From STRS: Report on 2008 STRS Board retreat

From STRS, February 4, 2008
Subject: [News] Board News -- 2008 Retreat

RETIREMENT BOARD HOLDS ANNUAL PLANNING RETREAT

On Jan. 30 and 31, 2008, the State Teachers Retirement Board held its annual planning retreat at STRS Ohio's offices in Columbus. This meeting enables board and staff members to discuss issues in more depth than the time constraints of a regular board meeting allow. This year's meeting agenda focused on issues the board members had collectively identified as appropriate for this format. One of the topics discussed was the demographic and economic assumptions used by the board's actuary as part of the annual pension fund and health care fund valuations. A summation of that discussion follows.

SEVERAL CHANGES RECOMMENDED FOR ACTUARIAL ASSUMPTIONS

Janet Cranna and Marco Ruffini of Buck Consultants presented the results of a four-year actuarial experience review covering the period July 1, 2003-June 30, 2007. This project looked at the assumptions about future experience that are used to calculate pension liabilities. Funding progress and security of promised benefits are expressed through the funding period, a measure of time needed to pay off the system's unfunded liability at current contribution rates, and the funded ratio, which is the actuarial value of assets compared to accrued liabilities. Based on the July 1, 2007 valuation, the funding period for the pension fund was 26.1 years and the funded ratio was 83%, meaning STRS Ohio has on hand $.83 for every dollar in accrued liabilities (e.g., pension, survivor and disability benefits).

The actuaries compared what actually happened during the four-year period versus what was expected to happen in such areas as service retirements, salary growth, payroll growth, disabilities, mortality and investment returns. Based on this review, Buck Consultants recommends adjustments to actuarial assumptions in several areas. One area was mortality assumptions, as STRS Ohio members are living longer, resulting in STRS Ohio paying benefits for a longer period of time. These changes would add about $1.026 billion to the pension fund's unfunded accrued liabilities and 3.9 years to the funding period.

Buck Consultants also recommends lowering the payroll growth assumption to 4% from 4.5% to more closely match recent experience. The level of payroll growth neither adds to nor reduces the liabilities of the pension fund; instead, it affects how long it will take the system to pay off its unfunded liability. Consequently, this change would add 4.0 years to the funding period.

In addition, Buck Consultants is recommending changes to the assumptions regarding when members retire. The enhanced benefit formula that members can attain with 35 years of service credit has resulted in a shift in retirement patterns. Only about two-thirds of the expected number of members are retiring with 30-34.99 years of service, while the number of individuals retiring with 35 or more years of service exceeds the current assumed rate. As a result, Buck Consultants is recommending that the current set of retirement assumptions for members with 30 or more years of service be separated into two sets (30-34.99 years and 35 or more years) to capture the significant difference in retirement experience for these two groups. If approved by the board, this change adds about $147 million to the pension fund's accrued unfunded liabilities and slightly increases the funding period. It was also noted that changing the retirement assumptions positively impacts the Health Care Stabilization Fund because members are working longer, thus reducing their number of years of participation in the STRS Ohio Health Care Program.

No changes were recommended for the assumed investment return of 8%, to the salary growth assumption of 5.5% or to the rate of disability retirements.

As a point of reference, Buck Consultants applied their recommended changes to the actuarial valuation of the pension fund as of July 1, 2007, to give the board some idea of their impact. With these changes, the funding period would increase to 34.6 years and the funded ratio would decline to 81.9%. Doing the same exercise with the Health Care Stabilization Fund, it was shown that the impact of the proposed changes is minimal. Further, the contribution increase of 5% being pursued through House Bill 315 is still adequate to fund health care for current and future retirees on a full-reserve basis (i.e., a 30-year funding period).

If approved by the board, these recommended changes to the actuarial assumptions will be reflected in the July 1, 2008, pension valuation and the Jan. 1, 2009, health care fund valuation.

OTHER ACTIONS
Other actions taken during the planning retreat include the following:

STRS OHIO SEVERANCE POLICY APPROVED

In presenting a draft Severance Policy to the board, staff explained how STRS Ohio benefits from offering severance when a reduction-in-force must occur due to an associate's job being eliminated. Examples include limiting overall costs to the retirement system, while protecting STRS Ohio from costly lawsuits and potential harm to systems and data. Further, severance protects recruiting and retention efforts. The board approved the proposed STRS Ohio Severance Policy. The motion passed by the board further stated that the executive director shall have continuing authority to conduct reductions-in-force. For each reduction-in-force, the executive director must provide advance notification to the board at a regular meeting. The executive director shall then take action in accordance with the Severance Policy.

LANGUAGE APPROVED FOR THE PAYMENT OF ASSOCIATE LEGAL FEES

The board agreed that the following language should be added to STRS Ohio's Associate Guidelines:

If an STRS Ohio associate requests legal representation for matters arising due to his or her employment by STRS Ohio, the associate shall first request assistance from the general counsel. In the event the STRS Ohio Legal Department will not provide representation, the associate shall seek representation from the Ohio Attorney General pursuant to Ohio Revised Code Section 109.361. Unless otherwise required by law, in no event will STRS Ohio pay fees for attorneys retained outside this process without Retirement Board approval.
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