Pennsylvania PSERS Drops Aon as Consultant

Aon admitted fault for the 2020 mistakes that led to the resignations of pension fund leaders, and the fund has moved on to a new consultant, Verus Investments.

About three years after Aon Investments USA Inc. inaccurately reported a performance figure for the Pennsylvania Public School Employees’ Retirement System, triggering a crisis at the pension fund, the two have officially parted ways.

Pennsylvania PSERS’ board of trustees voted Friday to terminate its contract with Aon as an investment consultant. The meeting agenda also included the approval of a decrease in employer contribution rate and lower payroll contribution rates for some employees for future fiscal years.

In August, PSERS filed a lawsuit against Aon over accounting errors made in a 2020 risk share analysis, alleging the firm hurt the pension fund’s reputation and caused millions of dollars in damaged. The Aon miscalculations led to the resignation of PSERS’ executive director, Glen Grell, and its CIO, Jim Grossman, as well as a Department of Justice investigation that lasted more than a year before finding no wrongdoing.

Because the board terminated its contract with Aon, services previously provided by Aon will now be performed, in full, by Verus Investments.

In other business, the annual employer contribution rate will decrease to 33.9% from the current rate of 34%, according to the board’s actuarial firm, Buck Global LLC. The new rate starts in the fiscal year that runs from July 1, 2024 through June 30, 2025, and certain employee groups’ lower payroll contributions run over the next three fiscal years, from July 1, 2024 through June 30, 2027.

“This is the second year in a row the [employer contribution rate] has gone down, and the Retirement Code requires the Board to accept the actuary’s calculation,” said Eric DiTullio, a PSERS trustee representing public schools boards and the chair of its finance and actuarial committee, in a statement. “There’s no guarantee those declines will continue in the future. Still, as an elected school board member, I’ll take an [employer contribution rate] reduction, no matter how slight, over an increase every day of the week.”

According to Buck, the decline in employer contribution rate was caused largely by school employers’ strong payroll growth and favorable demographic changes involving salary increases, mortality and retirements during the recently ended 2022 to 2023 fiscal year.

Those factors, along with sustained, actuarially required employer contribution rate funding, caused a $1.6 billion decrease in PSERS’ long-term unfunded actuarial liability, the largest year-to-year decline in more than a decade and a half. At the same time, PSERS’ actuarial funded status rose to 63.6% from 61.6%, according to Buck.

The vast majority of the employer contribution rate in the fiscal year that runs from 2023 into 2024 also will cover approximately 80% of debt payments for past service (unfunded liability). Compounded by higher-than-expected payroll growth, PSERS was able to make “significant and positive progress in paying down this debt,” according to a press release.

Buck estimated that total employer contributions to PSERS will be $5.3 billion in fiscal year 2025. Pennsylvania directly reimburses school employers for at least half of the total employer contribution rate payment.

PSERS is also funded through net investments earnings, which totaled $2.8 billion in fiscal 2023.

Mandatory employee contributions are the third funding source for PSERS, and employee contribution rates range from 5.25% to 10.30% of pay, depending on employees’ membership class in the pension fund and when they joined PSERS.

In addition to the decline in employer contribution rate, the employee contribution rate will also drop. Beginning in July, 116,851 public school employees who began their careers in 2011 will pay 0.5% or 0.75% less for their retirement benefits. This reduction was caused by net investment returns exceeding a statutory threshold in the calculation of the shared risk/shared gain contribution rate.

The shared risk/shared gain contribution rate is mandated by Act 120 of 2010 and Act 5 of 2017 in Pennsylvania law. Under those laws, certain member contribution rates for the defined benefit plan may fluctuate up or down every three years depending on a periodic review of the pension fund’s net investment performance.

“The lower employee contribution rate is welcome news for our hardworking school employees,” said Stacy Garrity, Pennsylvania’s treasurer and a PSERS trustee, in a statement. “The Audit, Compliance and Risk Committee, which I chair, oversaw and directed a robust, independent examination of PSERS’ net investment returns, and we’re confident in the work of ACA and the results we received.”

As of June 30, PSERS had total net assets of $72.8 billion and a membership of about 251,000 active school employees, 250,000 retired school employees and 27,000 vested inactive members.