State Teachers Retirement System of Ohio

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Retirement Board Adopts New Actuarial Assumptions; Will Consider Benefit Plan Design Changes in April

March 22, 2017

At its March meeting, the State Teachers Retirement Board voted to approve changes to the actuarial assumptions used to calculate pension liabilities. The vote follows the five-year experience review conducted this winter by the board’s actuarial consultant, Segal Consulting. The experience review measures the system’s economic and demographic assumptions versus the actual experience over the past five years. Based on this review, Segal recommended adjustments to assumptions about expected investment returns, mortality, inflation, salary growth, payroll growth and teacher retirements, disability inceptions and terminations. In total, the new assumptions outlined below have a negative overall impact on the system’s funding. When applied to the July 1, 2016, valuation of the pension fund, the new assumptions would add about $6.5 billion to STRS Ohio’s accrued liabilities (benefits earned by active and retired members).

The most common ways to express the system’s financial condition are through the funded ratio and the funding period. The funded ratio is the value of assets compared to accrued liabilities. The gap between the assets on hand and what is owed in benefits is called the “unfunded liability.” The funding period is the amount of time needed to pay off, or amortize, the system’s unfunded liability, assuming current contribution rates. When measured with the new actuarial assumptions in place, STRS Ohio’s funded ratio at fair value drops to 62.4% from 66.4%, and the funding period increased to 59.5 years from 26.6 years. The funding period falls outside of the state of Ohio’s 30-year funding target, and will require STRS Ohio to present a plan to reduce its funding period to 30 years or less.

Following is a summary of the key changes to the assumptions and how each impacts the system’s funding:

  • Reducing the expected investment return to 7.45% from 7.75% — assets are not expected to grow as fast as needed to pay benefits. Financial impact: adds about $3.2 billion to liabilities.
  • Change to updated generational mortality tables — recognizes that STRS Ohio members are living longer and STRS Ohio is paying benefits for a longer period of time than expected — and this trend is expected to continue in the future. Financial impact: adds about $4.1 billion to liabilities.
  • Reducing the inflation assumption to 2.5% from 2.75% — impacts expected investment return and individual salary increases.
  • Reducing salary growth scale for merit and seniority, as well as for inflation — reflects that individual teacher salary increases were lower than expected. Financial impact: reduces liabilities by about $1.3 billion.
  • Reducing overall payroll growth to 3% from 3.5% — lengthens the funding period by recognizing that there will be less money coming into the fund through member and employer contributions than expected.
Board to Continue Discussion on Benefit Plan Design Changes

When adopting the assumption changes, the board recognized that benefit plan design changes are now necessary to preserve the fiscal integrity of the pension fund. Models of possible plan design changes indicate the cost-of-living adjustment (COLA) is the most effective means possible to preserve the fiscal integrity of the fund because it by far has the biggest impact on liabilities. The COLA has a significant financial impact because it affects active and retired members of the retirement system. Substitute Senate Bill 342, passed in 2012, gives the Retirement Board authority to set the COLA. The board can choose to indefinitely suspend or reduce the COLA and can vote to restore the COLA when the pension fund is healthy enough to do so. Discussion on potential benefit plan design changes will continue at the April meeting, when a vote on these changes is likely.

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