Annual Pension Valuation Shows Modest Improvement, But Indicates Challenges Ahead
During the October meeting of the State Teachers Retirement Board, actuarial consultant Segal Consulting presented its July 1, 2016, report of the annual pension valuation results. The valuation report measures two sets of assumptions — demographic and economic — against the retirement system’s actual experience from the past year. Demographic measures include retirements, disability inceptions, withdrawals and mortality (the number of deaths among active members and benefit recipients). Economic measures include the rate of inflation, return on assets, salary increases and payroll growth. This year’s report shows the funding period — the amount of time needed to pay off the system’s unfunded liability — decreased to 26.6 years from 28.4 years, and the funded ratio increased slightly to 69.6% from 69.3%. During the presentation, Segal shared that while some of the valuation report shows improvement from last year, other aspects show the pension fund faces several issues that will result in a less favorable position going forward.
Segal noted that the pension fund has a net $2.8 billion in deferred investment losses that will be recognized over the next three years. STRS Ohio uses a common actuarial technique called “smoothing” to spread investment market volatility over a four-year window rather than a one-year “spike.” Investment returns during the past two fiscal years were below the assumed return of 7.75%, and the smoothing method means those losses have not yet been fully recognized.
Segal’s report showed the pension fund suffered a demographic loss of $485 million, primarily due to increasing lifespan among benefit recipients. These losses in the mortality or “longevity” experience reflect that retirees and benefit recipients are living longer and collecting benefits longer than expected. The system also continues to face challenges meeting the total covered payroll growth assumption.
Segal is currently working on a study that STRS Ohio conducts every five years called an experience review. This study compares the system’s economic and demographic assumptions to the actual experience over the past five years. Segal shared with the board that changes to the mortality assumption (to reflect benefit recipients’ longer lifespans) and the discount rate (the rate that is also used as the investment return assumption) will have a negative impact on system funding by increasing the system’s liabilities and decreasing its funded ratio. A change to the payroll growth assumption could also increase the funding period beyond the state of Ohio’s statutory 30-year target to pay down the system’s unfunded liability.
Other key points from the 2016 pension valuation report include:
- STRS Ohio’s Defined Benefit and Combined Plans paid about $7.3 billion in benefits during the fiscal year.
- The unfunded actuarial accrued liability increased to $30.6 billion from $30.4 billion.
- Total covered payroll increased 1.4%, while the system’s expected payroll growth rate is 3.5%.
Staff Provides Pension Funding Recap and Expectations
Following the valuation presentation, STRS Ohio Finance staff recapped some of the funding data the board has reviewed in 2016. These points included:
- The board’s investment consultant, Callan Associates, is forecasting lower returns over the next 10 years than the system’s assumed rate of 7.75%.
- Accounting for future mortality improvement in pension fund assumptions is now standard actuarial practice and should be strongly considered.
- Payroll growth is expected to continue to lag STRS Ohio’s current assumption, due in part to lower inflation and, looking ahead, to lower birth rates in Ohio — meaning there will likely be fewer students to educate, possibly indicating fewer classroom teachers will be needed.
The board will continue its discussion on long-term pension funding in the months ahead and will receive the results of Segal’s five-year experience review in January. Staff confirmed that any changes to the actuarial assumptions will impact the funding period and could increase the funding period beyond the state of Ohio’s statutory 30-year target to pay down the system’s unfunded liability. STRS Ohio will use its website, newsletters and eUPDATE email news service to share information as these discussions continue.
Board Explores Pathways to Offer Sustainable Health Care Program
During its September meeting, the Retirement Board continued its review of STRS Ohio’s Health Care Program. The board has identified health care funding challenges as a key area of focus for 2016–17. There is currently no dedicated source of funds for the health care program. STRS Ohio no longer allocates 1% of the 14% employer contribution to the Health Care Fund because these funds are needed to strengthen the pension fund.
This month, the board examined several potential options that could extend the years the health care program is offered. Staff shared that the current pension funding ratio and funding period are unlikely to improve enough to provide an opportunity to designate any funding for health care from employer contributions until 2042 (under current assumptions). Staff is targeting a solvency period that provides the chance to sustain a health care plan that maintains a solid base in the Health Care Fund until additional funding is available.
Staff presented options that are projected to extend the solvency of the Health Care Fund by 50 years or more, noting that changes to the current subsidy levels and eligibility for the program are the best options for achieving longer term solvency. Next month, the board is expected to narrow these options for further discussion.
Board Recognizes Chief Benefits Officer for Outstanding Service
The Retirement Board recognized Sandy Knoesel, deputy executive director — Member Benefits and chief benefits officer, who is retiring after 25 years of service at STRS Ohio. Knoesel served as STRS Ohio’s first female deputy executive director, and under her leadership, the Member Benefits Department has been ranked number one in service worldwide by CEM Benchmarking eight times in the past 17 years. The board thanked Knoesel for her dedication and outstanding service to the retirement system’s members, board and staff.
The Retirement Board approved 191 active members and 89 inactive members for service retirement benefits.
Other STRS Ohio News
Steen Reappointed to Four-Year Term
Governor John Kasich announced his reappointment of Wade Steen to the State Teachers Retirement Board. Steen is president and founder of Steen & Company LLC, with offices in Columbus, Ohio. His term on the Retirement Board will end Sept. 27, 2020.