The Ohio’s State Teachers Retirement Board has lowered the actuarial assumptions it uses to calculate pension liabilities, following a five-year experience review.
The plan’s actuarial consultant, Segal Consulting, which conducted the review, recommended adjustments to assumptions for expected investment returns, mortality, inflation, salary growth, payroll growth and teacher retirements, disability inceptions and terminations.
The review measured the system’s economic and demographic assumptions, compared to the actual experience over the past five years. The main changes to the assumptions include:
Reducing Expected Investment Return to 7.45% From 7.75%:
Because assets are not expected to grow fast enough to pay benefits, the projected financial impact adds about $3.2 billion to liabilities.
Updating Generational Mortality Tables: Because plan members are living longer, that means STRS Ohio is paying benefits for longer than expected. This is projected to add $4.1 billion to the fund’s liabilities.
Reducing Inflation Assumption to 2.5% From 2.75%: This impacts expected investment return and individual salary increases.
Reducing Salary Growth Scale for Merit and Seniority: Individual teacher salary increases were lower than expected, which reduced the fund’s liabilities by approximately $1.3 billion.
Reducing Overall Payroll Growth to 3% From 3.5%: This lengthens the funding period by recognizing that the money coming into the fund through member and employer contributions will be less than expected.
Under the new actuarial assumptions, the plan’s funded ratio drops to 62.4% from 69.6%, and the funding period increases to 59.5 years from 26.6 years. Because the funding period falls outside of the state of Ohio’s 30-year target, STRS Ohio is required to present a plan to reduce its funding period to 30 years or less.
The new assumptions would add about $6.5 billion to STRS Ohio’s accrued liabilities, according to the board, which also said that it would address the plan’s cost-of-living adjustments (COLA), and will likely make a change in April’s board meeting.
“Models of possible plan design changes indicate the cost-of-living adjustment is the most effective means possible to preserve the fiscal integrity of the fund because it by far has the biggest impact on liabilities,” said the board. “The COLA has a significant financial impact because it affects active and retired members of the retirement system.”
A state bill passed in 2012 gives the retirement board the authority to set the COLA, allowing it to indefinitely suspend or reduce the COLA if deemed necessary. It can also vote to restore the COLA if and when the pension fund recovers and is funded enough to do so.
“Discussion on potential benefit plan design changes will continue at the April meeting, when a vote on these changes is likely,” said the board.
New Asset Allocation
The board also selected a new asset allocation for the system’s total fund that has a lower risk-return portfolio, which was done in response to an asset-liability study conducted by the retirement board’s investment consultant, Callan Associates. The new asset mix is designed to provide lower volatility, although it will provide a slightly lower expected rate of return.
The asset-liability study, which began in August, was conducted to help the retirement board determine reasonable risk and return expectations. The plan conducts these studies every three to five years to keep up with change and uncertainty in the capital markets, and to confirm an investment policy to meet return and risk objectives in relation to funding, accounting, and policy goals.
Callan projects the new asset mix to earn a return of 6.84% over the next 10 years, but said returns could be higher over a longer time horizon.
New Asset Mix Target
Broad U.S. equity
Broad international equity
Broad U.S. fixed income
By Michael Katz