Pension Reform

March Board News …. The STRS Ohio eUPDATE

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%.

With the new actuarial assumptions, the system’s funded ratio drops to 56.6% and the funding period remains “infinite.” Below is an outline of how some of these new assumptions impact the system’s funding:

• Reducing the inflation assumption from 3% to 2.75% — impacts economic assumptions including expected investment return and individual salary increases.

• Change to mortality assumption increases liabilities — this change reflects that STRS Ohio members are living longer and STRS Ohio is paying benefits for a longer period of time.

• Reducing the expected investment return from 8% to 7.75% increases liabilities — assets are not expected to grow as fast, due primarily to lower inflation.

• Increasing the salary growth assumption increases liabilities slightly — reflects that individual teacher salary growth experience was slightly higher than previously assumed.

New Actuarial Assumptions Impact Board-Approved Pension Reform Plan; Board Asks Staff to Study Additional Plan Changes

In January 2011, the Retirement Board approved changes in its plan to strengthen the financial condition of the pension fund. The changes are projected to save about $10.9 billion in accrued liabilities and bring the pension fund to a 30-year funding period. As noted in the story above, the new actuarial assumptions approved by the board on March 2, have a negative net impact on the system’s funding. That impact, coupled with a delay beyond the proposed July 1, 2012, implementation date and a request to smooth the plan’s transition to new service retirement eligibility rules will cause the plan to fall outside the 30-year amortization period that has been considered a key element of the reform plan.

During its March 2 meeting, the Retirement Board discussed studying other benefit changes to reduce the amortization period. The board directed staff to study additional revisions to pension plan design and to provide implementation recommendations to the board at a future meeting. The revisions to be researched include smoothing the transition to new retirement eligibility rules for those nearing retirement and implementing a cost-of-living adjustment (COLA) cap or one-year COLA suspension.

As the board and staff prepare for an opportunity to move pension reform legislation this spring in the Ohio Senate, the board has asked staff to research mechanisms that could provide the board authority to adjust plan design in the future. This concept was also suggested by Pension Trustee Advisors, the actuarial firm hired by the Ohio Retirement Study Council to review pension reform plans. The board authorized staff to research plan design mechanisms including age and service eligibility, employee contribution rates, benefit formula, COLA, and a required Medicare Part B partial reimbursement and to provide details to the board at a future meeting.

If you wish to comment on a topic, please either email or call the Member Services Center toll-free at 1-888-227-7877.

VIA STRS….. The STRS Ohio eUPDATE is designed solely to provide timely and accurate news and information about legislation, benefits and other issues affecting the STRS Ohio membership.

  • The Center for State and Local Government Excellence has created an interactive map showing a sample of state and local governments that have negotiated changes in pension plans. While there are other sources of information that show yearly changes or that organize reforms by type, the creation of this map allows the cases to be viewed dynamically, in one place, and will continue to be updated by the Center.
  • OPERS  has established a new website page that  presents a list of online and print resources about recent pension and retirement  research.  Here is a list of online and print resources to consult in learning more about the merits of defined benefit plans and compensation in the public and private sectors.  To help you add to your knowledge of pensions and retirement security, they will add information about other topics in the future.  :
  • Pension Reform in the State of Ohio: this pamphlet contains valuable data from OPERS, STRS, and SERS about employer and employee contributions; it also presents important information regarding the important features of a defined benefits (DB) plan; for printing purposes, please note this document is designed for 11×17 paper.
  • Pension Reform Table of Changes: this two-sided matrix provides a simple, abbreviated side-by-side comparison of proposed changes to the three systems impacting our campuses (OPERS, STRS, and SERS),
  • Frequently Asked Questions: the IUC office is collecting the most frequently asked questions that are being raised on our campuses by our faculty and staff; this document helps answer these questions.
  • National Institute for Retirement Security (NIRS) study: this document is a 2008 research study that clearly and definitively describes and defends the low-cost, high-impact nature of a defined benefit pension plan; this study clearly reveals the efficiencies of a DB plan.
  • Pension Reform Communication of NIRS Study:  this simple-to-read two-page document is essentially the CliffsNotes version of the 24-page NIRS study titled:  A Better Bang for the Buck:  The Economic Efficiencies of Defined Benefit Pension Plans; Beth Almeida and William B. Fornia, FSA; August 2008.
  • OSU letter to campus community: this letter was written and distributed by Larry Lewellen, Vice President for Human Resources, to The Ohio State University faculty and staff; it is a well-written communication piece that describes the appropriate need to offer a DB plan to our campus’ faculty and staff population.
  • OPERSource, your Source for OPERS information
  • Latest Talking Points:
  • OPERS Letters to the Editor: