Valuation Report Shows Mixed Results for Pension Fund in Fiscal Year 2020
During the October meeting of the State Teachers Retirement Board, STRS Ohio’s actuarial consultant, Cheiron, shared the results of the fiscal year 2020 pension valuation report. The report provides a detailed look at the financial and actuarial health of the pension fund. Valuation reports measure two sets of assumptions — economic and demographic — against the retirement system’s actual experience from the past year. Economic assumptions include the return on assets, the inflation rate and the rate of salary increases and payroll growth. Demographic assumptions include retirements, disability inceptions, withdrawals and mortality (the number of deaths among active members and benefit recipients).
The health of the pension fund is most commonly measured through the funded ratio and the funding period. This year’s valuation report shows the funded ratio — the value of actuarial assets compared to the actuarial accrued liabilities (essentially, the assets on hand versus the value of the benefits expected to be paid) — improved slightly to 77.4%, from 76.1% last year when measured using the four-year actuarial smoothed value of assets. This means if STRS Ohio meets all future assumptions, including its assumed investment return rate of 7.45%, the fund has about 77 cents on hand for every dollar of benefits expected to be paid to members of the system. The shortfall between STRS Ohio’s actuarial assets and liabilities is called the unfunded actuarial liability. During fiscal 2020, STRS Ohio’s unfunded actuarial liability decreased to $22.31 billion from $23.43 billion last year. The funding period is a measure of how long it will take to close that gap (if all future experience matches assumptions) and reach a funded ratio of 100% — when plan assets are equal to the expected benefit to be paid to the membership. This measure also improved, decreasing to 14.9 years from 16.6 years in last year’s report.
The results of the valuation report are considered mixed because investment returns have been below the assumed 7.45% rate of return during each of the last two fiscal years. The four-year actuarial smoothing method defers some of those actuarial losses to future years (to spread market volatility over a four-year window rather than a one-year “spike.”) When measured using the June 30, 2020, market value of assets, the funded ratio fell below last year’s 76.1%.
During the presentation, Cheiron shared that despite some improvement in aspects of the plan’s funded status over last year, STRS Ohio’s pension plan is still very vulnerable to future adverse experience due to:
- A 7.45% investment assumption that exceeds STRS Ohio’s investment consultant’s 10-year expectations;
- A fixed employer contribution rate; and
- Negative cash flow that exceeds 5% of assets (benefit payments of about $7 billion during last fiscal year far exceeded contributions of about $3.4 billion).
As a result of these factors above, Cheiron noted that any consideration of benefit improvements needs a corresponding increase in plan contributions to avoid a deterioration in the plan’s financial outlook. Cheiron’s report said, “... without an additional source of funding above the current fixed statutory rate, a continued reduction of the cost-of-living adjustment to zero remains necessary.”
STRS Ohio staff estimates that the pension fund faces about a 29% chance of dropping below a 50% funded ratio in the next 10 years, primarily due to the volatility around investment returns. Cheiron expressed its desire to continue to work closely with the board and staff leading into the five-year experience review slated to begin late next year. This review will provide guidance around STRS Ohio’s economic and demographic assumptions.
Board Approves One-Time Health Care Premium Rebate of $250 for Plan Enrollees Who Qualify
STRS Ohio staff analysis showed plan year 2020 health care utilization has been less than projected — largely due to COVID-19 — with additional savings expected through the end of the plan year. The board approved staff’s recommendation to provide a premium rebate of $250 for each enrollee covered by the STRS Ohio retiree health care medical program in October 2020. The total cost of the rebate is $29.1 million and will cover benefit recipients, spouses and dependent enrollees. The premium rebate will be paid to STRS Ohio retiree health care program members in the December 2020 pension payment.
Health Care Valuation Report Shows Fund Improvement Despite No New Funding
Cheiron also shared the results of its actuarial valuation of STRS Ohio’s health care plan during the October meeting. The report shows good claims experience, lower than expected enrollment and continued federal government payments had positive impacts on the fund. 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 employer contributions are used to help fund health care since these contributions are needed for the pension fund.
The Health Care Fund balance on June 30, 2020, was $3.90 billion, an increase from $3.87 billion last year. Benefit payouts for the fiscal year totaled about $491 million, an average of more than $1.3 million per day. The funded ratio of the plan is 182.1%, slightly above last year’s funded ratio of 174.7%. The funded ratio improved even though the investment return on the fund did not reach the assumed return of 7.45%. The funding improvement also takes into account two plan improvements approved by the board in June: (1) continuing indefinitely the $29.90 Medicare Part B partial premium reimbursement and (2) allowing for premium subsidies for pre-Medicare benefit recipients to be increased by the amount (if any) not needed to meet the board’s Health Care Plan Management Policy to provide a baseline of up to 6% inflation-protection for the Medicare subsidy.
Under current conditions, 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. While this is positive news for the Health Care Fund, it is important to note that without a dedicated revenue stream for health care, the fund is more vulnerable to investment market volatility. Also, the various components that affect funding for the health care program — plan enrollment and utilization, government subsidies and rebates, investment returns — are not predictable and cannot be relied on in future years. These factors can result in greater volatility of a fund of this size with benefit payments of nearly half a billion dollars per year.
The Retirement Board approved 310 active members and 87 inactive members for service retirement benefits.
Other STRS Ohio News
Health care open enrollment begins Nov. 1 for medical, dental, vision plans
Open enrollment for STRS Ohio medical, dental and vision plans is Nov. 1–24, 2020. This is the period for benefit recipients to decide if they want to change plans or enroll in a new plan for 2021 without a qualifying event. Current medical plan enrollees can expect to receive materials in the mail in late October. Enrollees who have signed up with electronic delivery will receive an email when their materials are available in their Online Personal Account. All members will receive dental and vision plan information. Members who are not enrolled in an STRS Ohio medical plan and are interested in coverage should call STRS Ohio’s Member Services Center toll-free at 888‑227‑7877 or email [email protected] to request personalized enrollment information.
Retirement Board Election Notices to mail in early November
Election notices for the 2021 Retirement Board election will mail in early November 2020 to all employers to inform STRS Ohio members about the upcoming election. In spring 2021, STRS Ohio contributing members will vote to elect a contributing member and retired members of the system will vote to elect two retired members to the board. Those eligible to run for the contributing member seat include members presently contributing to STRS Ohio or those who have contributions on deposit with STRS Ohio (including members who are receiving disability benefits). Those eligible to run for the retired member seats include those who are current service retirement benefit recipients, including disability benefit recipients who have converted to service retirement. By law, STRS Ohio retirees employed in a position requiring them to make contributions to the system (commonly referred to as “reemployed retirees”) are ineligible to serve as a member of the Board. Members interested in running for one of these seats may request an election packet and nominating petitions beginning Nov. 1. The deadline for STRS Ohio to receive nominating petitions is Feb. 26, 2021. Board members are not compensated for board service other than reimbursement for actual, necessary expenses.