October Board News

Pension Valuation Report Shows Slight Funding Gains in Fiscal Year 2018

During the October meeting of the State Teachers Retirement Board, actuarial consultant Cheiron presented the results of its July 1, 2018, pension valuation report. This report provides a detailed look at the financial and actuarial health of the pension fund — a “snapshot” of the fund as of July 1, 2018. The actuarial valuation process includes collecting member data, retirement plan provisions and asset information — then applying economic and demographic assumptions to project all future benefit payments (actuarial liabilities). The actuary then determines the present value of projected benefits and compares that value to the retirement plan’s actuarial assets.

The most common ways to express the system’s financial and actuarial condition are through the funded ratio and the funding period. Cheiron’s report noted that the plan’s funded ratio has been steadily increasing since 2013. This year’s valuation report shows the funded ratio — the value of actuarial assets compared to the actuarial accrued liabilities — improved slightly to 75.5% from 75.1% last year. This means if STRS Ohio meets all future assumptions, including its assumed investment return rate of 7.45%, the fund has about 75 cents on hand for every dollar of benefits projected to be paid to members of the system. The shortfall between STRS Ohio’s actuarial assets and liabilities is called the unfunded actuarial liability. STRS Ohio’s unfunded actuarial liability decreased slightly to $23.79 billion, down from $23.91 billion last year. The funding period — the amount of time needed until assets match actuarial liabilities — also improved, decreasing to 17.8 years from 18.4 years last year.

Other key points from the valuation report include:

  • Investment returns for the 2018 fiscal year topped 9.5% and helped account for part of the funding improvement.
  • STRS Ohio’s Defined Benefit and Combined Plans paid about $7.1 billion in benefits during the fiscal year.
  • Total covered payroll increased by 3.2% during the fiscal year, slightly ahead of the system’s 3% payroll growth assumption.

While the funding level improved incrementally in fiscal year 2018, staff estimates STRS Ohio faces about a 29% chance that the pension fund could drop below a 50% funded ratio in the next 10 years. This is primarily due to the volatility around investment returns. The board and staff believe this risk level is too high and will continue to focus on improving the long-term sustainability of benefits.

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).

The valuation report indicated STRS Ohio has a net $1.8 billion in deferred investment gains that will be recognized over the next three years. The pension valuation 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 $155 million in deferred gains to be recognized.

Health Care Valuation Report Shows Health Care Fund Gained Strength

Cheiron also presented the results of its actuarial valuation of STRS Ohio’s Health Care Fund. This valuation was changed from a Jan. 1 calendar year basis to a July 1 fiscal year basis. Therefore, this valuation period’s results are for the six-month period since the last valuation was conducted. The report shows that plan design changes and good claims experience had a positive impact on the Health Care Fund during the valuation period. Costs for the health care program are paid from the Health Care Fund, which is currently funded through premiums charged to enrollees, government reimbursements and investment earnings on these funds. No percentage of employer contributions are directed to the Health Care Fund.

The Health Care Fund balance as of July 1, 2018, was $3.72 billion, an increase from $3.69 billion on Jan. 1, 2018. The valuation showed that benefit payouts for the 12-month period ending June 30, 2018, totaled about $517 million, an average of about $1.4 million per day. The funded ratio of the plan is 176%, meaning if the fund earns 7.45% in all future years and all other plan experience matches assumptions, the fund is projected to remain solvent for all current members.

The positive news for the Health Care Fund is tempered somewhat by the volatile nature of the various components that affect funding for the health care program. Examples of these components include investment returns, government subsidies and rebates, plan enrollment and utilization, and Affordable Care Act taxes. These areas led to gains for the fund in the past but are not predictable and may not necessarily be positive for fiscal year 2019 and beyond.

Retirements Approved

The Retirement Board approved 177 active members and 67 inactive members for service retirement benefits.

Other STRS Ohio News

Annual Statements of Account Delivered 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. About 55,000 members have opted for paperless delivery of their Annual Statement and instead view the statement through their secure Online Personal Account. 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. To receive paperless communication, members can update their communication preferences through their Online Personal Account.

Medical, Dental and Vision Open Enrollment Begins Nov. 1

Open enrollment for STRS Ohio’s medical, dental and vision plans is Nov. 1–20, 2018. During this time, eligible benefit recipients and their family members can make changes to their current coverage or enroll in a plan for the first time. Open-enrollment materials have been mailed to current enrollees and the coverage for plans selected during open enrollment begins on Jan. 1, 2019. STRS Ohio now offers online enrollment for the dental and vision plans. Eligible benefit recipients can use their Online Personal Account to enroll or cancel dental and/or vision coverage.