Joint Retention of Consulting Actuary

Statewide Pension Plans and

1^st Class Teacher Plans

June 25, 2004

On May 3, the fund directors from the 3 statewide plans and the 4 first-class teacher funds met to discuss how to conduct the request for proposals and the selection of a joint actuary pending the passage of Senate File 806. Because of the tight schedule that already exists for the actuary to complete the valuations in a timely basis, the directors agreed to move forward with defining the process for carrying out this responsibility even though the bill had not yet been passed by the last legislative body and forwarded to the Governor. (Senate File 806 was subsequently passed by the House on May 12 and signed by the Governor on May 19.)

A tentative schedule for the process of requesting proposals was defined. The tentative schedule was as follows:

A subcommittee of the group of seven fund administrators was selected to review the responses. The subcommittee was to be made up of the administrators, or designees thereof, from each of the three statewide pension funds and at least one of the first class city teacher funds’ administrators. Any administrators needing express approval of their Boards to make a decision regarding the selection of the joint consulting firm was to do so at the next scheduled board meeting.

It was agreed that the selection of a successful bidder would require a super majority vote of the entire committee (five of seven). It was agreed also that termination of the contract would also require a super majority vote.

After much discussion, it was decided that the initial contract would be for a three-year period with the possibility of two one-year extensions. While the state contract form only requires the signature of one agency head, it was agreed that a signature page would accompany the contract for signing by all parties to the contract. PERA was selected to manage the contract, thus Mary Most Vanek will be the "agency head" signer on the state contract form and will be the official signer on all payments, etc. However, all bills relating to the other six retirement systems party to the contract will be reviewed by those administrators who will be required to sign off on any billings that must be processed by PERA.

Requirements for the actuarial services contract were established by reviewing the language in Senate File 806 along with the Request for Proposal (RFP) used by the LCPR staff two years ago when this contract was last bid. An RFP was developed during the week of May 3^rd and preliminarily approved by the Department of Administration on May 10^th. Clarifying language modifications were made during the week of May 10^th as the fund directors reviewed the draft. The final version of the RFP was completed on Thursday, May 14^th. A draft RFP was sent to LCPR staff late in the week of May 3^rd and a final copy was sent the week of May 17^th. The RFP included the criteria that was to be used in the evaluation process.

During the week of May 10^th PERA contacted eleven large actuarial firms to let them know an RFP would be issued May 17^th and to find out if they wanted us to send them a copy once the State Register was published. The list was created based on the fund directors’ knowledge of large actuarial firms, with an emphasis on firms that have a Minnesota presence.

We touched base with the Minnesota office of the following firms:

• Deloitte & Touche
• Mercer Human Resource Consulting
• The Segal Company
• Hewitt Associates
• Watson Wyatt
• AON Consulting
• Van Iwaarden Associates

We also contacted national offices of the following actuarial firms:

• Gabriel, Roeder, Smith & Co.
• Milliman
• EFI Actuaries
• Mellon Human Resources

Nine of the eleven firms asked us to send them a copy of the RFP once the State Register had announced the RFP on May 17^th, which we did. AON Consulting and Van Iwaarden were not interested in receiving the RFP.

After the RFP was issued, we received a request for the RFP from Hertz Claim Management in Park Ridge, New Jersey. We sent them a copy of the RFP the day we received the request, May 24^th.

Responses to the request were required to be delivered to the Public Employees Retirement Association (PERA) offices by 3 p.m. on Friday, June 4, 2004. Between the time the RFP was issued and the proposals were due, we received questions from Mellon and Segal. Each wanted to know about the existing relationship with Milliman and the LCPR…how long we’d worked with Milliman, who the "boss" would be under the new contract, and the existing method used to allocate costs between the 7 pension plans.

As stated above, a subcommittee was formed to handle the initial review of the four proposals submitted in response to the RFP. The subcommittee consisted of the fund directors of the three statewide plans plus one of the directors of a first-class teacher plan, Minneapolis Teachers.

A preliminary meeting was held on June 10 to distribute the evaluation forms to the subcommittee and to determine when the group would be ready to complete their independent analysis and gather again. Fund directors evaluated each of the proposals on their own, then met together at a public meeting to evaluate the responses, which was scheduled for June 17. The meeting notice was posted.

At the June 17 meeting, the subcommittee collectively scored the proposals. It was decided that two firms, Mellon and EFI, would not be considered for interviews, because proposed costs were close to twice that of the lowest bidding firm. Two firms, The Segal Company and Milliman, were selected to be interviewed on June 22, the interview day stated in the RFP.

Dave DeJonge, Assistant Executive Director of PERA, set up interviews with The Segal Company and Milliman. The interview times were posted in the lobby of the Retirement Systems Building on Thursday, June 17. The interviews were scheduled for June 22 at 9:30 a.m. for The Segal Company and 1 p.m. for Milliman.

Comments from the June 17, 2004 meeting are included in the proposal evaluation forms.

Following the second interview, the following discussion and action took place:

• The fixed fees for Segal are $140,000 cheaper over 3 years than the fees for Milliman. If we take the 10 cost estimates out of Segal’s fixed bid, the savings might be even greater. We don’t know, however, if projects outside the fixed bid would cost more with Segal or with Milliman.
• Milliman will attempt to limit their liability. Segal does not have a liability limitation, though they only have $10 million or $20 million worth of insurance.
• Leslie Thompson at Segal tended to bring a big picture look to her answers during the interview. She seems to have a good understanding of the issues each of the pension plans are dealing with and how those problems are being handled in other parts of the country.
• Tom Custis at Milliman has done an excellent job over the past 13 years and said he would stay with Milliman for the next 2 or 3 years, but will most likely leave shortly after that. We are not as comfortable with Bill’s ability to communicate and think on his feet, so we would probably think seriously about switching actuaries after 3 years.
• We are more comfortable with Milliman being able to meet deadlines during this first year, since Segal would need to get us set up on their systems and verify 2003 numbers as a starting point for this year’s work.
• Milliman provides us with longevity. Segal provides us with a fresh look at ongoing problems. Most of the directors prefer the fresh look over the longevity.
• A vote was taken after the discussion. Six of the seven voted to hire Segal. One of the seven, St. Paul Teachers, voted to hire Milliman. Since the vote was a super majority, a contract will be negotiated with Segal, pending the outcome of reference checks and satisfactory answers to our insurance questions asked at the interview.

Dave Bergstrom (MSRS) called Chris DeRose, the Executive Secretary of the Michigan State Retirement System and Sparb Collins, the Executive Director of the North Dakota Public Employees Retirement System. Here are Dave’s comments:

I talked to Chris DeRose and Sparb Collins (actually exchanged voice mails with Chris).

Chris was extremely complimentary of Howard Rog and Cathy Eitelberg, and hasn't worked as much with Leslie. In general, he highly recommended Segal.

Sparb also thought Segal did an excellent job, and North Dakota recently renewed their relationship with Segal. Sparb works directly with Leslie. In addition, I asked if Leslie ever made presentations to his Board and Legislative Committee, and she has done both. He said that he thought she was easy to understand and that legislators seemed very comfortable with her style and communication skills. Again, a very positive recommendation on Segal. Sparb did not work with Howard Rog, but did indicate that the "worker bees" were also very approachable and timely.

Segal has not requested a liability limit clause for the contract, but they are only covered by $10,000,000 worth of Errors & Omissions Insurance. The insurance policy is claims-made insurance, meaning the policy must be in effect when the claim is made in order for the claim to be covered by the insurance. The $10,000,000 is a total yearly amount to cover all claims made during that year. We could still file a claim for greater than $10,000,000, but if the total amount of claims made during a year is greater than $10 million, only $10 million would be covered by the insurance. Segal would need to find other ways to pay the difference.

Since it would be difficult to allocate 10 free actuarial cost estimates each year (as was provided in Segal’s proposal) between all the parties who might request such estimates, it was decided to ask Segal to adjust the fixed bid portion of their proposal and eliminate the 10 free cost estimates. Segal lowered their fixed costs by $10,000 per year. We agreed to that reduction with the understanding that we expect future cost estimates to run close to $1,000 per estimate. Those figures will be tracked during the year. Segal will charge us $155,000 to do the valuations each year, down from $165,000 as originally proposed.