expected Nominal Return

Investment Consultant

Inflation Assumption

Expected Real

Return (2)–(3)

Actuary Inflation

Assumption

Plan Incurred Expense

Assumption

Expected Nominal Return (4)+(5)

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

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Geometric Results over 20 Years

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Probability of exceeding

Probability of exceeding

Probability of exceeding

Probability of exceeding

25th 50th 75th 7.80% * 7.50% 7.20% 7.00% (1) (2) (3) (4) (5) (4) (3) (2)

1 3.54% 5.10% 6.70% 12.8% 15.6% 18.8% 21.1%

2 4.92% 6.55% 8.21% 30.6% 35.0% 39.6% 42.8%

3 5.31% 6.84% 8.38% 33.7% 38.6% 43.7% 47.1%

4 5.75% 7.24% 8.76% 40.2% 45.4% 50.8% 54.4%

5 6.10% 7.44% 8.79% 42.8% 48.7% 54.7% 58.7%

6 5.67% 7.31% 8.99% 42.2% 47.0% 51.8% 55.1%

7 5.94% 7.46% 8.99% 44.0% 49.2% 54.5% 58.0%

8 6.49% 7.74% 9.01% 48.7% 55.1% 61.4% 65.5%

9 6.01% 7.72% 9.46% 48.7% 53.4% 58.1% 61.1%

10 7.38% 8.68% 10.00% 67.6% 72.9% 77.9% 77.9%

Average 5.71% 7.21% 8.73% 41.1% 46.1% 51.1% 54.2%

*Plan's current return assumption net of expenses.

Investment Consultant

Distribution of 20-Year Average Geometric Net Nominal Return

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%

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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

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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

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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

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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.