Board Approves One-Time Health Care Premium Rebate of $300 for Enrollees Who Qualify
At the October meeting of the State Teachers Retirement Board, STRS Ohio staff presented a proposal to provide a health care premium rebate to current plan enrollees. Staff shared that plan year 2021 claims experience continue to be lower than projected when plan premiums were adopted. The board approved a health care premium rebate of $300 for each enrollee covered by the STRS Ohio retiree health care medical program in September 2021. Retirees will receive $34 million in rebates for themselves, spouses and dependents. The premium rebate will be paid to STRS Ohio retiree health care program members in the November 2021 pension payment.
Pension Valuation Report Shows Funding Improvement in Fiscal Year 2021
STRS Ohio’s actuarial consultant, Cheiron, shared the results of its fiscal year 2021 pension valuation report that showed overall funding improved in fiscal year 2021, as strong investment returns more than offset the increase in liabilities caused by the decision to reduce the discount rate to 7.0%. The valuation indicated STRS Ohio’s funded ratio and funding period improved, while unfunded actuarial liabilities declined.
STRS Ohio’s funded ratio — that is, the actuarial value of smoothed assets compared to accrued liabilities — improved to 80.1% from 77.4% last year. In other words, future benefits are 80.1% funded. For actuarial measurements, investment gains and losses are smoothed over four years to spread market volaility. About $8 billion of investment returns from this past year will be recognized over the next three years. When measured using the June 30, 2021, market value of assets, the funded ratio increases to 87.8%. The Retirement Board’s funding policy goal is to reach 100% funding.
The shortfall between the pension fund’s actuarial assets and liabilities is called the unfunded actuarial liability, and during fiscal 2021, STRS Ohio’s unfunded actuarial liability decreased to $20.83 billion from $22.31 billion. The funding period is a measure of the time needed to close that gap and reach a funded ratio of 100%. This measure also improved, decreasing to 14.0 years from 14.9 years in last year’s report.
Cheiron concluded that despite improvement in the plan’s funded status over the past fiscal year, STRS Ohio’s plan is still vulnerable to future adverse experience — primarily due to a 7.0% return assumption that exceeds the long-term expectations of the board’s investment consultant, a fixed employer contribution rate that is currently at the statutory maximum of 14% and negative cash flow (paying out more in benefits than the fund collects in contributions). Cheiron said any consideration of benefit improvements should be delayed at least until after the completion of the upcoming five-year experience review (expected to be completed in March 2022).
Cheiron also reviewed the estimated financial and actuarial impact of various changes to STRS Ohio’s benefit structure. Several Retirement Board members expressed their interest in possible plan changes and will have further discussion in the months ahead.
Health Care Valuation Report Indicates Fund Was Steady in Fiscal 2021 Despite No New Sources of Funding
Cheiron also shared the results of its annual actuarial valuation of STRS Ohio health care plan at the October meeting. The report showed that plan improvements and the reduction of the discount rate to 7.0% increased plan liabilities during fiscal year 2021, but those were offset by asset growth due to strong investment returns. The health care fund balance on June 30, 2021, was $4.93 billion, an increase from $3.90 billion last year. The funded ratio of the plan as of June 30 was 174.7%, slightly lower than last year’s funded ratio of 182.1%.
The fund is projected to remain solvent for all current members as long as plan experience matches assumptions. Benefit payouts for the fiscal year totaled about $437 million, an average of more than $1.2 million per day. 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 those funds. No employer contributions are used to help fund health care since these contributions are needed for the pension 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, key components that affect funding for the health care program (e.g., 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 this size with payments of more than $400 million per year.
Board Reviews Investment Asset Class Presentations
STRS Ohio Investment Department staff provided overviews of three asset classes at the October meeting — alternative investments, domestic equities and international equities. The alternative investments presentation noted that the role of this asset class within the total fund is to provide diversification, growth and income. The asset class is comprised of private equity and opportunistic/diversified investments. These two subsets have different risk/return profiles. Staff shared that alternative investments have increased total fund returns (compared to total fund net returns) over the one-, three-, five- and 10-year time periods ending June 30, 2021. The outlook for alternatives is for normal returns over the next decade. Staff also noted it continues to make progress in efforts to integrate more direct and co-investments in this asset class — an initiative to help lower investment costs.
The domestic equities presentation noted that the 10-year return outlook for this asset class is lower now than it was during the 2017 asset-liability study. The board’s investment consultant, Callan, has a return forecast of +6.6% for domestic equities over the next decade. The international equities asset class also calls for a low-growth, low-return forecast over the next decade. At its September meeting, the board reviewed asset class presentations from the fixed income and real estate asset classes, as well as an overall economic outlook. The board is currently conducting an asset-liability study that is expected to be completed in March 2022.
The Retirement Board approved 319 active members and 108 inactive members for service retirement benefits.
Other STRS Ohio News
Plan year 2022 open enrollment begins Nov. 1 for STRS Ohio medical plans
Open enrollment for STRS Ohio’s medical plans is Nov. 1–23, 2021. This is the period for benefit recipients to decide if they want to change plans or enroll in a new plan for 2022 without a qualifying event. Current medical plan enrollees can expect to receive materials in the mail in late October. Those who have signed up for electronic delivery received an email when their materials became available in their Online Personal Account. 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 click “Contact” in the upper right corner of this page to email a request for personalized enrollment information.
Retirement Board Election Notices to mail in early November 2021
Election notices for the 2022 Retirement Board election will mail in early November 2021 to all employers to inform STRS Ohio members about the upcoming election. In spring 2022, STRS Ohio contributing members will vote to elect two contributing members to the board, and retired members of the system will vote to elect one retired member to the board. Those eligible to run for the contributing member seats 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 seat 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 by calling STRS Ohio toll-free at 888‑227‑7877. The deadline for STRS Ohio to receive nominating petitions is Feb. 25, 2022. Board members are not compensated for board service other than reimbursement for actual, necessary expenses.