Study Indicates Need for Benefit Plan Design Changes to Meet State Funding Requirements
During its 2017 education and planning meeting, the State Teachers Retirement Board received the results of actuarial consultant Segal Consulting’s five-year experience study. The study compares the system’s economic and demographic assumptions to STRS Ohio’s actual experience from the past five years. The study results led Segal to recommend several changes to STRS Ohio’s assumptions. These changes are projected to significantly increase STRS Ohio’s total accrued liabilities and extend STRS Ohio’s funding period well beyond the state of Ohio’s 30-year funding requirement. The pension fund would then be required to present a plan to reduce its funding period to 30 years or less.
The experience review measures economic assumptions (inflation, salary increases, overall payroll growth and investment return on assets) and demographic assumptions (retirements, disability inceptions, withdrawals and the number of deaths among active members and benefit recipients). Segal’s recommendations include:
- Reducing STRS Ohio’s investment return assumption from its current rate of 7.75%. Using various studies and factors, Segal indicated a possible return range of 6.95% to 7.45% before settling on its recommendation of a 7.00% investment return assumption. Segal indicates this change would add as much as $8.8 billion to STRS Ohio’s accrued liabilities.
- Adopting mortality tables that account for increasing lifespans among benefit recipients. This change would recognize that benefit recipients are living longer and collecting benefits for longer than expected and this trend is expected to continue. Segal indicated this change to the mortality tables would add about $4.1 billion to STRS Ohio’s accrued liabilities.
- Reducing the inflation assumption to 2.50% from the current 2.75%.
The board is not required to adopt Segal’s recommendations. However, as plan fiduciaries, board members will take into account that consultants have indicated investment returns over the next decade are not expected to be strong enough to close the current funding gap. If the board does adopt all of Segal’s recommendations, STRS Ohio’s accrued liabilities will increase by about $11.5 billion and its funding period would be infinite — meaning without changes, the pension fund would eventually be unable to pay benefits. The Retirement Board is expected to adopt new actuarial assumptions at its March meeting.
In preparation for upcoming discussions about benefit plan design changes, the board began reviewing its options to reduce liabilities. Models of possible plan design changes indicate that the cost-of-living adjustment (COLA) is the best means possible to preserve the fiscal integrity of the pension fund because it by far has the biggest impact on liabilities. The board will continue its consideration of plan design changes in the months ahead with a focus on providing a sustainable benefit to active and retired members of the retirement system. In fiscal year 2016 alone, STRS Ohio paid a total of about $7.1 billion in service retirement, disability and survivor benefits to nearly 158,000 benefit recipients. The Defined Benefit Plan had about $66.3 billion in assets at fiscal year end.
Board Reviews Plans to Increase Solvency of STRS Ohio Health Care Program
A key focus of the Retirement Board in 2016 was taking an intensive look at the funding challenges facing the STRS Ohio Health Care Program. At its January 2017 education and planning meeting, the board reviewed several options to extend the solvency of the program.
In July 2014, the board discontinued the 1% employer allocation to the Health Care Fund in an effort to strengthen the financial condition of the pension fund. The projected life of the Health Care Fund now measures at about 20 years; however, depending on the strength of the financial markets, the amount of health care claims and whether additional funding is available, there is a chance the life of the fund could be 10 years or less. Projections show that the opportunity to designate funding for health care from employer contributions is unlikely in the next 20 years.
During the January meeting, staff presented several health care models designed to extend solvency for the health care program for 50 years or more. The 50-year target was selected to keep the health care fund solvent until funding from employer contributions could resume. Staff presented plans that provide a sustainable program and represent value to plan enrollees. Discussion focused on health care models that maintain a higher premium subsidy percentage for Medicare enrollees than for non-Medicare enrollees. Costs for all participants are expected to increase, as health care program costs continue to grow. In fiscal year 2016 alone, health care benefit payments totaled about $677 million and the plan covered more than 128,000 enrollees. The Health Care Fund balance as of Jan. 1, 2016, was about $3.26 billion. The board will continue its discussion on the health care program in February.