Actuarial Valuation Shows COLA Change, Investment Returns Led to Funding Gains
STRS Ohio’s annual valuation report, prepared by Segal Consulting, shows pension funding levels improved during the fiscal year ending June 30, 2017. The report provides a detailed look into the financial health of the pension fund. The most common ways to express the system’s financial condition are through the funded ratio and the funding period. The valuation report shows the funded ratio — the value of assets compared to actuarial accrued liabilities (benefits earned by members of the system) — improved to 75.1% from 69.6% the previous year. The funding period — the time needed to pay off the system’s unfunded liability under current assumptions and benefit levels — also improved, decreasing to 18.4 years from 26.6 years in the previous year’s report. Segal shared that without the board’s action to reduce cost-of-living increases granted on or after July 1, 2017, to 0%, STRS Ohio’s funded ratio would be just 66.6% and the funding period would have increased to 50.4 years — well above the state of Ohio’s 30-year target.
STRS Ohio executive director Michael Nehf said the positive report is a welcome sign, but would like to see further funding improvement. “Reaching a 75% funded ratio is a step forward for STRS Ohio, but the funding position needs to further strengthen to improve our resiliency in a volatile market environment” said Nehf. Despite the improvement in the funding status, because of the volatility around investment returns, staff estimates STRS Ohio faces about a 30% chance that the pension fund could drop below a 50% funded ratio in the next 10 years.
Investment returns for the 2017 fiscal year topped 14% and also helped account for part of the funding improvement. Segal noted that the pension fund has a net $155 million in deferred investment gains that will be recognized over the next three years. STRS Ohio uses a common actuarial technique called “smoothing” to spread investment market volatility over a four-year window rather than a one-year “spike.” The previous year’s valuation report showed a net $2.8 billion in deferred losses to be recognized.
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 report included the updated actuarial assumptions the board adopted in March 2017. These new assumptions included reducing the expected investment return to 7.45%, updating to generational mortality tables to recognize that STRS Ohio retirees are living longer, reducing the inflation assumption and reducing overall expected payroll growth.
Other key points from the report include:
- STRS Ohio’s Defined Benefit and Combined Plans paid about $7 billion in benefits during the 2017 fiscal year.
- The unfunded actuarial accrued liability decreased to $23.9 billion from $30.6 billion.
- Total covered payroll increased by 4.1%, exceeding the system’s payroll growth assumption.
Final Average Salary Limitations Can Affect Your Retirement Benefit
Members who plan on retiring in the near future and are considering taking on extra duties to increase their salary should be aware of the limits on earnings used to calculate the final average salary (FAS) that is used in the retirement benefit formula.
FAS is the average of your five highest years of earnings — subject to certain limits. Many members do not realize that there are limits on earnings that can be used in the calculation of FAS. These limits are required by law and exist to help ensure that members’ retirement benefits have been properly funded.
Working extra duties will allow you to receive more annual income during your working years, but may not always provide a higher FAS at retirement because of the statutory provisions. Your FAS will be limited if the extra earnings you receive cause the percentage increases in your two highest years of earnings to be greater than the increases in the three years before the earlier of the two highest years. Compensation for a partial year may also be limited.
Examples of extra duties in two highest years of earnings that may trigger a limit to your FAS:
- Accepting a supplemental contract, summer school teaching (K–12) or summer session (college and university) that was offered to all qualified educators.
- Assuming extra duties that required working extra days or hours.
- Working additional duties for three years, but not teaching through the last day of the school year in the last year.
- Performing services for the school district for years with no pay and then getting paid for those duties only in the last year, last two years or last two years and a partial year.
- Receiving a supplemental contract for services performed as a mentoring teacher as part of the licensing requirement for teachers in your district.
- Working overload assignments in addition to your regularly salaried employment, even if that was required.
- Accepting new employment or more pay in a position covered by the Ohio Public Employees Retirement System or the School Employees Retirement System in addition to your employment covered by STRS Ohio.
- Being assigned extra duties in the last two years as a result of a collective bargaining agreement.
- Accepting an interim or short-term position that results in a significant increase in pay.
- Accepting a new part-time position with another STRS Ohio-covered employer.
These are some common reasons for FAS limits, but they are not the only examples. Remember, while all of these earnings may not be included in your FAS, at least a portion of the earnings are included in many cases — resulting in a higher FAS than if the extra duties had not been performed.
Please be sure to discuss your future retirement with an STRS Ohio benefits counselor at least twice before retirement. If you earn additional amounts beyond your contract for regular teaching duties, you should talk with a counselor at least four years before you retire. Also, if you do not plan to work through the last day of your contract in your last year of teaching, be sure to discuss this plan with a benefits counselor before your retirement. For more information or to schedule a counseling session, call STRS Ohio toll-free at 888‑227‑7877.
Robert A. McFee and Jeffrey Rhodes Elected to Retirement Board; Mayerfeld Reapppointed; New Representative Seated
Robert A. McFee and Jeffrey Rhodes were elected to contributing member seats on the Retirement Board in voting that concluded on May 7. The term for these seats runs from Sept. 1, 2018, through Aug. 31, 2022. McFee is a mathematics teacher for Willoughby Eastlake City Schools and Rhodes is a technology education teacher for North Royalton City Schools.
Earlier this year, Treasurer of State Josh Mandel reappointed Yoel Mayerfeld to an investment expert seat on the Retirement Board. Mayerfeld is the Principal & Managing Director of Chase Properties, an Ohio-based company with offices in Beachwood, Ohio. The term for this seat runs through Jan. 7, 2022.
In April, the Speaker Pro Tempore of the Ohio House of Representatives and the President of the Ohio Senate jointly appointed David Gruber to an investment expert seat on the Retirement Board. Gruber is the director of Risk Advisory Services for Holbrook & Manter, CPAs. The term for this seat runs through Nov. 4, 2020. The seat was formerly held by Craig Brooks.
Member Survey Results Reveal Impressions of STRS Ohio
Research with STRS Ohio members and retirees show that 95% of retirees and about 80% of active members have positive overall impressions of the Retirement System. The membership survey was completed in late 2017. Other notable findings included:
- Most retirees (85%) and active educators (72%) indicated STRS Ohio has earned the trust and confidence of its members.
- Compared with last year, fewer active members (61%) consider the pension they expect to receive an excellent/good value considering the amount they contribute to the system, while 86% of retirees consider their pension an excellent/good value.
- Most members continue to be satisfied with STRS Ohio communications — including email updates — with about eight out of 10 active members and nine out of 10 retirees indicating that STRS Ohio keeps them well-informed about pension- and retirement-related issues.
- 75% of active educators are setting aside additional savings for retirement — in addition to their retirement plan with STRS Ohio and the money they’re saving for health care.
- More than nine out of 10 retiree households reported at least one source of income in addition to their STRS Ohio pension. Investments and spouse’s pension are the most common forms of additional income. Survey respondents indicated on average, STRS Ohio provides 58% of retirees’ household income.
Building Your Nest Egg
If you are looking for an optional investment account in addition to your STRS Ohio retirement plan, you might consider an individual retirement account (IRA), a 403(b) plan or a 457(b) plan. These are individual investment accounts than can supplement the retirement income that you will receive from STRS Ohio. These accounts each have their own plan characteristics, such as maximum annual contribution limits, withdrawal limitations and fees.
A financial advisor can help you determine if one of these plans is right for you. The Ohio Public Employees Deferred Compensation Program is a supplemental 457(b) retirement plan that is available to all Ohio public employees. You can learn more about this option at www.ohio457.org.
Online Communication Options Save STRS Ohio Printing, Postage Costs
STRS Ohio now offers an electronic version of STRS Ohio News for Active Members delivered straight to your email account. Nearly 70,000 members now receive an e-newsletter instead of a paper copy, saving the retirement system the costs of printing and mailing these materials. Members who have an email address on file with STRS Ohio should receive an electronic version of the newsletter in their inbox. To opt out of the printed version, log in to your Online Personal Account and indicate that you prefer to receive newsletters by email. STRS Ohio is also pleased to offer the online availability of the Annual Statement of Account, sent to members in mid to late September each year. You may opt out of the printed Annual Statement via your Online Personal Account.