At the August meeting of the State Teachers Retirement Board, Investment Department staff reported that STRS Ohio’s total fund return for the year ending June 30, 2017, was +14.29%. This follows returns of +0.92% in fiscal year 2016 and +5.45% in fiscal 2015. The fiscal 2017 return beat the total fund benchmark by 0.63%. The system’s active management of the funds, rather than relying on index funds, added approximately $400 million in value after all investment costs during the fiscal year. Total fund assets were $75.1 billion as of June 30, 2017.
STRS Ohio’s fiscal 2017 total fund return ranked in the top 20% of Callan Associates’ public fund sponsor database. Callan serves as an investment consultant to the Retirement Board. The strong performance was led by a +22.2% return on international investments (vs. a benchmark return of 21.6%) and a +19.6% return on domestic equities (vs. a benchmark return of 18.5%).
The solid year for investment returns is a positive step for STRS Ohio in a longer journey to strengthen the financial condition of the pension fund. While stock market performance has been solid since the November election, STRS Ohio’s investment consultants continue to call for lower than normal returns over the next decade. At the Retirement Board’s October meeting, actuarial consultant Segal Consulting will present the results of its annual pension valuation report. This report will show the financial impact of the investment return, the cost-of-living reduction and several other factors that affect the retirement system’s funding position. The report is expected to reflect that fiscal 2017 was a favorable financial year for STRS Ohio.
|STRS Ohio’s Long-Term Returns|
|5-year total fund return||10.06%|
|10-year total fund return||5.48%|
|20-year total fund return||7.02%|
|30-year total fund return||8.39%|
|Assumed actuarial rate of return||7.45%|
The board continued its study of options to extend the life of STRS Ohio’s Health Care Fund. The fund has a balance of about $3.2 billion and is currently estimated to remain solvent for about 18 years. Solvency is largely driven by the subsidy provided to each enrollee, both the initial subsidy level and the growth of the subsidy. The STRS Ohio Health Care Program is currently funded through premiums charged to plan enrollees, government reimbursements and investment earnings on the fund. STRS Ohio no longer allocates a portion of employer contributions to the Health Care Fund, as all of the employer contributions are needed to fund pension benefits.
The health care trend projections provided by Segal Consulting show expected cost increases (trend rate) to be significant over the next decade. The board is reviewing cost models that cap subsidy increases in order to extend the life of the fund. Long-term costs are expected to grow for all enrollees, and most of the cost models maintain a higher premium subsidy percentage for Medicare enrollees than for non-Medicare enrollees. The board will continue its discussion on the health care program at its September meeting. The changes being discussed will not impact the 2018 plan design or subsidy level.
Final figures for fiscal year 2017 show that STRS Ohio’s operating expenditures were approximately $340,000 less than the operating budget approved for the fiscal year. Administrative expenses totaled $96.5 million for the fiscal year that ended on June 30, 2017. STRS Ohio posts approved administrative expenses on its website following each board meeting.
CEM Benchmarking, a leading global benchmarking company, reviewed with the board the results of its Pension Administration Benchmarking report for fiscal year 2016. STRS Ohio was benchmarked against 51 leading global pension systems from the United States, Canada, Denmark and The Netherlands. STRS Ohio’s service level score was the highest among all participants. STRS Ohio’s Member Services Center received the top service level score as well.
The CEM study also measures systems’ costs to provide service. Since 2013, STRS Ohio’s cost per member has decreased by an average of 1.2% per year, while the average costs for the peer group have increased by 1.3% per year.
The Retirement Board approved 1,113 active members and 222 inactive members for service retirement benefits.
More than 12,000 enrollees have chosen to go online for 2018 health care open-enrollment information, accessing the materials through their Online Personal Account. This option saves STRS Ohio the cost of printing and mailing these materials. Enrollees who choose the paperless option will receive an email when open-enrollment information is available and can access it through the Online Personal Account section of the STRS Ohio website. Enrollees can make the paperless selection by logging in to their personal account and updating their correspondence preferences.
STRS Ohio has streamlined the printed open-enrollment packet that will be mailed to enrollees who do not choose the paperless option. Since the benefit plan remained largely the same in 2018, the open-enrollment guide has been eliminated and the packet will mail in a standard business envelope that will be marked “Your health care open-enrollment materials are enclosed” to draw attention to the mailing. The packets will mail in late October.