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HomeMy WebLinkAboutAgenda - Pension Advisory Committee - 01/16/2024_____________________________________________________________________________________ Pension Advisory Committee (PAC) Quarterly Meeting Tuesday, January 16, 2024 2:00 p.m. City Hall Conference Room 301, 180 Market Street Virtually: https://meet.goto.com/SouthBurlingtonVT/pensionadvisorymeeting01-16-2024 You can also dial in using your phone. Access Code: 294-730-629 United States: +1 (224) 501-3412 A G E N D A ______________________________________________________________________________ 1)Welcome & Introductions 2)Additions, deletions, or changes to agenda 3)***Approve prior meeting minutes from October 24, 2023 PAC Meeting 4)***SEI review of Q4 Net Performance Report –Daniel Cappell, SEI 5)***Pension valuation Report, 2023 – Erik Schait, Newport Group 6)Other business 7)Next scheduled meeting- April 23, 2024 at 2pm 8) Adjourn _____________________________________________________________________________________ Pension Advisory Committee (PAC) Quarterly Meeting Tuesday, October 24, 2023 2:00 p.m. City Hall Conference Room 301, 180 Market Street Attend Virtually: https://meet.goto.com/SouthBurlingtonVT/pensionadvisorycommitteemeeting10-24-2023 You can also dial in using your phone. Access Code: 302-315-605 : +1 (312) 757-3121 MINUTES ______________________________________________________________________________ Attendees: Marcha Machar, Daisy Brayton, Dan Chappell, Dan Boyer, Matt Sleeman, Erik Shait, Tim Barrit, Spencer Baker, Jeff Spencer Absent: Steve Locke, Brad Datillio, Jason Morin 1) Welcome & Introductions 2) Additions, deletions, or changes to agenda - None 3) Approve prior meeting minutes from the July 11, 2023 PAC Meeting – Meeting minutes were approved. 4) SEI review of Q3 Net Performance Report. Discuss performance and status of asset allocation- Dan Cappell Overview of Fixed Income Investment-Dan Cappell Executive Summary: It is unlikely the central bank will begin cutting rates before the second half of 2024. There is a reasonable probability of a recession in 2024 Portfolio Perspectives: Q3 2023 had a negative return of -2.44% driven by both negative equity returns across all geographies and market caps. Fixed Income 101: Benefits of fixed income include diversification, income and security. Fixed income security is an investment that provides a return in the form of fixed periodic payments and eventual return of principal at maturity. Reviewed bond ratings and risks with bonds. Also reviewed duration, credit spreads, the dynamics of credit spreads and reinvestment risk. Market performance overview: Markets gave up some ground in the 3rd quarter. Commodities were the only notable outperformer despite a sharp move higher in real interest rates. Portfolio Review: Reviewed the Investment compliance verification for September 20, 2023. Should we consider cash investments such as CDs versus a general investment portfolio? Dan discussed over a longer period of time the reinvestment risk would not make sense. The committee reviewed the portfolio summary and annualized investment returns, and institutional investment strategies. Overall a challenging quarter. 5) South Burlington pension plan overview– Erik Schait, Newport Group Year end is being reviewed, the statements will be distributed and estimate of the next years contribution. Final copies will be received by Friday. 6) Other business 7) Next scheduled meeting- Tuesday January16, 2024, at 2:00 p.m. 8) Adjourn – meeting adjourned at 3:20 p.m. For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.1©2024 SEI Dan Cappell, CAIA dcappell@seic.com 610-676-5292 OCIO partnership review Fourth Quarter 2023 January 16, 2024 City of South Burlington For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.2©2024 SEI Agenda •Executive Summary •Market & Economic Review •Portfolio Review •Appendix For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.3©2024 SEI Please refer to the important disclosures accompanying your portfolio performance in this presentation for information on performance calculations. Executive summary Equities: In 2023, Global equities delivered solid returns, with the U.S. as a clear standout. A fever pitch of excitement over artificial intelligence and high expectations for interest rate cuts in 2024 were the key drivers of market performance. Fixed Income: The global central bank interest-rate tightening cycle was seemingly brought to a close with a dovish pivot from The Fed and interest rate hike pauses from the European Central Bank and the Bank of England. Yields fell (price of fixed income increased) and financial conditions eased substantially. Alternatives: The property market continued its modest selloff through the third quarter of 2023. Income remained the positive contributor to performance once again, as rising rates and heightened economic uncertainty pushed valuations down further. Q4 Manager Changes: Hired GMO and Terminated Stone Harbor within Emerging Markets Debt. Terminated All Spring from World Equity ex-US. As of:12/31/2023 net of fees Market Value 3 Month Return FYTD Return 1 Year Return 3 Year Return 5 Year Return Since Inception Return (10/31/16) City of South Burlington $43.9M 7.98%5.18%13.22%3.68%8.47%6.03% -30 -20 -10 0 10 20 30 U.S. Large cap U.S. Small cap International equity ex U.S. Emerging-markets equity U.S. Investment-grade bonds Long duration High-yield bonds Emerging-markets debt Inflation-linked Commodities Benchmark returns (%) 2023 2022 For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.4©2024 SEI SEI Point of View Economy: •The U.S. avoided a recession in 2023, managing to advance at an above-average pace through the first three quarters of the year, continuing a streak of superior performance relative to other major advanced economies. That noted, we expect more subdued growth in 2024, perhaps deteriorating into a stagnant/mildly recessionary environment along the lines of what is currently being seen in much of Europe. Interest Rates & Inflation: •We continue to believe that inflation will remain persistent, driven by services, low unemployment and wages. As a response, we believe that the degree of rate cuts will be closer to the Fed’s dot plot (three 25bps cuts) versus the projections coming from the futures market (six 25bps cuts) at this time. Markets: •The outperformance of the “Magnificent 7” tech stocks relative to the broader market in 2023 was not as pronounced in Q4 as valuations are currently rich and these stocks appear vulnerable. This is a trend we expect to continue. We prefer a more diversified posture across equity exposure, including individual stocks, sectors and geographies. For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.5©2024 SEI Market and economic review For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.6©2024 SEI Sources: Bloomberg, Russell, Standard & Poor’s. US Large Cap = Russell 1000 Index, US Small Cap = Russell 2000 Index. Value and Growth represented by Russell 1000 Value Index and Russell 1000 Growth Index, respectively. Sectors represented by respective S&P 500 sector indexes. As of 12/31/2023. Past performance is not a guarantee of future results. U.S. equity market review 9.5% 14.2%17.2% 10.9%12.4%13.0%9.7% 18.8% 14.0% 6.4%5.5% -7.0% 8.6%11.4% 42.7% 57.8%55.8% 42.3% 18.1% 12.5%12.3%12.1% 2.1%0.5% -1.4% -7.1% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% Value Growth Technology Communications Cons. Disc. Industrials Materials Real Estate Financials Healthcare Cons. Staples Energy Utilities To t a l R e t u r n U.S. Large Cap Sectors Fourth Quarter One Year For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.7©2024 SEI Source: Bloomberg, Russell, MSCI, SEI. U.S. = Russell 3000 Total Return Index, Developed (ex-US) = MSCI World ex-U.S Net Total Return Index, Emerging = MSCI Emerging Markets Net Total Return Index, Europe = MSCI Europe Net Total Return Index, Japan = MSCI Japan Net Total Return Index, Pacific ex-Japan = MSCI Pacific Ex Japan Net Total Return Index, EMEA = MSCI Emerging Markets Europe Middle East & Africa Net Total Return Index, Latin America = MSCI EM Latin America Net Total Return Index, Asia = MSCI EM Asia Net Total Return Index. All returns in USD. As of 12/31/2023. Past performance is not a guarantee of future results. International equity market review -5% 0% 5% 10% 15% 20% Dec '22 Jan '23 Feb '23 Mar '23 Apr '23 May '23 Jun '23 Jul '23 Aug '23 Sep '23 Oct '23 Nov '23 Dec '23Cu m u l a t i v e T o t a l R e t u r n YTD International Equity Market Returns Developed (ex-U.S.) (17.9%)Emerging Markets (9.8%) 12.1%10.5%7.9%8.2%11.1%11.4%17.6% 8.4%6.7% 25.9% 17.9% 9.8% 20.3%19.9% 6.4% 32.7% 8.2%7.8% U.S.Developed(ex-U.S.)Emerging Japan Europe Pacific ex-Japan Latin America EMEA Asia Broad Regions Developed Regions Emerging Regions To t a l R e t u r n Regional Performance Fourth Quarter One Year For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.8©2024 SEI Sources: Bloomberg, JP Morgan, SEI. Option-adjusted spreads over US Treasurys US Investment Grade = Bloomberg U.S. Corporate Index, US High Yield = Bloomberg U.S. Corporate High Yield Index, and Emerging Market Debt = JP Morgan EMBI Diversified Sovereign Index. Vertical axis in U.S. Yield Curve chart shortened to enhance visibility of yield curve dynamics. As of 12/31/2023. Past performance is not a guarantee of future results. Fixed income review •Treasury yields endured another volatile quarter. After wrestling in the third quarter with the prospect of stubborn inflation and a persistently restrictive Federal Reserve (Fed), investors took exceeding comfort in lower inflation readings and a more dovish tone from Fed chairman Jay Powell towards the end of 2023. •Improved bond market sentiment led to a further compression of credit spreads. US investment grade spreads fell below their long-term average, and high yield bonds finished the quarter more than a percentage point below theirs. 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 0 5 10 15 20 25 30 Yi e l d Maturity (Years) U.S. Yield Curve 12/31/2023 9/30/2023 12/31/2022 1.0% 3.2% 3.8% 1.2% 3.9% 4.3% 1.3% 4.7%4.5% 1.2% 4.3% 3.8% 0% 1% 2% 3% 4% 5% US Investment Grade US High Yield Emerging Market Debt Op t i o n -Ad j u s t e d S p r e a d Option-Adjusted Spreads 12/31/2023 9/30/2023 12/31/22 10Y Average For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.9©2024 SEI Source: Ned Davis Research, SEI. Data as of 12/31/2023 unless otherwise noted. Equities manage through presidential elections •There is a heavy global election schedule in 2024. There are presidential and/or parliamentary and congressional elections in several major countries, including Taiwan (January), Indonesia (February), Russia (March), India (April), South Africa (May), the EU (June), the U.K. (to be determined) and the U.S. (November). Some of these could be closely run affairs that may lead to important policy shifts. Of special interest, of course, are the elections in the U.K. and the U.S. 7.3 10.7 9.7 4.3 8.2 -0.3 9.1 11.5 8.9 -2 0 2 4 6 8 10 12 14 Average gain per year (19 cases) Median gain per year (19) Incumbent party wins (9) Incumbent party loses (10) Incumbent Republican wins (5) Incumbent Republican loses (5) Incumbent Republican loses, excluding 2008 (4) Incumbent Democrat wins (4) Incumbent Democrat loses (5) Percent S&P 500 Index (price-only) percent change in U.S. presidential election years since 1948 For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.10©2024 SEI Source: Organisation for Economic Co-operation and Development, SEI. Data as of 12/31/2023 unless otherwise noted. Lots of gray •We believe that demographics will limit the deceleration in compensation gains over the course of the next business cycle. Participation rates for those 65 and over is less than 20%. According to Pew Research, roughly one- fifth of the U.S. population will be retired by 2030. 0 10 20 30 40 50 60 70 80 90 Nu m b e r o f i n d i v i d u a l s a g e d 6 5 + pe r 1 0 0 w o r k i n g p e r s o n s ag e d 2 0 t o 6 4 Old-age dependency ratio 2000 2022 2027 2050 For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.11©2024 SEI 11 The good news •The U.S. economy remains relatively healthy in the near term, especially versus other major advanced countries. Financial conditions are more consistent with continued economic expansion, at least through the first half of 2024. •Fiscal policies are generally quite expansionary. There may be some reduction in government deficit financing as COVID and energy-relief measures disappear. But spending is on automatic pilot in the U.S., and the U.K. has engineered election-year tax cuts. •Risk assets traditionally have performed well when the Fed starts to cut interest rates, whether a recession materializes or not. According to statistics compiled by Ned Davis Research, a global provider of independent investment research, the S&P 500 Index (price only) has garnered an average gain of 15.2% over the first 12 months after the Fed begins cutting rates and a recession is avoided. The bad news •With animal spirits running high, it would not be surprising to see this bull market stumble early in 2024. Yet, there are many crosscurrents that make it difficult to forecast the path of financial assets through the year. A weaker-than-expected economy would likely undercut investors’ optimistic earnings growth assumptions. It also could lead to a more aggressive easing in U.S. central-bank monetary policy rated than we anticipate, but a big decline in interest rates already seems to be largely discounted by the markets. •Central banks might not be able to cut interest rates as much as markets are expecting and bond yields are not likely to fall much from here. That would be a problem for equities, but it also would likely be a problem for fixed-income markets. •A new source of possible volatility in the oil markets is the war between Israel and Hamas. Although the war has thus far remained fairly localized, a broader regional conflict cannot be ruled out. •These are the views and opinions of SEI which are subject to change. They should not be construed as investment advice. Economic outlook: Good news, bad news For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.12©2024 SEI Portfolio review For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.13©2024 SEI Important information: asset valuation and portfolio returns Inception date 8/31/2013. Historical Total Index can be provided upon request. The Portfolio Return and fund performance numbers are calculated using Gross Fund Performance, using a true time-weighted performance method (prior to 6/30/2012, the Modified Dietz method of calculation was used). Gross Fund Performance reflects the effective performance of the underlying mutual funds that are selected or recommended by SIMC to implement an institutional client’s investment strategy. Gross Fund Performance does not reflect the impact of fund level management fees,fund administration or shareholder servicing fees, all of which, if applicable, are used to offset the account level investment management fees the client pays to SIMC. Gross Fund Performance does reflect certain operational expenses charged by the funds and the reinvestment of dividends and other earnings. The inclusion of the fund level expenses that the client incurs but that are offset against the client’s account level investment management fees would reduce the Gross Fund Performance of the mutual funds. For additional information about how performance is calculated, please see your monthly performance report. If applicable, alternative, property and private assets performance and valuations may be reported on a monthly or quarterly lag. Alternative, property and private assets performance is calculated gross of investment management fees and net of administrative expenses and underlying fund expenses. However: Structured Credit Fund performance is calculated gross of investment management fees and net of administrative expenses; SEI Offshore Opportunity Fund II Ltd. Class A performance is calculated net of investment management and administrative expenses; and Energy Debt Fund performance is calculated net of management fees, performance fees, as applicable,and operating expenses. Net Portfolio Returns since 6/30/12 reflect the deduction of SIMC’s investment management fee and the impact that fee had on the client’s portfolio performance. Prior to 6/30/12, Net Portfolio Returns deduct a proxy annual fee for all periods to demonstrate the impact that SIMC’s investment management fee had on the portfolio performance. However, this is a hypothetical calculation, as it does not reflect the actual fees paid by the client during the period. Please see your client invoice for actual fees paid. For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.14©2024 SEI City of South Burlington Defined Benefit Plan Portfolio summary —December 31, 2023 For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.15©2024 SEI Return time periods less than 12 months are cumulative, over 12 months are annualized. City of South Burlington Defined Benefit Plan Annualized investment returns —December 31, 2023 For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.16©2024 SEI Return time periods less than 12 months are cumulative, over 12 months are annualized. City of South Burlington Defined Benefit Plan Annualized investment returns —December 31, 2023 For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.17©2024 SEI City of South Burlington Defined Benefit Plan Investment compliance verification —December 31, 2023 IMA Strategy Market Value Allocation Allocation U.S. Factor Allocation Fund $6,633,259 15.1%15.0% Large Cap Index Fund $5,746,068 13.1%13.0% Small Cap II Fund $1,331,422 3.0%3.0% World Equity Ex-US Fund $9,287,276 21.1%19.0% Emerging Markets Equity Fund $1,318,177 3.0%5.0% Equity $24,316,201 55.3%40.0% Core Fixed Income Fund $5,189,666 11.8%12.0% Limited Duration $4,959,126 11.3%7.0% High Yield Bond Fund $1,715,067 3.9%4.0% Emerging Markets Debt Fund $1,750,378 4.0%4.0% Fixed Income $13,614,237 31.0%27.0% Dynamic Asset Allocation Fund $2,189,050 5.0%5.0% Other $2,189,050 5.0%5.0% Core Property CIT $3,851,566 8.8%8.0% Real Estate $3,851,566 8.8%8.0% Government Fund $7 0.0%0.0% Cash & Equivalents $6 0.0%0.0% Total $43,971,061 100.0%100.0% For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.18©2024 SEI Data as of 12/31/2023. Source: APX and SEI Data Warehouse. Manager and fund allocations are subject to change. Note that SEI Investments Company has a minority ownership interest in LSV Asset Management as of the date of this report. City of South Burlington Defined Benefit Plan Institutional investment strategies Total Equity World Equity Ex-US Fund Jupiter Asset Management Ltd Acadian Asset Management LLC Pzena Lazard Asset Management LLC -International Quality Growth Lazard Asset Management LLC -All Country Ex-US 130/30 Momentum Lazard Asset Management Macquarie Investment Management Large Cap Index Fund SSGA Funds Management, Inc. Large Cap Fund Acadian Asset Management LLC LSV Asset Management Cullen Capital Management, LLC Mar Vista Investment Partners, LLC Copeland Capital Management, LLC Fred Alger Management, LLC Small Cap II Fund Leeward Investments, LLC Easterly Investment Partners LLC Los Angeles Capital Management LLC Copeland Capital Management, LLC EAM Investors, LLC ArrowMark Partners Total Fixed Income Core Fixed Income Fund Allspring Global Investments Metropolitan West Asset Management LLC Western Asset Management Company Jennison Associates LLC MetLife Investment Management, LLC Opportunistic Income Fund Manulife Investment Management (US) LLC Ares Capital Management II LLC Wellington Management Company LLP High Yield Bond Fund Brigade Capital Management, LP Benefit Street Partners LLC Ares Capital Management II LLC T. Rowe Price Associates, Inc. J.P. Morgan Investment Management Inc. SEI Investments Management Corporation Emerging Markets Debt Fund Neuberger Berman Investment Advisers LLC Ninety One Virtus Fixed Income Advisers, LLC Marathon Asset Management, L.P. Colchester Global Investors Limited Grantham,Mayo, Van Otterloo (GMO) For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.19©2024 SEI Important information: SIMC This presentation is provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company. The material included herein is based on the views of SIMC. Statements that are not factual in nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results. This presentation should not be relied upon by the reader as research or investment advice (unless SIMC has otherwise separately entered into a written agreement for the provision of investment advice). There are risks involved with investing including loss of principal. There is no assurance that the objectives of any strategy or fund will be achieved or will be successful. No investment strategy, including diversification, can protect against market risk or loss. Current and future portfolio holdings are subject to risk. Past performance does not guarantee future results. For those SEI funds which employ a “manager of managers” structure, SIMC is responsible for overseeing the sub-advisers and recommending their hiring, termination, and replacement. References to specific securities, if any, are provided solely to illustrate SIMC’s investment advisory services and do not constitute an offer or recommendation to buy, sell or hold such securities. Any presentation of gross mutual fund performance of underlying mutual fund investments or gross account level performance is only intended for one-on-one presentations with clients and may not be duplicated in any form by any means or redistributed without SIMC’s prior written consent. Annual performance is calculated based on monthly return streams, geometrically linked as of the end of the specified month end. Performance results do not reflect the effect of certain account level advisory fees. The inclusion of such fees would reduce account level performance, particularly when compounded over a period of years. The following hypothetical illustration shows the compound effect fees have on investment return: For an account charged 1% with a stated annual return of 10%, the net total return before taxes would be reduced from 10% to 9%. A ten year investment of $100,000 at 10% would grow to $259,374, and at 9%, to $236,736 before taxes. For a complete description of all fees and expenses, please refer to SIMC’s Form ADV Part 2A, the investment management agreement between SIMC and each client, and quarterly client invoices. Certain economic and market information contained herein has been obtained from published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such sources are believed to be reliable, neither SEI nor its affiliates assumes any responsibility for the accuracy or completeness of such information and such information has not been independently verified by SEI. Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transaction costs, or expenses, which would reduce returns. Indexes are unmanaged and one cannot invest directly in an index. Any presentation of gross mutual fund performance of underlying mutual fund investments or gross account level performance is only intended for one-on-one presentations with clients and may not be duplicated in any form by any means or redistributed without SIMC’s prior written consent. For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.20©2024 SEI Important information: collective trust funds As identified in the presentation, certain funds are collective trust funds, not mutual funds. A collective trust fund is an investment fund that is maintained by a bank or trust company for the collective investment of qualified retirement plans and governmental plans, and that is exempt from SEC registration as an investment company under Section 3(c)(11) of the Investment Company Act of 1940. Collective trust funds eliminate many of the administrative costs associated with institutional and retail mutual funds. For more information on the collective trust funds, including fees and expenses, please read the disclosure document for the trust. There is no guarantee that the investment objective will be fulfilled. If the fund is a target date fund, the principal balance of the portfolio may be depleted prior to a portfolio’s target end-date and, therefore, distributions may end earlier than expected. This risk increases if the distribution amount chosen is a significant portion of the starting principal. The target date represents the respective date when an investor intends to retire. Principal of any target date fund is not guaranteed at any time, including the target date. The projected time periods do not take into account the payment of fees to the advisor out of the portfolio or any other additional distribution from the account. For those SEI collective trust funds that may be held in the account, the SEI collective trust fund is part of a Collective Investment Trust (the "Trust") operated by SEI Trust Company (“STC”). STC manages the Trust based on the advice of one or more third party managers, which may include SIMC. Additionally,STC serves as the trustee of the collective trust funds and maintains ultimate fiduciary authority over the management of, and the investments made, in the funds. STC is also a wholly owned subsidiary of SEI Investments Company. For existing institutional investor client use only. Not for public distribution. The information contained herein is confidential and proprietary to SEI and is not to be reproduced or made available in any form to any persons without the express prior written consent of SEI.21©2024 SEI Thank you. 1 City of South Burlington Retirement Income Plan July 1, 2023 Actuarial Valuation Review Erik Schait, FSA, EA, MAAA Actuarial Consultant 1 January 16, 2024 2 Actuarial Funding Methods Review of 2023 Recommended Plan Contribution Funded Status Assumptions Plan Assets Census Information Questions Agenda 3 Actuarial Funding Methods 4 Actuarial Funding Methods There are many different ways for valuing future liabilities. The primary difference in these methods is the method of attributing liability to the past and to the future. Two primary methods to review when discussing funding of public pension plans: •Unit Credit –This cost method does not reflect expected future pay increases. The liability today is based on the present value of benefits based on current compensation and service earned to date. This is the method used for single employer private pension plans. This method was used by the City of South Burlington prior to July 1, 2014. •Entry Age Normal -The benefit funded is based on projected compensation. In addition, liability is assigned to periods of time based on compensation. Ultimately, the annual liability for an employee is designed to be an even percentage of their compensation each year. This is the method mandated for use in GASB financials. 5 Present Value of Accrued Benefit (PVAB) –The present value of retirement benefits accrued to date. This is a unit credit (UC) funding method. Entry Age Normal (EAN) Liability –The liability used for funding to determine the recommended contributions and for financial statements under GASB. •All expected benefits are projected to assumed retirement date. •The present value of expected benefits is allocated to the past and future as a percentage of compensation. •Evenly attributes liability over the compensation of an employee. PVAB does not consider future compensation increases. However, it does represent the present value of benefits for employees, assuming they all terminated employment on 7/1/2023. EAN anticipates future compensation increases. EAN also leads to greater liability attributed to the past, but less accumulation of future liabilities. Ultimately, the liability of both will be the same for a participant, at their retirement date. Funded Status –PVAB(UC) vs. EAN 6 PVAB (UC) vs EAN UC EAN Approximate position of City Pension Plan For an Active Employee 7 Actuarial Terms: •Accrued Liability –Present value of benefits earned as of a certain date. •Normal Cost –Benefit attributed to be earned during the next year. The greater the liability assigned to the past, the lower future normal costs will be. Ultimately, the value of benefits is the same at retirement under all options. A funding valuation under the Unit Credit method would have less liability now, but an escalating annual cost in the future. PVAB (UC) vs EAN 8 The City of South Burlington started using the Entry Age Normal liabilities for calculating the annual recommended contribution effective July 1, 2014. Each recommended contribution since that date has been based on the Entry Age Normal Method. The change was made for several reasons: •The Entry Age Normal Method produces less volatile annual contributions •It helps to fund the plan now, for future liabilities. •The Entry Age Normal Method became mandatory for GASB financial reporting purposes. The liability on financial statements is required to be calculated under this method. Funding Method 9 The ultimate liability to the City under all funding methods is the same. The difference is the period of time those liabilities are assigned to. Both a Unit Credit method (Present value of accrued benefits) and the Entry Age Normal method are presented in this report. Both are valid ways of assessing the status of the plan. The Entry Age Normal liabilities are given additional weighting as the method for funding the plan over the long term. The present value of accrued benefits is a good measure of currently accrued benefits compared to assets, i.e. on a plan termination basis. Funding Method (cont.) 10 Review of 2023 Recommended Plan Contribution 11 Once liabilities are attributed to the past, they are compared to the current actuarial value (smoothed) assets, the plan’s current recommended contribution is then calculated as the sum of: 1.An amortization payment on any unfunded liability. 2.The Normal Cost for benefits being earned in the current year. 3.Interest from the valuation date to the expected payment date. The expected employee contributions are subtracted from the total recommended contribution to arrive at the recommended City contribution. Funding Policy 12 Effective July 1, 2019 no new employees will participate in the plan. •Plan will slowly become more mature. •The remaining lifetime of the plan will no longer be indefinite and has an estimated date when all participants will be retired. •Opportune time to make changes to the funding policy to address this shift in plan characteristics. •The earlier a change is addressed, the easier the changes will be to incorporate. This method would amortize all unfunded liabilities by 2039. Funding Policy 13 Payment of current normal cost plus amortization of unfunded liability Current Year Actuarial Value 16 Years 20 Years Public Safety Group:$ 939,703 $ 876,912 Non-Public Safety Group:$ 244,035 $ 236,117 Total:$1,183,738 $1,113,029 Percent of payroll:23.04% 21.67% Prior Year Actuarial Value 17 Years 20 Years Public Safety Group:$ 911,395 $ 871,578 Non-Public Safety Group:$ 264,555 $ 257,869 Total:$1,175,950 $1,129,447 Percent of payroll:21.26% 20.43% *The City also makes an annual payment of towards a loan used to fund plan. Recommended City Contribution Actuarial Value of Assets 14 EE Contributions, 278,036 Normal Cost, 465,806 Interest, 91,093 Amortization Payment, 626,839 0%10%20%30%40%50%60%70%80%90%100% Division of Recommended Contribution City Portion, $ 1,183,738 15 Funded Status 16 Funded Status –Actuarial Value Public Safety Non-Public Safety Total 33,665,035 10,349,487 44,014,522 33,596,449 10,616,156 44,212,605 99.80%102.57%100.45% 39,143,904 11,315,663 50,459,567 33,596,449 10,616,156 44,212,605 85.83%93.82%87.62% Present Value of Accrued Benefits (PVAB): Actuarial Value of Plan Assets: Funded Ratio: Entry Age Normal Liability: Actuarial Value of Plan Assets: Funded Ratio: 17 Funded Status –Market Value Public Safety Non-Public Safety Total 33,665,035 10,349,487 44,014,522 32,685,569 10,319,973 43,005,542 97.09%99.71%97.71% 39,143,904 11,315,663 50,459,567 32,685,569 10,319,973 43,005,542 83.50%91.20%85.23% Present Value of Accrued Benefits (PVAB): Market Value of Plan Assets: Funded Ratio: Entry Age Normal Liability: Market Value of Plan Assets: Funded Ratio: 18 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 EAN PVAB Historical Funded Status EAN vs PVAB, Based on Market Value of Assets (1) $8.168 Million loan with local bank used to fund the plan during fiscal year end 6/30/11. (2) Large asset experience loss during 6/30/15 to 6/30/16. Updated mortality tables. (3) Positive asset experience offset by change in discount rate between 6/30/16 and 6/30/17. (1) (2)(3) 19 Comparison of Funded Ratios City of South Burlington -85.23% as of June 30, 2023. (7.25% discount rate) Average public plan -77.00% (increase from 74%), as of June 30, 2023 by Milliman(1) VMERS –74.10% as of 6/30/2023, from 73.60% on 6/30/2022. (7.00% discount rate) VSTRS –57.48% as of 6/30/2023, from 54.81% on 6/30/2022. (7.00% discount rate) City of Burlington –80.10% as of June 30, 2021. (7.20% discount rate) City of St. Albans –54.88% as of June 30, 2022. (6.07% discount rate) (1) Data from 2023 Milliman public funding study. Based on Entry Age Normal Liabilities and Market Value 20 Assumptions 21 Assumptions Sensitivities Key Economic Assumptions Sensitivity of Liabilities to Assumption Discount Rate for Liabilities High Salary Growth Medium Inflation Low Key Demographic Assumptions Sensitivity of Liabilities to Assumption Retirement Medium Withdrawal Medium Mortality Low to Medium Disability Low Percentage Married Low Form of Payment Low 22 An in-depth analysis of assumptions are beyond the scope of this presentation. These items are periodically reviewed in depth to determine if changes should be made. Results reviewed for reasonability each year to determine if additional analysis should be accelerated. Last major change to mortality was effective July 1, 2016, in which the mortality assumption was updated to include generational mortality improvements. Mortality improvement projection is updated each year based on most recently available projection scales. Greater rates of mortality decrease liabilities. Actuarial Assumptions Review 23 Mortality assumption Public Safety -Pri-2012 Blue Collar Table projected with scale MP2021. Non -Public Safety -Pri-2012 Total Dataset projected with scale MP2021. Employee Turnover –unchanged (Scale T-3) Long-Term Rate of Return –unchanged at 7.25%. Median public rate was 7.00%(1). Assumed Retirement Age –Public Safety age 53, Non-Public Safety age 65. Plan Compensation –Public Safety unchanged at 5%; Non-Public Safety unchanged at 4%. (1) NASRA Issue Brief: Public Pension Plan Investment Return Assumptions -Updated March 2022 Actuarial Assumptions Review (cont.) 24 The Long Term Rate of Return (also the Discount Rate) was last changed effective July 1, 2017 based on input from investment providers, current market conditions, and desire of City to reflect the changing investment environment. Sensitivity of Entry Age Liability to Discount Rate EAN Liability Market Value Funded Position Current Discount Rate 50,459,567 43,005,542 7,454,025 Current Discount Rate + 1% 45,231,960 43,005,542 2,226,418 Current Discount Rate -1%56,731,768 43,005,542 13,726,226 Employee Turnover –is the rate at which employees leave employment prior to retirement age for reasons other than death or disability. Greater rates of termination will decrease liabilities. Actuarial Assumptions Review (cont.) 25 Plan Assets 26 Smoothed asset valuation method is used to mitigate large swings in contribution requirements. Both market value and smoothed value will be shown. Discretion may be used in making contributions to the plan. Smoothing Method: 1.Expected assets based on assumed rate of return, MINUS 2.Market Value of Assets 3.20% of the difference is between Market Value of assets and Expected assets (#2 -#1) 4.Adjust Expected assets by #3 5.Only recognizing 20% of gain or loss on assumed rate 6.Result must be within 80% -120% of market value Asset Valuation Method 27 Actuarial vs Market Value of Assets 15 20 25 30 35 40 45 50 2015 2016 2017 2018 2019 2020 2021 2022 2023 Mi l l i o n s Year ended 6/30 Market vs Actuarial Value Actuarial Value Market Value 28 Plan Experience: Assets Assumed rate of return: 7.25% Actual asset rate of return: 9.74% Prior year asset rate of return:-10.72% 3-Year Average:8.54% 5-Year Average:6.69% 10-Year Average:7.02% 29 Plan Year Rate of Return Assumed Rate 6/30/2023 9.74%7.25% 6/30/2022 (10.72%)7.25% 6/30/2021 26.60%7.25% 6/30/2020 2.86%7.25% 6/30/2019 4.97%7.25% 6/30/2018 7.61%7.25% 6/30/2017 12.21% 7.25% 6/30/2016 (1.06%) 7.50% 6/30/2015 1.57%7.50% 6/30/2014 16.40%7.50% 6/30/2013 13.50%7.50% 6/30/2012 1.70%7.50% 6/30/2011 20.10%7.50% Historical Rate of Return 30 Participant Census Information 31 Participant Count by Year and Status 48 45 52 55 59 62 64 68 67 75 79 82 89 93 97 22 27 39 38 44 43 45 45 51 44 46 44 47 52 54 129 128 112 105 105 110 112 116 115 104 95 92 78 68 59 - 50 100 150 200 250 6/30/09 6/30/10 6/30/11 6/30/12 6/30/13 6/30/14 6/30/15 6/30/16 6/30/17 6/30/18 6/30/19 6/30/20 6/30/21 6/30/22 6/30/23 Retirees Deferred Vested Actives 32 Participant Statistics NPS PS Average Service:17.44 14.74 Average Expected Future Service:7.62 8.70 Average Active Age:57.03 42.16 Average Retiree Age:75.66 64.19 Duration of Liabilities:9.81 12.60 Duration is a method of measuring the effects of interest rates on the plan liabilities. The smaller this number is, the less effect there will be from changing interest rates. For example, a duration of 9.81 implies that a 1% increase in interest rates would decrease the liability by 9.81%. Duration is also the weighted average of time of future benefit payments. 33 Questions?