South Dakota Retirement System...Jul 2014 Jan 2015 Jul 2015 Jan 2016 Jul 2016 Jan 2017 Jul 2017 Jan...
Transcript of South Dakota Retirement System...Jul 2014 Jan 2015 Jul 2015 Jan 2016 Jul 2016 Jan 2017 Jul 2017 Jan...
South Dakota
Retirement System
Projected Funded Status as of June 30, 2019,
Risk Analysis, and SDRS Comparisons
June 5, 2019
1
Projected Funded Status and COLAs
• SDRS contributions are fixed and benefits are variable based on affordability
• COLA is primary variable benefit and will vary directly with both inflation and long-
term affordability
• Fair Value Funded Ratio (FVFR) is expected to remain at 100% but:
– Investment returns significantly or sustained below 6.5% assumption may result in COLA
of 0.5%, a FVFR less than 100%, and a required Corrective Action recommendation
– Returns significantly or sustained above the 6.5% assumption could increase the FVFR
above 100%
• The following exhibits examine:
– SDRS COLAs and inflation since 2010
– Projected FVFR at June 30, 2019 and corresponding COLA range
– Risk analysis showing:
• Projected COLA ranges at June 30, 2020 through June 30, 2022 based on ranges of investment
returns
• Likelihoods based on SDIC June 2018 investment portfolio statistics (mean expected return of
6.19% with 15.4% one-year standard deviation)
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Inflation and SDRS COLAs Since 2010
0.0%
3.6%
1.7%
1.5%
1.7%
0.0% 0.3%
1.96%
2.79%
1.5%
2.1%
3.1%
2.1%
3.1% 3.1% 3.1%
2.1%
1.89%2.03%
2.5%
0%
1%
2%
3%
4%
2011 2012 2013 2014 2015 2016 2017 2018 2019 Average
Annual Inflation and SDRS COLA Increases 2011-2019
Prior Year Inflation (Increase in 3rd quarter CPI-W) SDRS COLA Effective July
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Inflation and SDRS COLAs Since 2010
14.3%
14.3%
10.4%
8.5%
6.9%
5.1%
5.1%
4.80%
2.79%
25.0%
22.4%
18.8%
16.3%
12.8%
9.4%
6.1%
3.96%
2.03%
0% 10% 20% 30%
Before 7/1/2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017
FY 2018
Retirement Date
Cumulative Inflation and SDRS COLA Increases 2011-2019
Cumulative Inflation (Increase in 3rd Quarter CPI-W) Cumulative SDRS COLA Increases
4
Inflation Measurement
for Social Security and SDRS COLAs
(1) Increase in the third calendar quarter average over the prior highest third calendar quarter average is the specified inflation measurement for the
Social Security COLA effective the following January and the SDRS COLA effective the following July
(2) Increase in most recent three-month average over July to September, 2018 average (through 7 months). April, 2019 index is up 1.21% from the
2018 average.
215
225
235
245
255
Jul 2014 Jan 2015 Jul 2015 Jan 2016 Jul 2016 Jan 2017 Jul 2017 Jan 2018 Jul 2018 Jan 2019 Jul 2019
Index Monthly CPI-W and 3rd Quarter Average
3rd Qtr Ave CPI-W
0.35% Increase(1)
2.79% Increase(1)
0.58% Increase(2)
No Increase(1)
1.96% Increase(1)
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Projected Funded Status as of June 30,
2019 and 2020 Maximum COLA*
* Before consideration of liability gains/losses for year ending June 30, 2019. June 30, 2018 Baseline FVFR was 97.7% and Restricted Maximum
COLA was 2.03%.
If Net Investment
Return for FYE
June 30, 2019 is:
Step 1:
Determine Baseline
FVFR(Using Baseline COLA
assumption of 2.25%)
Step 2:
Determine Restricted
Maximum COLA(Resulting in FVFR of 100%)
Step 3:
Determine FVFR(Using Baseline COLA or Restricted
Maximum COLA, if applicable)
(8.3%) 84% 0.50% 100%Minimum Return to
Avoid Corrective Actions
8.8% 100% Unrestricted: 3.5% 100%Minimum Return for
100% FVFR with
Baseline COLA
6.5% 98% 2.04% 100%Assumed Return
(5.0%) 87% 0.88% 100%
(2.5%) 89% 1.15% 100%
0.0% 92% 1.41% 100%
2.5% 94% 1.66% 100%
5.0% 96% 1.90% 100%
7.5% 99% 2.13% 100%
Return Examples
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Risk Analysis
• Actuarial standards now require identification & assessment of future funding risks
(ASOP 51)
• Assessment methods can include scenario tests, sensitivity tests, stochastic
modeling, stress tests, and comparing liability to “risk-free” liability
• The most significant and immediate risk to SDRS is investment risk
• Investment returns will first impact the variable SDRS COLA
– Less than assumed will reduce restricted maximum COLA or require corrective actions
– Greater than assumed will increase maximum or enable full COLA range
• However, the variable COLA will not be sufficient to maintain 100% FVFR in all
cases and additional corrective actions may be required
• The following exhibits show the likelihood of restrictions to the COLA and
additional corrective actions over the next three years based on the expected
volatility of investment returns
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Projected Future COLA Ranges: 2021Assuming 2.5% Net Investment Return for FY19
• Following an assumed net investment return of 2.5% for FY19, the likelihoods for 2021 COLA ranges,
which are primarily driven by FY20 investment returns, are:
– 33% likelihood that the baseline COLA will be payable (CPI-W between 0.5% and 3.5%)
– 43% likelihood that the COLA will have a restricted maximum (CPI-W between 0.5% and the restricted maximum)
– 24% likelihood that a 0.5% COLA will be payable and additional Corrective Action recommendations will be required
* Before consideration of liability gains/losses. Likelihoods based on SDIC 2018 investment portfolio statistics. Assumes 2.25% annual inflation.
-60% -40% -20% 0% 20% 40% 60% 80% 100% 120%
FY 2020 Investment Return
24% 43% 33%
76%
FY 2020 Net InvestmentReturn Less than (4.9%)
COLA=0.5% & Corrective Action Recommendations Required
FY 2020 Net Investment Return (4.9%) to 12.8%
Restricted Maximum COLA
FY 2020 Net Investment Return Greater than 12.8%
Full COLA: 0.5% to 3.5%
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• Following an assumed net investment return of 2.5% for FY19, the likelihoods for 2022 COLA ranges,
which are primarily driven by FY20 and FY21 investment returns, are:
– 38% likelihood that the baseline COLA will be payable (CPI-W between 0.5% and 3.5%)
– 32% likelihood that the COLA will have a restricted maximum (CPI-W between 0.5% and the restricted maximum)
– 30% likelihood that a 0.5% COLA will be payable and additional Corrective Action recommendations will be required
* Before consideration of liability gains/losses. Likelihoods based on SDIC 2018 investment portfolio statistics. Assumes 2.25% annual inflation.
Projected Future COLA Ranges: 2022Assuming 2.5% Net Investment Return for FY19
-60% -40% -20% 0% 20% 40% 60% 80% 100% 120%
FY 2020-2021 Cumulative Investment Return
30% 32% 38%
70%
Cumulative Net InvestmentReturn Less than 0.9%
[Annualized Less Than 0.4%]COLA=0.5% & Corrective Action
Recommendations Required
Cumulative Net Investment Return 0.9% to 20.0%
[Annualized 0.4% to 9.5%]Restricted Maximum COLA
Cumulative Net Investment Return Greater than 20.0%
[Annualized Greater than 9.5%]Full COLA: 0.5% to 3.5%
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• Following an assumed net investment return of 2.5% for FY19, the likelihoods for 2023 COLA ranges,
which are primarily driven by FY20, FY21, and FY22 investment returns, are:
– 40% likelihood that the baseline COLA will be payable (CPI-W between 0.5% and 3.5%)
– 27% likelihood that the COLA will have a restricted maximum (CPI-W between 0.5% and the restricted maximum)
– 33% likelihood that a 0.5% COLA will be payable and additional Corrective Action recommendations will be required
* Before consideration of liability gains/losses. Likelihoods based on SDIC 2018 investment portfolio statistics. Assumes 2.25% annual inflation.
Projected Future COLA Ranges: 2023Assuming 2.5% Net Investment Return for FY19
-60% -40% -20% 0% 20% 40% 60% 80% 100% 120%
FY 2020-2022 Cumulative Investment Return
33% 27% 40%
67%
Cumulative Net InvestmentReturn Less than 7.0%
[Annualized Less Than 2.3%]COLA=0.5% & Corrective Action
Recommendations Required
Cumulative Net Investment Return 7.0% to 27.6%
[Annualized 2.3% to 8.5%]Restricted Maximum COLA
Cumulative Net Investment Return Greater than 27.6%
[Annualized Greater than 8.5%]Full COLA: 0.5% to 3.5%
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Projected Future COLA Ranges: 2023if Starting Baseline FVFR = 120%
• If the starting baseline FVFR is 120%, the likelihoods for 2023 COLA ranges, which are primarily driven by
FY20, FY21, and FY22 investment returns, are:
– 76% likelihood that the baseline COLA will be payable (CPI-W between 0.5% and 3.5%)
– 15% likelihood that the COLA will have a restricted maximum (CPI-W between 0.5% and the restricted maximum)
– 9% likelihood that a 0.5% COLA will be payable and additional Corrective Action recommendations will be required
* Before consideration of liability gains/losses. Likelihoods based on SDIC 2018 investment portfolio statistics. Assumes 2.25% annual inflation.
-60% -40% -20% 0% 20% 40% 60% 80% 100% 120%
FY 2020-2022 Cumulative Investment Return
9%
15%76%
91%
Cumulative Net InvestmentReturn Less than (15.7%)
[Annualized Less Than (5.5%)]COLA=0.5% & Corrective Action
Recommendations Required
Cumulative Net Investment Return (15.7%) to (0.3%)
[Annualized (5.5%) to (0.1%)]Restricted Maximum COLA
Cumulative Net Investment Return Greater than (0.3%)
[Annualized Greater than (0.1%)]Full COLA: 0.5% to 3.5%
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Projected Funded Status and Risk
Analysis Summary
• Absent a significant run up or downturn in investment markets, the FVFR will be
100% at June 30, 2019
– Net FY19 returns greater than approximately 9% would result in an unrestricted 2020
COLA (COLA equal to inflation between 0.5% and 3.5%)
– Net FY19 returns less than approximately -8% would reduce the 2020 restricted
maximum COLA to 0.5% and also require corrective action recommendations
• Results to date would indicate a FY20 SDRS COLA equal to inflation – but inflation
and investment returns can change quickly and dramatically
• Assuming FY19 net investment returns remain at approximately 2.5%, the
likelihood of additional required corrective action recommendations in the near
future varies from approximately 24% (one year) to approximately 33% (three
years)
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Stress Testing
• Stress testing is one risk assessment method listed in ASOP 51
• A few organizations are advocating mandatory standardized stress testing:
– Striving to have their version endorsed as appropriate standard approach
– Working to have state legislatures require standard approach
– Often includes funding implications of a sustained, significant economic downturn
without recognizing the impact of future plan adjustments
• To be valuable, risk analysis must:
– Be tailored to each plan specifics
– Include actions that will be taken in an economic downturn
– Answer questions specific to each system
– Offer decision-useful information
• SDRS has actively assessed risks prior to these requirements and has focused on
SDRS specifics identifying the economic conditions that would require corrective
actions and the likelihood of those events
13
Additional Risk Assessments
• Additional insight can be gained from scenario testing – examining the impact of
specified conditions or events on SDRS
• The following exhibits compare future results if investment returns equal the
assumed 6.5% with the results if future returns are 5% and:
– All other experience matches assumptions
– FY 2019 net investment returns equal 2.5%
• Results are stable under the 6.5% scenario with gradual increases in the restricted
maximum COLA
• Under the 5.0% return scenario, funding will slowly deteriorate until reaching the
corrective action threshold in 2031
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Additional Risk Assessments:
5% Investment Returns
94%
97%
93%
84% 83%
60%
80%
100%
120%
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Projected Baseline Fair Value Funded Ratio
6.5% Future Returns
5.0% Future Returns
Corrective Actions Required in 2031
1.68%
1.96%
1.54%
0.50% 0.50%
0.50%
0.0%
1.0%
2.0%
3.0%
2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Projected COLA Range 6.5% Future Returns
5.0% Future Returns
Corrective Actions Required in 2031
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Additional Risk Assessments:
Negative Cash Flow
• The amount of negative cash flow (contributions less benefit payments and
expenses) is also an important risk factor since it can also impact future
investment returns
– The projected negative cash flow is expected to grow from approximately 3% to almost
4% of beginning of year assets with a 6.5% return
– If returns are 5.0% per year, the negative cash flow grows more rapidly
-3.3%
-3.8%-3.3%
-4.1%
-5.0%
-4.0%
-3.0%
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Projected Net Cashflow as Percent of Assets
6.5% Future Returns
5.0% Future Returns
Corrective Actions Required in 2031
Future Payroll Growth = 3.0%
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Additional Risk Assessments:
Negative Cash Flow
• Changes in the growth of covered payroll can also influence cash flows
– If payroll growth slows to 1.5% per year, the projected negative cash flow will be larger
– Investment return less than the assumed 6.5% together with lower payroll growth results
in even larger negative cash flow
-3.3%
-4.2%
-3.4%
-4.5%
-5.0%
-4.0%
-3.0%
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Projected Net Cashflow as Percent of Assets
6.5% Future Returns
5.0% Future Returns
Corrective Actions Required in 2030
Future Payroll Growth = 1.5%
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Cash Flow Considerations:
Benefit Starts
• As expected, the number of benefit starts during FY19 is up considerably from prior years
0
100
200
300
400
500
600
July August September October November December January February March April May June
Benefit Starts by Fiscal Year and Month
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
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• After three years of declining retirements, the number of retirements in FY19 is up 19%
• We expect the elevated number of retirements to continue through FY 2022
• All South Dakota public employers will need to replace a large portion of their workforce
0
500
1,000
1,500
2,000
July August September October November December January February March April May June
CumulativeFY Starts Cumulative Benefit Starts by Fiscal Year and Month
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
Total Starts2012 1,5602013 1,5092014 1,5592015 1,5632016 1,4922017 1,4212018 1,4192019 1,687
Cash Flow Considerations:
Benefit Starts
19
• Projected benefit payment increase was 6%. Through April, payments had increased 5.4%.
$450
$482$510
$541$564
$495
7.1%(1)5.8%(1)
6.0%(1)4.3%(2)
5.4%(3)
$0
$200
$400
$600
FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 thru April
Millions Benefit Payments and Refunds by Fiscal Year
Annuities Refunds Increase
(1) Increase includes 3.1% COLA.(2) Increase includes 2.1% COLA. (3) Increase in FY 2019 through April over FY 2018 through April. Increase includes 1.89% COLA.
Historical Cash Flow Growth
20
Summary of Additional Risk
Assessments
• Automatically adjusting features of SDRS will stabilize the funded status and cash
flow requirements under many scenarios
• However, severe or sustained economic downturns or slowdowns may result in
SDRS reaching corrective action thresholds and may increase the cash flow
requirements
• Identifying and monitoring risks will remain critical
• Refining an action plan will help drive decisions in a crisis
21
Public Plan Criticism
• Frequent criticism of public plans focuses on high and consistently increasing
contribution requirements, increasing unfunded liability and their perceived causes
• Most frequently cited causes:
– Contributions have been less than actuarial requirements
– Defined benefit plans are unsustainable:
• Benefits are too generous
• Can be manipulated by employee or employer actions
• Retirement can last longer than career
– Assumptions are too optimistic and assumed investment return should be reduced
• Recent returns have been less than assumed
• Benefits should be valued on “risk-free” discount rate
• Arguments often conflated, touting “risk-free” discount rate as more realistic assumed investment
return
– Actuarial practices that have not highlighted the risks of inadequate funding
• A combination of these causes has frequently magnified the problem
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SDRS is Different
SDRS
• Fixed member and employer
contributions
• Variable benefits
• Statutory thresholds delineating
acceptable funding measurements
– Corrective actions required if
thresholds not met
• 6.5% investment return assumption
• SDIC invests assets
Typical State Retirement System
• Fixed member, variable employer
contributions
• Fixed benefits
• No pre-determined limits on
measurements
– No definitive call to action
.
• 7.25% investment return assumption
• Responsibility for asset management
may be combined with administration,
or separate
These structural and operational differences have been key to SDRS success
23
SDIC Results: Statewide Pension Plan
One-Year Returns
Investment return data on 114 statewide plans from Public Plans Database. Calendar year 2018 returns assumed to be -3% if not yet reported.
-30%
-20%
-10%
0%
10%
20%
30%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Annual Investment Returns
SDRS Median
24
SDIC Results: Statewide Pension Plan
Five-Year Returns
Investment return data on 114 statewide plans from Public Plans Database. Calendar year 2018 returns assumed to be -3% if not yet reported.
-5%
0%
5%
10%
15%
20%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Rolling 5-Year Geometric Average Returns
SDRS Median
25
SDIC Results: Statewide Pension Plan
10-Year Returns
Investment return data on 114 statewide plans from Public Plans Database. Calendar year 2018 returns assumed to be -3% if not yet reported.
0%
2%
4%
6%
8%
10%
12%
2010 2011 2012 2013 2014 2015 2016 2017 2018
Rolling 10-Year Geometric Average Returns
SDRS Median
26
SDIC Results: Statewide Pension Plan
18-Year Returns
OK Teachers 7.36%SDRS 7.27%
Vermont State 7.08%
Investment return data on 114 statewide plans from Public Plans Database. Calendar year 2018 returns assumed to be -3% if not yet reported.
Median5.88%
0%
2%
4%
6%
8%
18-Year Geometric Average Returns for 114 Statewide Plans SDRS 7.27%
27
SDRS Results:
Funded Status Comparisons
Data from Public Plans Database. Many calendar year 2018 results are not yet reported and when reported will likely reduce the 2018 median plan
funded ratio.
99.3%
109.2% 110.6%
116.8%121.4%
104.8%
76.5%
87.9%
102.9%
92.8%
103.2%107.3%
104.1%
96.9%100.1% 100.0%
80.4%84.5% 86.4% 86.8%
93.0%
75.1%
62.6%66.0%
70.1% 68.7%72.0%
77.6%74.3%
71.0%73.9% 75.1%
0%
50%
100%
150%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Fair Value Funded Ratio
SDRS Median Public Sector Plan
SDRS' FVFR exceeds median by an average of 26.1% since 2003
28
SDRS Results:
Contribution Comparisons
Data from NASRA Public Fund Survey.
6.0%
6.5%
8.5%
9.4%10.6%
12.9% 13.3% 12.8%
5.0%5.7%
6.0%
0%
5%
10%
15%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Fiscal Year
Contribution Rates for General EmployeesSDRS and Median, Large Public Sector Plans (In Social Security)
SDRS - Member and Employer Median Employer Median Member
29
SDRS Results:
Plan Maturity Comparisons
Median public sector plan data from Public Plan Database.
4.284.74
5.115.57
6.29
5.36
3.894.36
5.32 5.225.98
6.68 6.516.10 6.30 6.43
3.804.22 4.39 4.60
4.984.22
3.463.85 4.14 4.25
4.635.21 5.00 4.84
5.24 5.19
0.00
2.00
4.00
6.00
8.00
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Fair Value of Assets to Active Payroll Ratio
SDRS Median Public Plan
SDRS’ assets to payroll ratio is growing about 70% faster than other systems’
4.31 4.34 4.62 4.765.18 5.12 5.09 4.96 5.17
5.62 5.796.23 6.26 6.29 6.29 6.43
5.08 5.25 5.38 5.45 5.59 5.70 5.84 5.97 6.27 6.55 6.82 6.94 7.15 7.26 7.35 7.24
0.00
2.00
4.00
6.00
8.00
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Accrued Liability to Active Payroll Ratio
SDRS Median Public Plan
SDRS’ liability to payrollratio is growing about 12% slower than other systems’
30
SDRS Results:
Cash Flow Comparisons
Median public sector plan data from Public Plan Database.
-1.1%
-0.9%
-1.4%
-1.6% -1.7%
-1.5%
-2.0%
-2.9%-2.7%
-2.5%
-2.9%
-2.6%-2.5%
-2.7%
-2.9%-2.7%
-2.4%-2.3% -2.3% -2.2% -2.2%
-1.8%
-2.4%
-3.1% -3.0%
-2.9%
-3.1%
-2.8%
-2.6%
-3.0%
-3.2%
-3.0%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Net External Cash Flow as a Percentage of Beginning Assets
SDRS Median Public Sector Plan
In recent years, SDRS net
external cash flow has been a
similar percentage of assets as
the median public sector plan
31
Cash Flow Comparisons
Median public sector plan data from Public Plan Database.
3.3% 3.8%3.0% 2.7% 2.5% 2.2% 2.6%
3.5% 3.1%2.5% 2.6% 2.4% 2.1% 2.1% 2.3% 2.1%
3.9% 4.2% 4.0% 4.0% 4.0% 3.8%4.5%
5.6% 5.2% 5.0% 5.1% 5.2% 5.0% 5.4% 5.5% 5.3%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Contributions as a Percentage of Beginning Assets
SDRS Median Public Sector Plan
-4.4% -4.6% -4.4% -4.3% -4.2% -3.7%-4.6%
-6.3%-5.8%
-5.0% -5.4% -5.0% -4.6% -4.8% -5.2% -4.9%
-6.4% -6.5% -6.2% -6.1% -6.3% -5.9%-7.1%
-8.8% -8.7% -8.2% -8.5% -8.2% -7.8% -8.2%-8.7% -8.4%-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Benefits and Expenses as a Percentage of Beginning Assets
SDRS Median Public Sector Plan
But both SDRS contributions and expenses are a smaller percentage of assets than the median plan
32
Summary of SDRS Success
• Investment performance has been the primary driver
• Fixed contributions, variable benefits, benefit improvement discipline, and statutory
requirements for corrective actions have been important factors
• Investment assumptions aligned with SDIC outlook
• Risks evaluated and communicated
• Planning, goal setting, and monitoring results