Retirement Board Reviews Pension Reform Plan Design Changes
As previously reported in Board News, the pension reform proposal passed by the State Teachers Retirement Board in January 2011 no longer meets the 30-year funding period required by the Ohio Legislature. At its March 22, 2012, meeting, the Retirement Board discussed various revisions to the current proposal, aimed at reaching the 30-year amortization goal.
Earlier this month STRS Ohio staff presented several scenarios to reduce the system's liabilities and funding period. The Retirement Board asked for further study — including a potential cap on the cost-of-living adjustment (COLA) that is paid in retirement, and/or a one-year COLA suspension. Staff was also asked to consider ways to smooth the transition to new retirement eligibility rules that will include a longer teaching career and an age requirement to qualify for retirement.
Pension Adviser Gives Council Tour of Other States' Reforms
The Ohio Retirement Study Council's outside consultant on pension reform presented council members Wednesday with an overview of how other states are addressing unfunded liabilities in their own retirement systems. William "Flick" Fornia of PTA/KMS said the income-replacement targets in Ohio's retirement systems are in line with those of other states whose public employees are not enrolled in Social Security -- about a quarter of all states. Retirement eligibility ages also are consistent with other states, but final-average-salary calculations and cost-of-living adjustments are higher than average in Ohio.
Fornia said defined benefit plans, like Ohio's, are the norm for state retirement systems, with only Alaska and Michigan instituting defined contribution plans. West Virginia adopted defined contribution plans in the 1990s only to revert to defined benefit plans after investment returns lagged and the 2000-2001 economic downturn left many workers unable to afford to retire.
However, he noted a move in several states toward some version of a "hybrid" plan. For example, Utah has proposed a system where if the 10 percent employer contribution is insufficient to cover benefits, excess costs are deducted from employee paychecks; but if the 10 percent employer contribution is more than enough to cover benefits, the excess flows into a defined contribution plan.
Niehaus Opens Door to Pension Bill Passage this Spring
Senate President Tom Niehaus (R-New Richmond) said Tuesday he'll push his chamber to pass pension-reform legislation before the General Assembly's summer break if the state's five retirement systems can demonstrate support for their proposals from active and retired public workers. "These changes are not being proposed by the Legislature; they're being proposed by the plans. So I want to make sure that the rank-and-file members who are affected by these changes support them," he said.
The demonstration of support could come in the form of public announcements, press releases or other actions, Niehaus said. He's asked the retirement systems to submit plans to him for how they could show solidarity with their beneficiaries. "The longer we wait to make changes to the pension systems, the more difficult the changes become," Niehaus said.
Board Approves Changes to Actuarial Assumptions
At a special meeting on March 2, the State Teachers Retirement Board voted to approve changes to the actuarial assumptions used to calculate pension liabilities. In February, the board's actuarial consultant, PricewaterhouseCoopers (PwC), presented the results of a three-year experience review used to evaluate the economic and demographic assumptions. The experience review, conducted at the board's request, compared what actually happened during the three-year period versus what was expected to happen to the financial and demographic assumptions. Based on its review, PwC recommended adjustments to assumptions about mortality, service retirement, inflation, expected investment returns and salary growth. In total, these new assumptions have a negative overall impact on the system's funding.
The most common ways to express the system's financial condition are through the funding period and the funded ratio. The funding period is the amount of time needed to pay off the system's unfunded liability assuming current contribution rates. The funded ratio is the actuarial value of assets compared to accrued liabilities. The results of the July 1, 2011, valuation showed STRS Ohio's funding period to be "infinite," meaning at the current contribution rates, the system would not be able to pay off its unfunded liability. The funded ratio stood at 58.8%.
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