#1VERMONT PENSION INVESTMENT COMMISSION core Finalist Presentation for Actuarial Consulting Services June 27, 2023 GRS#2INTRODUCTIONS Proposed GRS Team Presenting Today (GRS Joe Newton FSA, EA, MAAA, FCA Pension Market Leader Office of the Chief Actuary 23 Years of Experience Shelly Jones ASA, EA, MAAA, FCA, CFA Consultant & Actuary 15 Years of Experience 1#3ABOUT GRS OUR FIRM A nationally-recognized actuarial consulting firm established in 1938 Your Public Sector Experts OUR PEOPLE 64 public sector focused credentialed actuaries OUR EXPERTISE We specialize in Pension, OPEB, and Retirement Technology Expert An expert experience t extensive k called in fo 2#4ABOUT GRS CA OR Client Base A Firm with a National Perspective & Strong Local Presence WA MT ND MN AK ID SD WY WI MI PA IA NE OH IL IN NV UT CO KS MO AZ NM ME VT NY NH MD WV VA KY TN OK AR SC GA MS AL TX LA States where GRS has provided actuarial and benefits consulting services FL States where GRS currently provides retained consulting services to statewide systems NC RI 1,000+ clients in nearly 50 states served out of 7 GRS offices across the country GRS serves hundreds of public plans including many cost-sharing plans 41 state or statewide retirement systems covering a total of over 6 million participants and over $1 trillion in assets 3#5ABOUT GRS GRS' Industry Support Society of Actuaries Pension Section Council Retirement Plans Experience Committee SOA Conference of Consulting Actuaries Board of Directors of the CCA and Strategic Planning Committee Joint Program Committee for the Enrolled Actuaries Meeting Committee on CCA ◉ Public Plans Community Professionalism Steering Committee GRS GRS Actuaries Serve on ASB AAA Actuarial Standards Board Full Board Pension Committee American Academy of Actuaries ☐ Public Pensions Committee ☐ Retiree Benefits Subcommittee 4#6WHY GRS ? Experience with Public Sector Environment Risk Management OUR CLIENTS LIKE US ■ We understand legislative sessions and sensitivities ■ Need for unbiased, reliable results ■ Need for a consistent process ■ Risk means different things to different people ■ Our focus is to minimize risk, then have robust processes to manage the remaining risk and meet as many expectations of as many stakeholders as possible T ■ Over 1,000 public sector clients 。 Many clients with us for 30 years or more, some for over 80 years o 99% of our clients surveyed indicated that we met or exceeded their expectations with regard to consultant knowledge and timeliness PUBLIC SECTOR! GRS A SATISFIED CUSTOMER IS THE BEST BUSINESS STRATEGY OF ALL 5#7Inflation 3.23% 2.81% Federal Reserve Bank of Philadelphia 5-Year Annual Average 3.75% 10-Year Annual Average 2.95% Federal Reserve Bank of Cleveland 10-Year Expectation 2.22% 20-Year Expectation 2.29% 30-Year Expectation 2.37% Federal Reserve Bank of St. Louis 10-Year Breakeven Inflation 2.26% 20-Year Breakeven Inflation 2.50% 30-Year Breakeven Inflation 2.26% U.S. Department of the Treasury" Big Question: What is this used for? Forward-Looking Price Inflation Forecasts a Congressional Budget Office" 5-Year Annual Average 10-Year Annual Average Actual Inflation and Expected Inflation can impact pension plans in various ways and present different risks in different circumstances It is important to know how the specific system would be impacted when setting the assumption 10-Year Breakeven Inflation 2.07% 20-Year Breakeven Inflation 2.40% 30-Year Breakeven Inflation 2.21% Source 2019 2022 Change 50-Year Breakeven Inflation 2.34% 100-Year Breakeven Inflation 2.44% Client Investment Consultant 2.30% 2.50% +0.20% Social Security Trustees Ultimate Intermediate Assumption 2.40% Implied Inflation 20-Year Treasuries 1.85% 2.40% +0.55% SSA Trustees Report 2.60% 2.40% -0.20% Survey of Professional Forecasters 2.20% 2.95% +0.75% GRS 6#8Investment Return Assumption Big Question: What is this used for? This assumption is used to predict what percentage of a future benefit payments will be covered by investment return and what percentage by contributions Percentage of Benefits 100 88 80 60 64 40 20 20 Lower Returns/Higher Contributions GRS 0 6% Return 7% Return 8% Return Contributions Earnings 7#9Investment Return Assumption National Trends >8.5% Across the industry return expectations have decreases by 1.00% over the last decade While industry information should not dictate the assumption for a specific system, it is useful to know what decisions similar peers are making 8.5% >8.0% <8.5% 8.0% Distribution of Investment Return Assumptions, FY 01 to present >7.5% <8.0% 7.5% >7.0% <7.5% Median 7.0% >6.5% <7.0% GRS >7.5% <8.0% 7.5% >7.0% <7.5% 7.0% 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Fiscal Year Nov-22 NASRA 6.5% <6.5% 80#10Investment Return Assumption Change since Last Decision Public Fund Data - Investment Return Assumption 40% 35% 30% 25% 20% % of Plans لاس 5% GRS Below 6.75% 6.75% 7.00% 7.25% 2022 7.50% 7.75% 翻 2017 8.00% 8.25% Useful to separate out the trends since last time the assumption was analyzed 9#11Capital Market Assumption Set (CMA) (1) 1 2 3 Investment Return Assumption • Range of Expectations from Experts We will compare results using VPIC's asset allocation to our own survey of investment consultants that work with public sector GRS 2023 CMAM Distribution of 10-Year Average Geometric Probability of Net Nominal Return exceeding 40th 50th 60th 7.00% (2) (3) (4) (5) 5.20% 6.22% 7.25% 42.41% 5.43% 6.57% 7.72% 46.22% 6.05% 7.15% 8.27% 51.38% 4 5.97% 7.18% 8.40% 51.50% retirement systems 5 5.99% 7.21% 8.44% 51.71% 6 6.43% 7.62% 8.83% 55.24% 7 6.55% 7.65% 8.77% 55.93% 8 6.58% 7.68% 8.78% 56.20% • There are both shorter- 9 6.70% 7.78% 8.88% 57.24% term (7-10 year) and 10 6.92% 7.93% 8.95% 59.24% 11 6.82% 7.97% 9.14% 58.43% longer term (20-30 year) expectations Average 6.24% 7.36% 8.49% 53.23% Average from last 3 CMAMS 6.61% GRS 10#12Investment Return Assumption Range of Expectations from Experts Similar information as the previous slide, shown graphically and includes longer term expectations Median Expectation 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% GRS T 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 Investment Consultant 7-10 Years 20-30 Years 7-10 Year Median (6.28%) 20-30 Year Median (7.11%) Current Assumption (7.25%) 11 14#13Investment Return Assumption Sample Time Horizon Illustration This illustration shows how order matters when cashflow is negative. Thus, even though long term returns meet the assumptions, if the returns are lower over the short-term, asset accumulation and thus funding status will be impacted 125% 100% 79% 75% Funded Ratio 118% Scenario A 103% Scenario B Scenario C 81% 80% - Scenario D 50% -9.9% 12.7% 6.0% 5.3% 9.9% -10.8% 25% 14.0% 20.3% 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 The above scenarios all achieve a 7.25% compound return over a 20-year period. All scenarios have the same annual returns, in the same order, but a different starting point. -7.6% 13.6% 17.2% 10.9% 0.1% -2.9% 5.3% 36.7% GRS 27.5% 19.8% -8.9% 0.2% 12#14Investment Return Assumption • We will also look at the historical trend and variability in Historical Change in Expectations 10-Year Median Expected Return Using Current Target Allocation and Last 5 GRS Surveys the survey results 8.00% 7.40% Stability has value 7.50% 7.10% 6.80% 7.00% 6.50% 6.30% 6.10% 6.7% Average Changing the 6.00% assumption is its 5.50% 5.00% own risk factor and 4.50% the impact should 4.00% be considered 2019 2020 2021 2022 2023 GRS 13#15Philosophy Understand Your Limitations "It is difficult to make predictions, especially about the future" - Danish proverb GRS 14#16Investment Return Assumption How does this impact the outcomes? Projected Contribution Rates Sensitivity to Actual Investment Returns 40% 29.0% 30% 20% 10% 0% 30.5% 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 Fiscal Year Future 7% Investment Returns - Future 6% Investment Returns Future 5% Investment Returns GRS Assumes all other assumptions exactly met 15#17Investment Return Assumption How does this impact the outcomes? Projected Contribution Rates Sensitivity to Changes in Assumptions and Actual Investment Returns 45% 36% 29.0% 27% 18% 9% 0% 40.6% 37.3% 30.5% 16.2% 7.0% 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 Future 7% Investment Returns Fiscal Year Future 6% Investment Returns Future 5% Investment Returns Change Assumption to 5%, Actual Return 5% Assumes all other assumptions exactly met GRS 16#18Asset Smoothing Smoothing Dampens the Short Term Volatility $225 $200 $175 $150 $125 $100 $75 $50 $25 2000 2002 2004 $193.9 $184.2 2006 2008 2010 2012 2014 2016 2018 2020 2022 -Market -Smoothed Assumes all other assumptions exactly met GRS 17 17#19Asset Smoothing Benefits/Costs of Approaches Example from ALM Study for other System, all considered 5 year smoothing Typical Closed Base Approach Adjustment Method Hybrid Approach 18% 9% 13% Probability of a Contribution Increase of 1%+ of Payroll Probability Funded Ratio 28% 31% 28% <80% in 20 Years Probability Funded Ratio 5% 15% 5% <70% in 20 Years GRS 18#20QUESTIONS Thank you for the opportunity to meet with you today. 19