October Board News from STRS

Despite Strong Investment Returns, Annual Actuarial Valuation Underscores Need for Pension Plan Adjustments

At its October meeting, the State Teachers Retirement Board received the preliminary annual actuarial valuation report prepared by its actuarial consultant, PricewaterhouseCoopers (PwC). The report provides a "snapshot" of the actuarial position of the retirement fund as of July 1, 2011. Even though the system reaped its strongest investment return in nearly three decades during fiscal year 2011, the funding period for the pension fund remains "infinite," and the funded ratio declined slightly from 59.1% to 58.8%. The fund experienced a small actuarial gain of about $181 million during the fiscal year.

While the positive investment return for fiscal year 2011 generated a gain, STRS Ohio uses a common accounting and actuarial technique called "smoothing" to spread market volatility over four-year periods. This method helps pension funds recognize investment returns for a given year over a four-year window rather than a one-year "spike." The smoothing technique is more apparent when the returns are especially high (as they were in 2011), or unusually low (as they were in 2009). Some of the significant investment losses from fiscal year 2009 are still being absorbed into this year's valuation, which is part of the reason for the overall decline in funded ratio. The pension fund has a net $5.5 billion in unrecognized gains being deferred to future years.

Other significant factors in this year's valuation included:

• A net gain for the system in individual salary increases — these increases were smaller than expected.

• Net losses for the system in retiree mortality — retirees are living longer than expected and collecting benefits for a longer period of time.

• A net loss for the system in retirements/terminations/withdrawals — the system saw a greater number of retirements than expected.

The results of this year's actuarial valuation reiterate the need for pension reform and implementation of the changes the Retirement Board proposed to strengthen the financial condition of the retirement system.

CEM Benchmarking Gives STRS Ohio High Marks for Member Service

CEM Benchmarking, a leading global research and benchmarking company, reported the results of its annual pension administration benchmarking report for fiscal year 2010 at the October Retirement Board Meeting. CEM has used peer comparative analysis to measure the performance of public pension plans since 1998, and STRS Ohio has consistently scored in the top quartile of CEM's universe for service. This year's results again recognize STRS Ohio as above the peer median for total service, while noting that the system's total cost is also above the peer average (but below the average of all 78 participating private and public retirement systems from around the world). The report noted that STRS Ohio's costs per member decreased by 2.7% annually between 2007 and 2010, while the average cost of its peers increased by 2.0%.

One key takeaway from the report is that there is a global shift to online service and related savings. STRS Ohio has been aware of this shift and is currently developing an online Service Retirement Application to make the retirement process easier for members and more efficient for the retirement system. STRS Ohio will continue to enhance its website and to review other internal processes to identify opportunities to gain efficiency.

Retirements Approved

The Retirement Board approved 1,090 active members and 134 inactive members for service retirement benefits.

Other STRS Ohio News

ORSC Scores Proposals for Pension Plan Adviser; Firms to Present to Council Nov. 16

A subcommittee of the Ohio Retirement Study Council (ORSC) met Oct. 11 to score six proposals that were submitted in response to a request for proposals issued by the Council. The subcommittee, chaired by Rep. Kirk Schuring (R-Canton), also includes Rep. Dan Ramos (D-Lorain) and Seth Morgan, a gubernatorial appointee.

Categories included in the scoring were: management summary, vendor capabilities and references, staff qualifications, resources, methodology, timeline, additional information about services, glossary and cost information. The Hay Group received the highest score — a 46 out of a possible 50 points. The combined proposal from Pension Trustee Advisors/KMS Actuaries came in at 43 points. Two firms, The Segal Company and Milliman both scored 37 points. Rounding out the bottom with 30 and 26 points, respectively, were Bolton Partners and Deloitte.

The results of the scoring were accepted by the full Council at its Oct. 13 meeting. On Nov. 16, the six bidding firms are expected to make presentations to the Council. Awarding of the contract will likely happen after the November meeting.

Open Enrollment for the STRS Ohio Health Care Program Begins Nov. 1

The annual open-enrollment period for the STRS Ohio Health Care Program for calendar year 2012 will be Nov. 1–22. Benefit recipients currently enrolled in an STRS Ohio health care plan will soon receive a personalized information packet about their 2012 plan options, monthly premiums and details about features of the hospital/medical and prescription drug coverage. During open enrollment, current enrollees may change plans and enroll dependents. Benefit recipients who do not currently participate in the program may enroll without a waiting period.

STRS Ohio Receives Additional ERRP Payments

After a lengthy quality assurance review by the U.S. Department of Health and Human Services (HHS), STRS Ohio received $9.3 million on Sept. 21 for a 2011 payment from the Early Retiree Reimbursement Program (ERRP). This brings the system's total ERRP funds received to $29.7 million. In late September, STRS Ohio staff submitted four new payment requests: two for the 2010 self-insured plans and two for the fully insured plans for 2010 and 2011. The total of the four requested payments is $35.9 million. Staff expects these payments to be subjected to HHS quality assurance review; so, it is unclear if or when STRS Ohio will receive any reimbursement.

Health Care Services staff is currently working with consultants to plan the timing of fourth quarter ERRP submissions to HHS, as it is unknown at this time when the federal ERRP funds will run out.