STRS May Board News

From STRS, May 18, 2009
Subject: [News] May Board News Details Retirement Board Actions and Discussions

Last 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 May report follows.

MAY BOARD NEWS

CORRETHERS, MCGREEVY AND STEIN WIN BOARD SEATS Carol Correthers, James McGreevy and Bob Stein were elected to the State Teachers Retirement Board in the recent election. These three individuals will take their seats on the board on Sept. 1, 2009, and serve a four-year term through Aug. 31, 2013.

RETIREMENT BOARD COMPLETES ASSET ALLOCATION STUDY Since November 2008, the Retirement Board has been engaged in an Asset Allocation Study with its investment consultant, Russell Investment Group. The study's purpose was to analyze STRS Ohio's current investment asset mix and determine how this mix might be positioned in the future to meet the long-term needs of the retirement system.

As a result of the study, STRS Ohio's current investment mix will be adjusted with the intent of providing some downside protection to the investment fund during equity bear markets. This will be accomplished by increasing the allocation to private equity (e.g., investments in venture capital or leveraged buyout funds) to 5% from 3.5%, while also targeting future investment to a new category called "opportunistic/diversified" investments. Allocations to this new category, which can include investments in commodities, infrastructure and natural resources, will grow to a target allocation of 5% of total investment assets over the next three years. Such investments tend to perform better than equities during down periods in the markets. The allocation to real estate will also increase slightly. To accommodate these changes, the allocations to domestic and international equities and fixed income will be reduced over time. This new investment asset mix maintains a diversified port folio for STRS Ohio, but should also help moderate losses during stock market downturns by reducing exposure to those markets by 6% over time. Further, the board's long-term goal of earning an 8% annual actuarial rate of return should still be met.

LONG-TERM CONTINGENCY PLANNING DISCUSSION CONTINUES The downturn in the global financial markets has significantly reduced the value of STRS Ohio's investment funds. Further, changing economic and demographic trends, such as STRS Ohio members living longer, are impacting the system's pension fund. At the May meeting, the Retirement Board continued to look at options for addressing future liabilities of the pension fund, as well as provide for additional allocations to the health care fund.

Recognizing that no pension plan or member/employer contribution changes will be in place by the beginning of the 2010 fiscal year, which starts on July 1, 2009, the staff is now using the projected asset and liability figures as of July 1, 2010, on which to base its sample scenarios. At that date, STRS Ohio expects to have about $94.6 billion in accrued liabilities, with approximately $54.7 billion in actuarial assets. This results in a funded ratio (percentage of assets on hand to pay all benefits accrued to date) of 57.8% and a funding period of infinity. ("Infinity" means that the system would eventually be unable to pay members' earned benefits.)

At the May meeting, the board looked at the impact of a scenario that called for:

- A 2% increase in contributions phased in over four years beginning July 1, 2012;

- Minimum retirement age of 60 with 30 years of service, beginning July 1, 2015;

- Five-year final average salary effective July 1, 2015;

- 2.2% formula for the first 30 years of service and a 2.5% formula for the 31st year and after, effective July 1, 2015;

- A 3% cost-of-living adjustment (COLA) for retirees as of July 1, 2011, until July 1, 2015, when it would be reduced to 1.5%; and

- A 1.5% COLA for those retiring after July 1, 2011.

As in previous presentations, staff noted that this scenario was not a recommendation. Rather, this was designed to show how delayed implementation and phasing in changes could lessen their impact. As evidenced in this scenario, this combination of changes would only improve the funded ratio to 63.3% and the funding period to 51.6 years - and not allow for any additional allocation other than the current 1% of employer contribution to the health care fund.

During the Retirement Board's discussion, Aristotle Hutras, director of the Ohio Retirement Study Council, addressed the board. He noted that Ohio's five public pension plans will be a focal point of the Ohio Legislature once state budget discussions are ended. There will undoubtedly be pension legislation. He is urging all the retirement systems to make funding discussions a priority. In response, the State Teachers Retirement Board will schedule additional meetings this summer to further discuss possible changes.

BOARD ADOPTS PBI PROGRAM FOR 2010 FISCAL YEAR During its May 2009 meeting, the State Teachers Retirement Board adopted a Performance-Based Incentive (PBI) Program for 2010 for eligible Investment Department associates that includes a provision for no incentives being awarded if the STRS Ohio total investment fund has a negative absolute return for the fiscal year (July 1, 2009-June 30, 2010).

The vote followed months of discussion and consideration regarding incentive compensation. Other key components of the newly adopted incentive program include provisions adopted by the board at previous meetings:

- If the STRS Ohio total fund earns a positive absolute return but the total market value of investment assets is less than $65 billion by the end of the fiscal year (June 30, 2010), then incentive awards will be reduced by 3% for every $1 billion (and fraction thereof) of the shortfall from $65 billion. For example, if assets on June 30, 2010, are $55 billion, earned PBIs will be reduced by 30%. As of April 30, 2009, total fund assets were approximately $51 billion.

- The new PBI program will enhance earned PBIs when the absolute and relative performances are high.

The board also adopted a motion that said in future years, when the total investment fund returns are negative, no Investment Department staff will receive PBIs. This is effective with fiscal year 2011 going forward.

BOARD REVIEWS ENROLLMENT AND COST TRENDS AFFECTING HEALTH CARE PREMIUMS The factors that affect health care costs nationwide continue to also affect the STRS Ohio Health Care Program. Escalating health care premiums, along with accompanying higher out-of-pocket expenses, are a national issue facing all Americans. Overall national medical and drug trends continue to outpace the Consumer Price Index (CPI). The continuing introduction of new medical technologies, high cost services and biomedical and specialty drugs all contribute significantly to high trend rates. The premiums charged in the STRS Ohio Health Care Program also reflect increasing use of services by STRS Ohio members and the claims experience for those enrolled in the program. For some enrollees, such as spouses of benefit recipients, the claims experience is particularly high as more healthy spouses have left the STRS Ohio program due to the availability of less costly plans in the marketplace. In June, staff will present proposed premiums for all of its health care plans for calenda r year 2010 for the board's approval.

At the May meeting, the board also received additional information about Medicare Advantage plans as an option for enrollees in STRS Ohio's self-insured Medical Mutual and Aetna Plus and Basic plans. The Ohio Public Employees Retirement System (OPERS) and the School Employees Retirement System (SERS) already offer these plans through their retiree health care programs. Staff noted that STRS Ohio could introduce a Medicare Advantage plan beginning Jan. 1, 2010, by one of three ways: (1) through voluntary enrollment; (2) by moving all Medicare recipients into a Medicare Advantage plan, but giving them the opportunity to "opt-out" during open enrollment; or (3) replacing all existing plans for Medicare enrollees with a Medicare Advantage plan. The savings to enrollees could range from approximately $4 million annually for option 1 to $31 million annually for option 3, primarily due to lower premiums. Under a Medicare Advantage plan, enrollees should be able to continue to use th eir current physicians and hospitals, and there would be no cost for preventive services (e.g., annual physical exams, mammograms and colorectal cancer screenings). The board will continue its review of Medicare Advantage plans during the June board meeting as part of a larger discussion about plan administrators for its self-insured plans.

RETIREMENTS APPROVED The Retirement Board approved 63 active members and 61 inactive members for service retirement benefits.

STRS OHIO RECEIVES CERTIFICATE OF ACHIEVEMENT RECOGNITION The Government Finance Officers Association has awarded its Certificate of Achievement for Excellence in Financial Reporting to STRS Ohio for the 2008 Comprehensive Annual Financial Report. This is the 19th consecutive year STRS Ohio has received this national award, which recognizes annual reports that achieve the highest standards in government accounting and financial reporting.

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