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Notes to Financial Statements (continued) FINANCIAL SECTION (Unhedged) Index composed of primarily investment grade, relatively liquid non-U.S. public bonds with an overall weighted-average NRSRO credit rating of A or better. • An allocation of 2.0% of the portfolio has been made to the emerging markets fixed income asset class benchmarked to the Barclays Capital EM Local Currency-Government-MV Weighted (Unhedged) -10% Country Cap Index composed of primarily investment grade, relatively liquid non-U.S. public bonds with an overall weighted-average NRSRO credit rating of BBor better. • An allocation of 5.0% of the portfolio has been made to cash benchmarked to the Merrill Lynch U.S. Treasury Bill 0-3 Months Index composed of primarily investment grade, relatively liquid U.S. and non-U.S. public bonds with an overall weighted-average NRSRO credit rating of AA or better. The following table discloses aggregate market value by credit quality rating category. Many securities have ratings from more than one NRSRO and sometimes those ratings differ from one NRSRO to another. The data listed below uses the rating (expressed as S&P equivalent) available from Fitch, Moody’s and/or S&P that indicates the lowest credit quality at June 30, 2012 and 2011. (Dollar Amounts in Thousands) 2012 2011 Quality Rating Fair Value Fair Value AAA $ 764,417 $ $1,397,723 AA 473,928 489,305 A 705,148 1,063,433 BBB 702,523 844,735 BB and Below 971,777 1,222,225 NR* 8,055,914 5,183,904 Total Exposed to Credit Risk 11,673,707 10,201,325 US Government Guaranteed** 3,638,615 8,342,563 Total Fixed Income and Short-Term Investments $ 15,312,322 $ 18,543,888 For derivatives exposed to credit risk, the table below presents aggregate market value by the least favorable credit rating provided by NRSROs at June 30, 2012 and 2011. (Dollar Amounts in Thousands) 2012 2011 Quality Rating Fair Value Fair Value AA $ (11,394) $ 29,005 A (11,866) (211) Total Swaps - Total Return $ (23,260) $ 28,794 (d) Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of a fixed income investment. The System manages its interest rate risk by diversifying the fixed income portfolio and maintaining the fixed income portfolio at a Board-approved effective duration range of the benchmark index. Duration is a measure of the approximate sensitivity of a bond’s value to interest rate changes. The higher the duration, the greater the changes in fair value when interest rates change. For example, a duration of 4.0 would mean that, given a 100-basis point change up/down in rates, a bond’s price would move down/up approximately 4.0 percent. PSERS measures interest rate risk using optionadjusted duration, which recognizes the fact that yield changes may change the expected cash flows due to embedded options. * Not Rated securities include $5,455,269 and $4,202,834 in collective trust funds at June 30, 2012 and 2011 respectively. ** Comprised of U.S. government and agency obligations explicitly guaranteed by the U.S. government and not considered to have credit risk. This space intentionally left blank PAGE 51
Notes to Financial Statements (continued) FINANCIAL SECTION At June 30, 2012 and 2011, the System’s fixed income portfolio had the following option-adjusted durations by fixed income sector: (Dollar Amounts in Thousands) 2012 2011 Option- Option- Adjusted Adjusted Investment Type Duration Fair Value Duration Fair Value Domestic asset-backed and mortgage-backed securities 1.0 $ 2,580,131 1.3 $ 3,418,696 U.S. government and agency obligations 6.9 1,961,606 5.7 1,773,700 Domestic corporate and taxable municipal bonds 0.6 1,426,219 3.4 1,724,004 International fixed income 4.0 1,239,602 4.3 1,611,233 Collective trust funds 4.3 5,455,269 3.8 1,131,686 PSERS Short-Term Investment Fund 0.1 1,789,068 0.1 4,587,180 Total 3.1 * $ 14,451,895 2.4* $ 14,246,499 * Fixed income investment managers enter into futures contracts to adjust the durations of their portfolios as a whole rather than any particular investment type within the portfolio. In total, the futures contracts have adjusted PSERS’ total portfolio duration upward by 0.1 at June 30, 2012 and 2011. The total portfolio option-adjusted duration is calculated by weighting each investment type by fair value. This space intentionally left blank PAGE 52
Page 1 and 2: PENNSYLVANIA PUBLIC SCHOOL EMPLOYEE
Page 3 and 4: INTRODUCTORY SECTION Table of Conte
Page 5 and 6: INTRODUCTORY SECTION This page inte
Page 7 and 8: INTRODUCTORY SECTION Letter of Tran
Page 9 and 10: INTRODUCTORY SECTION PSERS has annu
Page 11 and 12: INTRODUCTORY SECTION Statement No.
Page 13 and 14: INTRODUCTORY SECTION PAGE 12
Page 15 and 16: INTRODUCTORY SECTION Mission Statem
Page 17 and 18: INTRODUCTORY SECTION PSERS Board of
Page 19 and 20: INTRODUCTORY SECTION OFFICE OF FINA
Page 21 and 22: INTRODUCTORY SECTION PSERS REGIONAL
Page 23 and 24: INTRODUCTORY SECTION This page inte
Page 25 and 26: FINANCIAL SECTION This page intenti
Page 27 and 28: Management’s Discussion and Analy
Page 31 and 32: FINANCIAL SECTION Management’s Di
Page 33 and 34: FINANCIAL SECTION Management’s Di
Page 37 and 38: FINANCIAL SECTION Statements of Pla
Page 39 and 40: FINANCIAL SECTION Statements of Cha
Page 41 and 42: FINANCIAL SECTION Notes to Financia
Page 43 and 44: Notes to Financial Statements (cont
Page 51: Notes to Financial Statements (cont
Page 61 and 62: Valuation as of June 30 FINANCIAL S
Page 63 and 64: FINANCIAL SECTION Supplementary Sch
Page 65 and 66: FINANCIAL SECTION Supplementary Sch
Page 67 and 68: Dear Members of The PSERS Board of
Page 69 and 70: INVESTMENT SECTION (11.2%). Within
Page 71 and 72: INVESTMENT SECTION To benchmark rea
Page 73 and 74: INVESTMENT SECTION The System also
Page 75 and 76: INVESTMENT SECTION Comparison of Ac
Page 77 and 78: Description INVESTMENT SECTION Comm
Page 79 and 80: INVESTMENT SECTION Comparison of In
Page 81 and 82: INVESTMENT SECTION Professional Con
Page 83 and 84: INVESTMENT SECTION This page intent
Page 85 and 86:   ACTUARIAL SECTION January 31, 2
Page 87 and 88: ACTUARIAL SECTION In our opinion, t
Page 89 and 90: ACTUARIAL SECTION HISTORY AND PROJE
Page 91 and 92: ACTUARIAL SECTION DESCRIPTION OF AC
Page 93 and 94: ACTUARIAL SECTION SCHEDULE OF ACTIV
Page 95 and 96: ACTUARIAL SECTION ANALYSIS OF PAST
Page 97 and 98: ACTUARIAL SECTION SCHEDULE OF EMPLO
Page 99 and 100: ACTUARIAL SECTION This page intenti
Page 101 and 102: STATISTICAL SECTION Statistical Sec
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STATISTICAL SECTION Schedule of Tot
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STATISTICAL SECTION Schedule of Tot
Page 107 and 108:
STATISTICAL SECTION Deductions from
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STATISTICAL SECTION Schedule of Pre
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STATISTICAL SECTION Schedule of Pen
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STATISTICAL SECTION Schedule of Ave
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STATISTICAL SECTION Schedule of Ave
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A__________________ Abington Abingt
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Schedule of Employers (Continued) O
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Schedule of Employers (Continued) A
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STATISTICAL SECTION This page inten
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