January 27, 2012


Alan Calandro



State Employees Retirement System (SERS) Valuation Questions

You asked the following questions:

1. In the analysis of savings related to state employee pensions in last year's SEBAC agreement, how much did the Malloy administration and union officials project would be saved over the next 20 years?

2. In the draft analysis of savings related to state employee pensions in last year's SEBAC agreement, how much does the state-contracted actuary project will be saved over the next 20 years?

3. In light of the fact that the state-contracted actuaries who completed the draft analysis are the same actuaries who worked with the Malloy administration and union officials to develop the initial pension savings projections, could you offer an explanation for the discrepancy between the initial projections and the latest projections in the draft analysis if such discrepancy exists?

Our responses appear below in the order of the above.

1. A total reported savings of $ 4. 8 billion was attributed to the changes to the SERS pension plan provisions as contained in the Revised SEBAC 2011 Agreement. Changes to the SERS pension plan provisions as contained in the Revised SEBAC 2011 Agreement and associated reported savings are outlined in the table below.

ARC Savings as Reported with the Revised 2011 SEBAC Agreement

SERS-Related Pension Provisions

(in millions)

FY 12 $

FY 13 $

20-Yr $

Pensionable Salary Cap

2. 4

2. 5

62. 0

Pension Savings from Wage Freeze

69. 3

71. 2


(no 20-year)

Minimum and Maximum COLA Change

32. 5

34. 3

1,342. 0

Increase Early Retirement Reduction Factor

8. 9

8. 5

~165. 5

Increase Normal Retirement Age

22. 0

22. 0

677. 0

New Tier III


9. 6

2,982. 0

Adjust Pension Break Point



(458. 0)

SERS ARC Savings Total

135. 1

148. 1

4,770. 5

2. The draft valuation1 does not clearly indicate the savings attributable to the SEBAC Agreement. It does, however, provide a derivation of the experience gain/(loss) in accrued liabilities which has occurred during the valuation period. In other words, the valuation highlights areas in which actual experience differs from assumed experience. In the revised preliminary valuation, the three significant areas of difference lie in a higher-than expected number of retirements (a $ 112. 5 million loss), adjustments for plan changes (a $ 644 million gain), and investment income (a $ 447. 1 million gain). It is assumed the retirement loss and plan changes gain are attributed to the Agreement, for a net impact to the fund's actuarial accrued liabilities of $ 531. 5 million over the 20-year amortization period. As this present value information is used to calculate the ARC, we use this to estimate the compounded ARC impact of the Revised 2011 SEBAC Agreement (discussed further below).

Beyond showing the ARC savings in the biennium, the preliminary revised valuation does not provide a revised schedule for the state's next 20 year's worth of ARC payments. This schedule appears to have been issued, however, by the Governor's office during a press conference held on January 23, 2012. If we compare this revised payment schedule to a baseline schedule included in supplemental actuarial information provided after the SEBAC negotiations, we arrive at a 20-year savings of $ 3. 6 billion.

However, the $ 3. 6 billion in savings cannot be fully attributable to the Revised SEBAC 2011 Agreement since investment returns are a significant factor unrelated to the pension changes.

In an attempt to isolate the SEBAC Agreement savings, we have applied a percentage based on the preliminary revised valuation's break-out of the various experience gains and losses to the fund's accrued liabilities during the valuation period.

Age/Service Retirements &

Adjustments for Plan Changes* 531. 5 million = 47. 8%

Investment Income 447. 1 million = 40. 2%

Other 132. 4 million = 11. 9%

Composite Gain (or Loss) 1,111. 0 million

*Net impact attributed to the Revised SEBAC 2011 Agreement

Therefore, we estimate that approximately $ 1. 7 billion of the $ 3. 6 billion ARC savings over the 20-year amortization period is attributed to the Revised SEBAC 2011 Agreement. This compares to the $ 4. 8 billion reported ARC savings for an estimated shortfall of $ 3. 1 billion over the 20-year amortization period.

3. It is our understanding that the reported agreement's savings figures were estimated individually, i. e. on a stand-alone basis. Therefore, at least a portion of the savings shortfall can be attributed to that fact that interrelated provisions were mutually exclusive.

If you have any questions, please contact me.

1 The latest preliminary revised SERS valuation was completed to update the annual required contribution (ARC) for FY 12 and FY 13 as previously determined by the June 30, 2010 actuarial valuation. It should be noted that this valuation and its results are not deemed official until approved by the State Employees Retirement Commission and until then, changes to the valuation could still take place. The preliminary revised valuation incorporates assumption changes to the SERS plan provisions as contained in the Revised SEBAC 2011 Agreement as well as FY 11 market impacts and was prepared as of June 30, 2011. Additional data pertaining to retirements that occurred between June 30, 2011 and October 1, 2011 (largely attributed to the SEBAC Agreement) were also included in the valuation.