Friday, November 21, 2008

STRS report on November 2008 Retirement Board meeting

From STRS, November 21, 2008
This week, the State Teachers Retirement Board held its monthly meeting. Following the regularly scheduled meetings, a report titled "Board News" is posted on the STRS Ohio Web site, as well as mailed to a number of members and education organization representatives who have requested it. As a member of STRS Ohio with an e-mail address on file, you will also receive this report each month. The November report follows.
NOVEMBER BOARD NEWS
RETIREMENT BOARD REVIEWS INVESTMENT RETURNS; ALSO BEGINS ASSET ALLOCATION STUDY DISCUSSION During its November meeting, the State Teachers Retirement Board received an update on the impact of current economic conditions on the value of STRS Ohio's investment assets. Noting that October 2008 was undoubtedly one of the worst months in STRS Ohio's history, staff reported a total fund investment return of -13.4% for the month. The fiscal year 2009 return-to-date on the total fund, which reflects the time period from July 1-Oct. 31, 2008, stands at -21.4%. The market value of STRS Ohio's investment assets on Oct. 31 was $54.5 billion.
John Osborn from Russell Investment Group, which is the board's investment consultant, provided perspective on the long-term behavior of the U.S. stock markets. Looking at a time period from January 1926 through September 2008, he noted that bull markets have, on average, lasted longer and been much more substantial than bear markets (as measured by the S&P 500). The average loss during a bear market is 29.5%, whereas the average gain during a bull market is 162.9%. Osborn said keeping this long-term perspective is important to avoid overreaction; the markets will eventually recover.
He also noted that the most important investment decision the board makes is how assets are allocated among the various investment options; 8% of the total 8.4% long-term projected return for the investment fund is expected to be generated by the asset mix. The current target asset allocation is 42% domestic equities, 25% international equities, 20% fixed income, 9.5% real estate and 3.5% alternatives. During the board's asset allocation study, it will review this mix and the outlook for long-term returns from each asset category and determine if any adjustments need to be made. The project timeline calls for the board to continue its discussions at the January and February 2009 meetings, with any recommendations presented in March 2009.
BOARD CONTINUES IN-DEPTH REVIEW OF PERFORMANCE-BASED INCENTIVE (PBI) PROGRAM During the November Retirement Board meeting, Adam Barnett from McLagan presented an overview of the STRS Ohio Performance-Based Incentive (PBI) Program and its significance in the current market. McLagan specializes in compensation surveys and compensation consulting for investment staff.
Under the STRS Ohio PBI Program, eligible Investment associates are able to receive an additional percentage of their base salary through a PBI payment, depending on both total investment fund performance and their individual goals over the previous fiscal year. In 2005, McLagan conducted a pay study of STRS Ohio's investment staff and recommended that total compensation (salary plus incentives) for selected associates focus on the 25th percentile of the private sector, but that higher performance standards also be met for associates to achieve the maximum payment. These recommendations were adopted by the board. In this month's report to the board, McLagan recommended that STRS Ohio not change the PBI Program at this time at the risk of losing top performing staff.
Following the McLagan presentation, the Retirement Board voted to assign a detailed review of the PBI Program to its Staff Benefits Committee. This committee will explore compensation options and develop recommendations for the entire board's consideration.

FUNDING PERIOD AND FUNDED RATIO IMPACTED BY FISCAL YEAR 2008 EXPERIENCE AND CHANGES TO ACTUARIAL ASSUMPTIONS The net actuarial loss experienced by STRS Ohio in fiscal year 2008, coupled with changes to some of the actuarial assumptions (e.g., how long members are living), are resulting in a longer funding period and a slightly reduced funded ratio for the system's pension fund.
The funding period is the number of years required to pay off the unfunded accrued liabilities of the system at current contribution rates. As of July 1, 2008, the funding period for the pension fund increased to 41.2 years from 26.1 years. The system's funded ratio -- the market-related (smoothed) value of assets compared to liabilities -- decreased to 79% from 83%. This means that STRS Ohio has on hand 79% of the assets needed to pay all benefits accrued by STRS Ohio members to date -- even though the liabilities are not payable all at once.
At the October 2008 board meeting, STRS Ohio outside actuary PricewaterhouseCoopers (PwC) presented the State Teachers Retirement Board with its first look at the annual "snapshot" of the actuarial position of the retirement fund as of July 1, 2008. It showed an increase in the funding period to 28.3 years and a decrease in the funded ratio to 80.1%. Investment losses were a contributing factor, as were lower-than-expected increases in teacher payrolls and shifts in retirement patterns. Since a public pension plan's actual experience each year is rarely identical with all actuarial assumptions (such as payroll growth, salary increases and retiree mortality), public pension plans typically review all their actuarial assumptions every five years to determine if any adjustments are necessary. The results of PwC's five-year review of STRS Ohio, completed in October 2008, led the Retirement Board to adopt changes to some actuarial assumptions at its November 2008 meeting and furth er changed the July 1, 2008, status of the pension fund, as noted above.
The three changes having the biggest impact on the pension fund were to assumptions about retiree mortality, payroll growth and salary increases. The five-year experience review showed that, not only are STRS Ohio members living longer, but also that STRS Ohio member life expectancy is longer than that of the general population. Based on the five-year review, payroll growth was also adjusted downward. Both of these changes lengthened the funding period. However, the impact of these two changes was lessened somewhat by a change to the salary growth assumption that calls for an increase in the total expected salary increases before age 35, and a decrease to the expected salary increases after age 35.
The information contained in the actuarial valuation is one piece in a continuum of financial, investment and actuarial information that the Retirement Board continually reviews and considers as it addresses pension and health care issues.
STRS OHIO RECEIVES AWARD FROM AUDITOR OF STATE During the November board meeting, STRS Ohio was presented with the "Making Your Tax Dollars Work" award from the Auditor of State's Office. This award recognizes the quality of financial reporting and absence of audit issues at STRS Ohio. Less than 5% of the 5,500 entities that the Auditor of State's Office audits each year receive this award.
RETIREMENTS APPROVED The Retirement Board approved 172 active members and 74 inactive members for service retirement benefits.
ADDITIONAL ITEMS REPORTED AT THE MEETING BY EXECUTIVE DIRECTOR MICHAEL J. NEHF
TURN2GENERICS PROGRAM FOCUSES ON POTENTIAL SAVINGS FOR ENROLLEES The STRS Ohio Health Care Program began participating in the Express Scripts Turn2Generics program on Nov. 1. This program educates enrollees about potential savings they can realize by changing to generic prescription drugs. Individuals using brand-name drugs that have a generic option receive an educational mailing from Express Scripts within days of filling a targeted formulary or non-formulary retail brand medication. These mailings go out daily and currently focus on the following brand-name medications and/or therapy classes:
- Ace Inhibitors (hypertension)
- ARBs (hypertension)
- Bisphosphonates (osteoporosis)
- Calcium Channel Blockers (hypertension and coronary artery disease)
- HMGs (high cholesterol and triglycerides)
- PPIs (erosive esophagitis and heartburn)
- Celebrex (osteoarthritis and rheumatoid arthritis)
- Lyrica (neuropathic pain)
Increased use of generic drugs reduces enrollees' costs and also retains funds in the Health Care Stabilization Fund.
Larry KehresMount Union Collge
Division III
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