Board Continues Discussion of Possible Benefit Improvements; Aims to Vote In March
At the February meeting of the State Teachers Retirement Board, actuarial consultant Cheiron provided further analysis of potential benefit improvements designed to benefit both active and retired members of the system. The board expressed interest in various options that include a one-time cost-of-living adjustment (COLA) for eligible benefit recipients and a change to the current age and service eligibility requirements for active members, which would allow teachers with 35 years of service to retire at any age (eliminating the age 60 requirement set to be put in place in 2026). The board is also considering a reduction in the member contribution rate to 13% from 14%. Cheiron will complete its analysis of the financial impact of the proposed changes at the March board meeting now that its five-year experience review has concluded (see story below).
A one-time simple COLA increase would result in a higher benefit in all future years but does not commit to additional COLA increases each year. Cheiron estimates the cost to provide a one-time 2% COLA is about $1 billion. With investment returns expected to be muted over the next decade and negative cash flow of about $4 billion annually (paying out about $7.4 billion in benefits versus collecting $3.4 billion in contributions), Cheiron is advising the retirement system to proceed cautiously with benefit changes. The board is expected to vote on benefit changes at its March meeting.
Board’s Actuary Provides Further Analysis, Board Approves Changes to Assumptions Used to Value Fund Liabilities
Cheiron concluded its actuarial experience review and recommended several changes to STRS Ohio’s actuarial assumptions. Cheiron’s study compared the retirement system’s demographic assumptions to the actual experience over the past six years. Demographic measures include retirement, salary increase, disability/termination and mortality assumptions. Cheiron recommended slight modifications to each of these areas. The Retirement Board approved the recommendations, which will result in an actuarial gain of about $2.6 billion. This decrease in the fund’s liabilities slightly improves STRS Ohio’s financial condition. The demographic assumption changes will also have a positive impact on STRS Ohio’s Health Care Fund, resulting in an actuarial gain of about $300 million.
Consultant’s Report Shows STRS Ohio Investment Returns Rank High, Risk Level Low Versus Peers
During the February meeting, board investment consultant Callan LLC shared its quarterly performance report for various time periods ending Dec. 31, 2021. Callan’s report showed STRS Ohio’s total fund return for calendar year 2021 was +19.36%, beating the fund’s benchmark by a full 2.00% and outperforming 96% of funds included in Callan’s public fund sponsor database of more than 200 public funds. Callan also shared that STRS Ohio’s returns ranked in the top 15% of public funds for the three-, five-, seven- and 10-year time periods.
The performance report also includes analysis of the level of risk in the investment portfolio. Callan shared that STRS Ohio’s total fund has a lower level of risk than the average fund in the database.
Callan also presented the next phase of its ongoing asset-liability study. This study, conducted every five years, helps the board determine its asset mix for the pension fund and provides investment risk/return expectations moving forward. Last month, Callan recommended that the board should focus on investment mixes that do not differ substantially from the current asset mix, as less aggressive mixes do not provide significant growth potential and more aggressive mixes subject the plan to excessive volatility and downside potential.
Callan reviewed five potential asset mixes with the board and discussed the pros and cons of each. The board is expected to approve an asset mix at its March meeting. The fund’s current neutral weight portfolio mix includes 28% broad U.S. equities, 23% broad international equities, 16% broad U.S. fixed income, 10% real estate, 10% opportunistic/diversified, 7% private equity, 5% liquid treasury and 1% liquidity reserve.
Board Reviews STRS Ohio’s Enterprise Risk Management
STRS Ohio Finance staff shared with the board an overview of key risks to STRS Ohio, along with steps that are taken to mitigate those risks. Staff identified the prominent risks in each STRS Ohio department and placed them on a grid measured by the probability of the identified event and the potential financial impact of such an event. This ongoing exercise helps the organization stay ahead of possible threats to the retirement system.
The Retirement Board approved 210 active members and 178 inactive members for service retirement benefits.