NHRS: Past, Present, and Future

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Cover: To fully understand where NHRS stands today and where it is headed, it’s important to understand how we got here. In this presentation, we will walk through some significant events in the history of NHRS and explain how many decisions made long ago continue to resonate. Slide 2: In 1967, RSA 100-A was enacted, establishing the New Hampshire Retirement System as a contributory, public employee defined benefit plan. Prior to the creation of NHRS, there were separate retirement systems for firefighters, police, teachers, and employees. NHRS was set up with two member groups – Group I employees and teachers, and Group II police and fire – with separate benefit provisions for each group. The state paid 40% of the employer contribution for teacher members, which was a carryover from the previous Teachers Retirement System. Slide 3: RSA 100-A was amended in 1977 to require the State to pay 35% of the local employer contributions for teacher, police, and fire members employed by political subdivisions. This change coincided with the an increase in employer contributions for police and fire stemming from significant improvements to Group II benefits that were enacted in 1974. These subsidies remained in place until they were reduced beginning in 2009 and ultimately eliminated in 2011. Slide 4: The Special Account was created to pay for cost-of-living-adjustments (aka COLAs) and other post-employment benefits (aka OPEB), from “excess earnings” above the retirement system’s assumed rate of return. In subsequent years, the definition of “excess” was modified by the Legislature periodically. Previously, COLAs were typically funded through General Fund appropriations. Dedicating investment income over a certain level to pay for additional benefits – known as “gain-sharing” – left NHRS vulnerable in down markets, as investment income in strong years was essentially capped. The investment income diverted into the Special Account was unavailable to offset years in which the retirement system did not achieve its assumed rate of return, contributing to a structural unfunded liability. Slide 5: In 1984, the NH Constitution was amended by referendum. Part I, Article 36-a, established that trust fund assets are for the exclusive benefit of providing benefits, not to be diverted for any other purpose. The amendment also mandated the NHRS Board of Trustees to certify actuarially sound employer contribution rates, and required employers to pay those rates as certified. This amendment distinguishes NHRS from many retirement systems where the annual funding level is at the discretion of the Legislature. Slide 6: The retirement system’s autonomy from the executive branch was confirmed by the NH Supreme Court in NHRS v. Sununu. This case, which dealt with whether or not NHRS contracts had to be approved by the Governor & Executive Council, recognized the importance of maintaining independence for the retirement system so that it could operate for the exclusive benefit of its members and beneficiaries, and, if necessary, take action to protect the trust fund. Slide 7: Following strong investment performance in previous years, benefit improvements for all groups were enacted in the late 1980s. These changes increased the retirement system’s unfunded liability, which is the difference between the value of assets on hand and the present value of future benefit obligations. The changes resulted in a large projected increase in employer contribution rates beginning in the 1992-93 biennium. By 1991, however, the state was feeling the impact of a national recession. In response, the Legislature passed House Bill 51, adopting new actuarial methodology and setting the assumed rate of return at 9.75% for the fiscal year ending June 30, 1992, resulting in substantially lower employer contributions than previously projected. Originally promoted as a “short-term” adjustment, HB 51 resulted in artificially depressed employer contribution rates from 1992 to 2009. Slide 8: Structural funding issues became more apparent following the recession of 2001-02 and policymakers began looking at ways to shore up the retirement system. In 2007, House Bill 653 changed the actuarial funding methodology to a more widely accepted method that is still in use, and created a closed, 30-year amortization of the retirement system’s unfunded liability beginning in fiscal year 2010. The same year, HB 876 created a commission to study the long term viability of the retirement system. The commission made a number of material recommendations, many of which were subsequently enacted into law. One of these recommendations led to the creation of a decennial retirement commission to convene every 10 years. Slide 9: The following year, in this midst of the largest economic crisis since the Great Depression, the Legislature enacted HB 1645, which established an Independent Investment Committee, transferred $250 million from Special Account to stabilize the Pension Trust, and made several other changes. Several provision of this bill were challenged by member organizations in AFT v. State of NH. Slide 10: RSA 100-A was amended in 2009 to reduce the 35% state subsidy toward local employer contribution rates for teachers, police, and firefighters to 30% in Fiscal Year (FY) 2010 and 25% in FY 2011, resuming to 35% in FY 2012. However, in 2011 the Legislature modified changed the 2012 appropriation to a lump sum of $3.5 million and eliminated the state contribution entirely for subsequent years. The elimination of the subsidy essentially increased local taxpayer contributions toward teacher, police and fire retirement costs by more than 50%. Several employers challenged this action in City of Concord v. State of NH. Slide 11: While the 2007-08 changes to the pension statute primarily dealt with funding and administration, the Legislature on 2011 focused on the benefit side of the equation. House Bill 2 was enacted, increasing contribution rates for all members and changing benefit provisions for some current members and all future hires. These changes essentially created a three-tier benefit structure based on a member’s “vested by” or “hired by” date. HB 2 also created a statutory definition of “part-time” for retirees working for participating employers; permanently froze Medical Subsidy payment amounts; and changed the composition of the NHRS Board by eliminating legislator members, reducing public employee members, and increasing employer and public members. Several provision of this bill were challenged by member organizations in two cases, PFFNH v. State of NH (1&2). The first case challenged the contribution increase and the second case challenged other benefit adjustments. Slide 12: In the ensuing years, the NH Supreme Court decided in favor of the State of NH in four separate pension cases: -Against the City of Concord in its claim that eliminating the employer contribution subsidy was effectively the imposition of an unconstitutional unfunded mandate. -Against members and retirees in the other cases, which argued that changes such as increasing member contributions, revising the definition of earnable compensation, and eliminating or reducing benefits represented an unconstitutional breach of contract rights. In deciding the three member cases, the Court adopted the ‘unmistakability doctrine,’ which states that laws can be changed prospectively unless there was an unmistakable legislative intent to establish a contractual right that cannot be modified. Slide 13: In the fall of 2017, the Decennial Commission to study the long-term viability of the retirement system met for several months and heard from representatives of member, retiree, and employer organizations, NHRS staff, and outside experts on public pension policy and funding. Several recommendations from the commission became the basis for subsequent legislation, including revisions to the working after retirement laws, the adoption of layered amortization – a mechanism to reduce volatility by amortizing future asset gains or losses over closed, 20-year periods; a one-time $500 retiree payment; and increasing terms of NHRS Trustees from 2 to 3 years. Slide 14: The commission also hired an independent third party – the Center for Retirement Research (CRR) at Boston College – to review NHRS’ past and future funding progress and provide recommendations. The Boston College-CRR report found that despite its below-average funded status, NHRS costs were low in comparison to the national average and its current actuarial assumptions were more conservative than most public plans. Slide 15: Here are some of NHRS’ key demographic, funding and actuarial metrics at the close of the most recent fiscal year. The funded ratio, which is the ratio of the actuarial value of assets to the benefits our members have earned, has continued to improve over the past decade, despite paying out billions in pension benefits over the same time period. Most of those payments stay in New Hampshire, where nearly 80% of our retirees and beneficiaries still live, and provide a significant economic impact. Slide 16: This chart shows the changes in trust fund assets over the past decade. Slide 17: This chart, which is the most recent national data available, shows how NHRS’ funded ratio has increased over time. In contrast, the average funded ratio for all US public pension plans has decreased. The three triangles on the chart indicate years in which NHRS reduced its assumed rate of investment return, which has decreased from 8.5% to 6.75%. NHRS has gone from having one of the highest assumed rates of return in the 1990s to one of the most conservative assumed rates of return today. Slide 18: Fiscal year investment returns reflect year-over-year volatility in financial markets. This chart also illustrates why actuaries use five-year smoothing when calculating the actuarial return. Without this smoothing, employer contributions rates could experience significant swings every two years. Slide 19: As previously mentioned, steps have been taken to ensure the errors of the past would not be repeated today or in the future. Because of its strong constitutional and statutory foundation, NHRS is on the path to full funding. Slide 20: The retirement system is making good progress on paying down its unfunded liability. A slow, steady decrease in the liability is projected in the coming decades, with a corresponding increase in the funded ratio. Slide 21: Of course, a lot of plans can look good in theory, but how can we be certain that NHRS’ funding plan will be successful in reality? The experience in Maine paints an encouraging picture. As demonstrated in this chart, the changes made in Maine bear a striking resemblance to the statutory and governance decisions made in New Hampshire. However, Maine made its changes a dozen years before we did and is therefore further along its path to full funding. Slide 22: Although NHRS is moving in the right direction, there are still factors largely beyond our control. These include future legislative changes, as well as unforeseen economic and demographic changes. Regardless of what lies ahead, our mission is straightforward, “To provide secure retirement benefits and superior service.” The NHRS Board and staff are committed to promoting the sustainability and stability of the retirement system for the benefit of all members and beneficiaries. Slide 23: If you would like to learn more about some of the topics covered in this presentation, the retirement system’s “Now You Know” series of issue briefs provide additional information and context on funding, benefits, investments, and plan governance. These briefs can be found at www-dot-nhrs-dot-org/now-you-know Slide 24: (Disclaimer-no audio).

NHRS Benefit Overview for Employers

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NHRS 101

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Slide 1: The New Hampshire Retirement System presents “NHRS 101,” updated in January 2021. Slide 2: This presentation contains an overview of the New Hampshire Retirement System. Topics covered include membership, investments, contributions and funding, benefits, and legislation. Additional statistical data and background is appended to the end of the presentation. Slide 3: The mission of the New Hampshire Retirement System is “To provide secure retirement benefits and superior service.” Our vision is to “fulfill our role as fiduciary of the trust and deliver retirement benefits to our members and beneficiaries through a commitment to value, innovation and excellence.” Slide 4: The retirement system was established in 1967 when four separate state retirement systems were consolidated. NHRS provides retirement, disability, and death benefits, as well as a medical subsidy to eligible retirees and dependents. The retirement system is a contributory, defined benefit plan. Once a member attains eligibility, he or she may receive a guaranteed lifetime pension. Pension benefits are funded through employee and employer contributions, and investment income. Historically, investment returns have provided the bulk of trust fund assets. Slide 5: NHRS is a component unit of state government overseen by a 13-member Board of Trustees consisting of employee representatives, employer representatives, public members and the state treasurer. There is an independent investment committee to manage plan assets. The retirement system is governed by statute, RSA 100-A, and the NH Legislature is the plan sponsor. NHRS staff implements the statute, administrative rules, and board policies – and also must adhere to the Internal Revenue Code. The NH Constitution, Art. 36-a, protects trust funds ‘for the exclusive purpose’ of providing benefits, requires the Board to certify employer contribution rates based on sound actuarial practice, and requires employers to pay the rates certified. Slide 6: Members of the Board of Trustees and the investment committee are fiduciaries who are required to act in the best interest of plan participants to ensure that the retirement system is well-managed and adequately funded to meet its obligations. In the long term, contributions from members and employers plus investment income going into the trust fund must equal benefit payments and expenses going out. Slide 7: This chart shows changes to trust fund assets over the past 10 years. Slide 8: NHRS has two membership groups. Group I consists of Employee and Teacher members; Group II consists of Police and Fire members. There are nearly 470 participating employers, with the largest employer being the State of New Hampshire. We also have counties, school districts, cities and towns, and other political subdivisions. Participation in the retirement system is mandatory for full-time teachers, police and firefighters. Participation by full-time political subdivision employees is not mandatory, although most local employers have opted to participate in the retirement system. Slide 9: This chart shows the current breakdown of members and retirees by group. Slide 10: This slide shows the profile of an average member and an average retiree. Slide 11: In terms of investment management, the Board of Trustees has a high level role which includes setting an investment policy, including a target asset allocation and acceptable ranges, and hiring an investment consultant. These tasks are done based on recommendations of the independent investment Committee – or IIC, which was created by legislation more than a decade ago. The IIC, which typically meets monthly in public session, oversees investments, hires service providers such investment managers, and prepares a comprehensive annual investment report. Since its inception, the IIC has consistently out-performed peer retirement systems. Slide 12: The IIC regularly reviews all investments. The goal is to meet or exceed the retirement system’s assumed rate of investment return over the long term while managing risk and liquidity through a diverse portfolio of asset classes. Slide 13: These pie charts show target and actual asset allocation at the close of the most recent fiscal year. The five main asset classes are domestic equity, non-US equity, fixed income, alternative investments, and real estate. Slide 14: This chart shows NHRS investment performance over the one-, three-, five-, 10-, 20- and 25-year time periods. The retirement system’s current assumed rate of investment return is 7.25%. Slide 15: This chart shows annual investment performance in each of the past 20 years. The most important point to take away here is that investments do not move in a straight line and while short-term results matter, the financial well-being of the pension plan depends largely upon meeting or exceeding the assumed rate of return over the long term. Slide 16: Member contribution rates are set by statute. Employees and teachers contribute 7% of their pay to the retirement system, police contribute 11.55% and firefighters contribute 11.8%. Employer contributions are not set statute, they are actuarially determined and certified by the Board of Trustees on a biannual basis. There are separate employer contribution rates for employees, teachers, police and fire based on the demographics of each plan. Employer contributions consist of the normal cost, the unfunded actuarial accrued liability and medical subsidy. The NH Constitution requires the full payment of employer contributions. Local employers have paid 100% of contributions for teachers, police and fire since a state subsidy was repealed in 2011. Slide 17: The normal cost is the estimated annual value of pension benefits as they are accrued. This cost is shared by the employer and the member. The unfunded liability is the estimated value of benefits earned in the past, but not yet funded. The cost of the liability is borne solely by the employer. The unfunded liability accounts for more than three quarters of the total employer pension cost. The medical subsidy is a payment made by NHRS directly to an eligible retiree’s former employer to offset any health insurance premiums paid by the retiree. The medical subsidy benefit was closed to active Group I members as of July 1, 2009. There is a limited number of active Group II members eligible for this benefit. Slide 18: This chart shows the employer contribution rates for state employees, political subdivision employees, teachers, police and firefighters. The gray column in the center shows the percentage of the pension cost attributable to the unfunded actuarial accrued liability. Slide 19: Unfunded pension liability – which is more formally referred to as unfunded actuarial accrued liability, or UAAL, in financial statements – is the difference between a retirement system’s assets and the value of benefits already accrued. The primary contributing factors to NHRS’ current unfunded liability were a flawed statutory funding methodology in effect from 1991 to 2007 that led to the long-term under-collection of employer contributions, the diversion of roughly $900 million from the pension fund into the since-repealed special account over roughly the same period, and significant economic downturns in 2001-02 and 2008-09, which impacted investment performance. In addition, the Board of Trustees adopted more conservative actuarial and investment assumptions in 2011 and 2016, which added to the liability. Beginning in 2007 legislative changes were made to address the structural funding issues and put a funding plan in place to pay off the existing liability through 2039. It is worth noting that simply having an unfunded liability does not mean that a pension plan is unable to pay the benefits for which it is presently obligated or to meet current cash flow requirements. More information about the UAAL and many of the other topics covered in this presentation is available on our website, www.nhrs.org. Hover over the “About NHRS” tab and select “Now You Know” from the menu. Slide 20: This chart shows the change in the funded ratio over the past decade. Decreases to the funded ratio in 2011 and 2016 were the result of reductions to the assumed rate of investment return, which served to increase liabilities. The modest improvement in the funded ratio shown is an expected result of the statutory funding plan; increases to the funded ratio are projected to increase at a greater rate in the later years of the payoff period. Slide 21: The retirement system provides four types of retirement benefits: service, disability, early, and vested deferred. Different benefit provisions apply to Group I and Group II members. In addition, different benefit provisions apply within each group based on vested status and date of hire. Pension amounts are calculated under statutory formulas consisting of three components: service, average final compensation, and a benefit factor. Slide 22: This slide shows a sample pension calculation for a Group I member hired on or after July 1, 2011. The retirement age for this member is 65. The service retirement formula for this member is average final compensation – and average of the member’s highest five years of her compensation – divided by 66 and then multiplied by their months and years of creditable service. In this example, a member with an AFC of $50,000 and 30 years of service will see an annual benefit of $22,727. Slide 23: This slide shows a sample pension calculation for a Group II member hired on or after July 1, 2011. The retirement age for this member is 52.5, provided that he or she has at least 25 years of creditable service. The service retirement formula for this member is average final compensation – again the average of the member’s highest five years of her compensation – multiplied by 2%, then multiplied by months and years creditable service. In this example, a member with an AFC of $50,000 and 25 years of service will see an annual benefit of $25,000. Note that Group II members do not participate in Social Security. Slide 24: This slide shows the amount of pension and medical subsidy benefits paid by NHRS in the most recent fiscal year. Roughly 80 percent of retired members continue to live in New Hampshire so these benefits help support the state’s economy. Slide 25: This slide shows the average annual benefit by member group, as well as the average for all groups. Slide 26: This slide shows the distribution of benefits by amount, breaking out the percentage of beneficiaries who receive an annual benefit of $10,000 or less, $25,000 or less, $50,000 or less, and greater than $75,000. Slide 27: An average of 10 to 20 bills related to the New Hampshire retirement System are introduced each year. You can follow current legislation on our website, www.nhrs.org. Hover over the “About NHRS” tab and select “Legislative Updates” from the menu. Slide 28: This concludes the narrated portion of this presentation. A series of slides containing supplemental data and background information on the retirement system will continue to play without audio. Please visit www.nhrs.org for more information. Questions or comments regarding this presentation may be sent to info@nhrs.org. Slide 29: 10-year history of members and beneficiaries Slide 30: Members broken down by state versus political subdivision and by gender. Slide 31: NHRS administrative and investment expenses as a percentage of assets. Slide 32: Employer contribution rates for fiscal years 2020 and 2021. Slide 33: Timeline for setting employer contribution rates. Slide 34: List of Recent Legal Challenges to Pension Changes. Slide 35: The New Hampshire Retirement System (NHRS) is governed by New Hampshire RSA 100-A, rules, regulations, and Federal laws including the Internal Revenue Code. NHRS also implements policies adopted by the Board of Trustees. These laws, rules, regulations, and policies are subject to change. Even though the goal of NHRS is to provide information that is current, correct, and complete, NHRS does not make any representation or warranty as to the current applicability, accuracy, or completeness of any information provided. The information herein is intended to provide general information only, and should not be construed as a legal opinion or as legal advice. Members are encouraged to address specific questions regarding NHRS with an NHRS representative. In the event of any conflict between the information herein and the laws, rules, and regulations which govern NHRS, the laws, rules, and regulations shall prevail.