Actuarial Valuation Shows COLA Change, Investment Returns Lead to Funding Gains
During the October meeting of the State Teachers Retirement Board, actuarial consultant Segal Consulting presented key findings from its July 1, 2017, annual pension valuation report. This report provides a detailed look at the financial health of the pension fund. The most common ways to express the system’s financial condition are through the funded ratio and the funding period. This year’s valuation report shows the funded ratio — the value of assets compared to actuarial accrued liabilities (benefits earned by members of the system) — improved to 75.1% from 69.6% last year. The funding period — the amount of time needed to pay off the system’s unfunded liability under current assumptions and benefit levels — also improved, decreasing to 18.4 years from 26.6 last year. Segal shared that without the board’s action to reduce cost-of-living increases granted on or after July 1, 2017, to 0%, STRS Ohio’s funded ratio would be just 66.6% and the funding period would have increased to 50.4 years.
Investment returns for the 2017 fiscal year topped 14% and also helped account for part of the funding improvement. Segal noted that the pension fund has a net $155 million in deferred investment gains 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.” Last year’s valuation report showed a net $2.8 billion in deferred losses to be recognized.
The valuation report measures two sets of assumptions — economic and demographic — against the retirement system’s actual experience from the past year. Economic measures include the rate of inflation, return on assets, salary increases and payroll growth. Demographic measures include retirements, disability inceptions, withdrawals and mortality (the number of deaths among active members and benefit recipients).
This year’s valuation report included the updated actuarial assumptions the board adopted in March. These new assumptions included reducing the expected investment return to 7.45%, updating to generational mortality tables to recognize that STRS Ohio retirees are living longer, reducing the inflation assumption and reducing overall expected payroll growth.
Other key points from the meeting include:
- STRS Ohio’s Defined Benefit and Combined Plans paid about $7.2 billion in benefits during the fiscal year.
- The unfunded actuarial accrued liability decreased to $23.9 billion from $30.6 billion.
- Total covered payroll increased by 4.1%, exceeding the system’s payroll growth assumption.
- Despite the improvement in the funding status, because of the volatility around investment returns, staff estimates STRS Ohio faces about a 30% chance that the pension fund drops below a 50% funded ratio in the next 10 years.
Retirement Board Adopts Health Care Premium Subsidy Plan for 2019 and Beyond that is Designed to Extend the Life of the Health Care Fund
At its October meeting the Retirement Board adopted a new plan for providing health care premium subsidy assistance to benefit recipients who are enrolled in the STRS Ohio Health Care Program. The new subsidy strategy will go into effect in 2019 and will not affect the 2018 health care plan or premiums.
Since STRS Ohio health care plan enrollees are eligible for Medicare for most of their retirement years, the board-approved subsidy plan will offer greater protection against health care inflation for Medicare enrollees than for non-Medicare enrollees. Under the new subsidy plan, benefit recipients who are enrolled in an STRS Ohio health care plan under Medicare will receive a subsidy that will grow with health care inflation up to a cap of 6%. Non-Medicare enrollees will receive the same subsidy dollar amounts that are offered in 2018; however, this dollar amount will not grow with inflation in the future.
The newly adopted plan is projected to extend the solvency of the Health Care Fund to the year 2047. The fund previously was estimated to remain solvent through 2034. Additional details on subsidies, plan design and 2019 plan premiums will be shared in the spring/summer 2018 newsletters.
Annual Statements of Account Mailed to Members
Members began receiving their Annual Statements for the Defined Benefit Plan at the end of September. Mailing continued through mid-October for the Combined Plan and Reemployed Retiree statements. Many STRS Ohio members have chosen paperless delivery of their Annual Statement and instead view the statement through their Online Personal Account. Nearly 59,000 members have now opted out of receiving paper statements. Regardless of whether a member received a paper statement, all members can view a PDF version of their statement through the STRS Ohio website’s Online Personal Account section.
Public Participation at Retirement Board Meetings Moves to Mornings; Next Meeting Scheduled for Dec. 14
In response to member requests, the Retirement Board is moving the public participation portion of future board meetings to a morning time slot. Public comments will now take place mid-morning, typically following the report from the Investment Department. This is expected to be between 9:30 and 11 a.m., depending on the length of the agenda. STRS Ohio members requested the opportunity to speak before the current after-lunch time slot so they can express their views before the board takes actions during the day. The new schedule will begin at the board’s next scheduled meeting on Dec. 14.
The Retirement Board approved 281 active members and 91 inactive members for service retirement benefits.