Excerpt from STRS Ohio News for Benefit Recipients
STRS Ohio’s annual valuation report, prepared by Segal Consulting, shows pension funding levels improved during the fiscal year ending June 30, 2017. The report provides a detailed look into the financial health of the pension fund. The most common ways to express the system’s financial condition are through the funded ratio and the funding period. The valuation report shows the funded ratio — the value of assets compared to actuarial accrued liabilities (benefits earned by members of the system) — improved to 75.1% from 69.6% the previous year. The funding period — the time needed to pay off the system’s unfunded liability under current assumptions and benefit levels — also improved, decreasing to 18.4 years from 26.6 years in the previous year’s report.
Segal shared that without the board’s action to reduce cost-of-living increases granted on or after July 1, 2017, to 0%, STRS Ohio’s funded ratio would be just 66.6% and the funding period would have increased to 50.4 years — well above the state of Ohio’s 30-year target.
STRS Ohio Executive Director Michael Nehf said the positive report is a welcome sign, but would like to see further funding improvement. “Reaching a 75% funded ratio is a step forward for STRS Ohio, but the funding position needs to further strengthen to improve our resiliency in a volatile market environment” said Nehf. Despite the improvement in the funding status, because of the volatility around investment returns, staff estimates STRS Ohio faces about a 30% chance that the pension fund could drop below a 50% funded ratio in the next 10 years.
Investment returns for the 2017 fiscal year topped 14% and also helped account for part of the funding improvement. Segal noted that the pension fund has a net $155 million in deferred investment gains that will be recognized over the next three years. STRS Ohio uses a common actuarial technique called “smoothing” to spread investment market volatility over a four-year window rather than a one-year “spike.” The previous year’s valuation report showed a net $2.8 billion in deferred losses to be recognized.
The valuation report measures two sets of assumptions — economic and demographic — against the retirement system’s actual experience from the past year. Economic measures include the rate of inflation, return on assets, salary increases and payroll growth. Demographic measures include retirements, disability inceptions, withdrawals and mortality (the number of deaths among active members and benefit recipients).
The report included the updated actuarial assumptions the board adopted in March 2017. These new assumptions included reducing the expected investment return to 7.45%, updating to generational mortality tables to recognize that STRS Ohio retirees are living longer, reducing the inflation assumption and reducing overall expected payroll growth.
Other key points from the report include:
- STRS Ohio’s Defined Benefit and Combined Plans paid about $7 billion in benefits during the 2017 fiscal year.
- The unfunded actuarial accrued liability decreased to $23.9 billion from $30.6 billion.
- Total covered payroll increased by 4.1%, exceeding the system’s payroll growth assumption.
Member Survey Results Reveal Impressions of STRS Ohio
Research with STRS Ohio members and retirees show that 95% of retirees and about 80% of active members have positive overall impressions of the Retirement System. The membership survey was completed in late 2017. Other notable findings included:
- Most retirees (85%) and active educators (72%) indicated STRS Ohio has earned the trust and confidence of its members.
- Compared with last year, fewer active members (61%) consider the pension they expect to receive an excellent/good value considering the amount they contribute to the system, while 86% of retirees consider their pension an excellent/good value.
- Most members continue to be satisfied with STRS Ohio communications — including email updates — with about eight out of 10 active members and nine out of 10 retirees indicating that STRS Ohio keeps them well-informed about pension- and retirement-related issues.
- 75% of active educators are setting aside additional savings for retirement — in addition to their retirement plan with STRS Ohio and the money they’re saving for health care.
- More than nine out of 10 retiree households reported at least one source of income in addition to their STRS Ohio pension. Investments and spouse’s pension are the most common forms of additional income. Survey respondents indicated on average, STRS Ohio provides 58% of retirees’ household income.
