Retirement Board Considers Pension Funding Perspectives, Adopts Amendments to Its Funding Policy
At the May meeting of the State Teachers Retirement Board, STRS Ohio Finance Department staff shared some historical perspectives regarding the current pension funding status. As STRS Ohio approaches its 100th anniversary, it’s important to recognize that some demographic and economic characteristics have changed over the years, and these changes have had a significant impact on plan funding. Key points from the presentation include:
- Ratio of active members to beneficiaries has dropped — As a mature plan, the ratio of active members to beneficiaries has dropped to about 1.1 to 1 (about 170,000 active teachers and 157,000 beneficiaries) — compared to 20 years ago when the ratio was about 1.8 to 1 (about 170,000 active teachers and 92,000 beneficiaries). With Ohio birth rates dropping steadily over the past five or more decades, there are fewer students to educate, which could erode the number of active teachers needed
in the future.
- The pronounced growth in the number of benefit recipients means that STRS Ohio has a negative cash flow — Meaning the fund pays out about $4 billion more in benefits each year than it collects in contributions. The balance is expected to be made up with investment returns. STRS Ohio needs to earn nearly 6% on investment returns to make up for the negative cash flow and must earn 7.45% to meet the expected needs of the retirement system.
- Economic environment has reduced risk-free rates of return considerably over the past 20–30 years, so investments must take on more risk — Staff shared that the 10-year treasury rates stood at 8.82% in 1988, versus 2.85% in 2018. This requires the pension fund to place a higher percentage of its portfolio in stocks and other volatile assets than it did 30 years ago in order to earn its assumed investment rate of return. Doing so increases the risk that the portfolio in a given year could lose assets during a market downturn and in these instances, the $4 billion in negative cash flow impacts the funding status even more.
- The likelihood of lower-than-expected investment returns leading to a funded ratio of less than 50% is reduced as the funded ratio improves — The changes in plan maturity and economic context combine to make the pension fund much more vulnerable to economic downturns. With its current asset mix, STRS Ohio faces about a 29% chance that the pension fund could drop below a 50% funded ratio in the next 10 years; however, the resiliency of the plan improves faster as the plan goes from a 75% funded level to a 90% funded level.
Board adopts amendments to its funding policy
After several months of review and discussion, the Retirement Board adopted amendments to its funding policy. The stated purpose of the funding policy is “... to state the Board’s objectives for funding and to lay out clear criteria for making decisions regarding changes to funding and benefits, as well as when those changes should be considered by the Board.” The policy’s goal is “... to safeguard members’ benefits in the long term.”
The funding objectives in the policy include:
- 100% funding.
— At 85% or greater, the Board may consider plan changes that in the determination of the Board’s actuary do not materially impair the fiscal integrity of the system.
- Manage the risk of unanticipated benefit changes.
- Intergenerational equity, to the extent consistent with other funding objectives.
- Transparency and accountability.
During the discussion about the funding policy, the board chose to add the 85% language above. The approved amendment allows the board to consider plan changes when the funded ratio reaches 85% or higher, but the board’s actuary must determine that any proposed changes do not materially impair the fiscal integrity of the system.
Board Reviews Proposed Health Care Changes, Premium-Setting Strategy for 2020 Plan Year
STRS Ohio Member Benefits staff presented its proposed changes for the STRS Ohio Health Care Program for plan year 2020, along with its proposed strategy for setting premium subsidy rates. Staff reported that claims experience continues to trend in a positive direction and that should result in smaller premium increases than expected. Specific premium amounts were not part of the proposal but are expected to be shared at the June board meeting.
Proposed health care plan changes include:
- Extending the current Medicare Part B Partial Reimbursement program for one year. Under this program, benefit recipients currently enrolled in the STRS Ohio Health Care Program and Medicare Part B receive $29.90 per month to reimburse a portion of the Medicare Part B premium. The reimbursement was set to be reduced to $0 beginning Jan. 1, 2020. This impacts about 85,000 benefit recipients.
- Increasing prescription drug maximum out-of-pocket limit to $6,350 from $5,100 for the Medicare plans to align with the 2020 standard Medicare prescription plan.
- Modifying the specialty drug coinsurance for Medicare enrollees — changing the specialty drug coinsurance to the lesser of 13% or $450 per 31-day period from the lower of 13% or $550 per fill.
- Adding SaveonSP manufacturer copay assistance program — manufacturer pays higher copay with a $0 balance to the enrollee and net cost is lower for STRS Ohio.
- Adding 24-hour nurse line to the Medical Mutual Basic Plan for non-Medicare enrollees.
- Requiring transplants to be performed at Organ Transplant Centers of Excellence.
- Moving enrollees in the regional AultCare PPO plan to AultCare’s Medicare Advantage Plan.
The board is expected to discuss these proposed changes along with 2020 premiums at its June meeting. Once voted on, plan changes and premiums will be posted on the STRS Ohio website and outlined in upcoming newsletters.
The Retirement Board approved 46 active members and 53 inactive members for service retirement benefits.
Other STRS Ohio News
STRS Ohio to recognize 100th anniversary — A Legacy of Service to Ohio Educators
STRS Ohio will recognize its 100th anniversary during fiscal year 2020, (July 1, 2019–June 30, 2020), after a century of providing retirement benefits and quality service to its members. The 100th anniversary is a milestone worthy of acknowledging as we focus on strengthening the organization’s financial position and continue the mission to partner with members in helping to build retirement security. The framework for the year is an outward focus on both active and retired members, honoring Ohio’s teachers for their contributions to society — and to recognize the milestone and offer opportunities to further engage members, stakeholders and associates.