Board Discusses Options to Reduce Amortization Period for the Pension Fund
During the State Teachers Retirement Board’s annual retreat, board members reviewed several options to reduce the retirement system’s funding period. Ohio law requires the statewide retirement systems to amortize unfunded liabilities over a period of not more than 30 years, otherwise they must submit a board-approved plan to the Legislature to reduce the funding period to 30 years. STRS Ohio’s current funding period is 40.2 years.
Pension reform laws passed in 2012 reduced STRS Ohio’s accrued liabilities by $15.7 billion and improved the system’s funded ratio to 66.3% from 56.0%. These reforms also reduced the retirement system’s funding period from infinity — but have not yet resulted in a 30-year amortization period. The board-approved plan to reach the 30-year target is due to the Ohio Legislature Feb. 21.
During the funding discussion, the board learned that investment gains from 2011–2014 to be factored into this year’s valuation should reduce the amortization period. Actuarial projections indicate that if investment gains thus far in fiscal year 2014 hold through June 30, the amortization period could be reduced by as much as four years. Other projections that were reviewed by the board include:
The impact of moving all or part of the 1% of employer contributions that now help fund the STRS Ohio Health Care Program, into the pension fund;
The impact of a 1% increase in the mitigating rate paid by active participants in STRS Ohio’s Defined Contribution Plan, as well as college and university educators who participate in an alternative retirement plan. The retirement system would need actuarial support to make this change; and
The impact of a one-year freeze in the annual cost-of-living adjustment paid to current benefit recipients.
Of these considerations, directing the 1% employer contribution to the pension fund — rather than the health care fund — would have the biggest impact on the amortization period. If the entire 1% is directed to pensions, the amortization period would be reduced by about four years. Such a move would shorten the projected life of the Health Care Fund to about 20 years; however, the board has authority to direct the 1% back to the Health Care Fund in the future, and to make “catch up” payments to the Health Care Fund once the financial condition of the pension fund improves. The Retirement Board will learn more about the strength of the Health Care Fund during the February board meeting when it is scheduled to receive the 2013 health care valuation report. The board is expected to approve a plan to reach a 30-year amortization period for the pension fund before Feb. 21.
Segal Addresses Coding Error in Pension Valuation Report
Representatives from Segal Consulting met with the State Teachers Retirement Board to address the coding error in the pension valuation report that was delivered to the board in November. Segal’s error miscalculated future member contributions and the time it will take to pay off the system’s unfunded actuarial liabilities. The corrected valuation report shows STRS Ohio’s funding period now stands at 40.2 years, rather than 36.1 years that was previously stated in Segal’s November report. During the Retirement Board’s annual retreat, Segal’s senior-level executives shared how the error occurred, how it was identified and the additional safeguards now in place to prevent this from occurring in the future. Board members questioned Segal on issues surrounding the error and were attentive to the consultant’s responses. The error did not impact the system’s assets and does not affect STRS Ohio’s ability to pay benefits. Segal is scheduled to deliver results of the 2013 health care valuation report at the February board meeting.
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