Report on STRS February 2012 Board Meeting

From STRS, Feb. 20, 2012

February Board News

Pension Legislation Could Move in Ohio Senate

STRS Ohio's director of governmental relations Terri Bierdeman reported to the board that Ohio Senate leaders are open to moving pension legislation before its summer break. Senate leaders met with representatives from each of the five public pension systems separately to share this new development and to discuss how best to proceed. The legislators would like pension plan design changes to include a smoother transition to new retirement eligibility rules than what was originally proposed by the systems. Any change in this regard, along with any delay in STRS Ohio's proposed July 1, 2012, implementation date, would cause STRS Ohio's plan to fall outside the 30-year amortization period that has been considered a key element of the system's pension reform plan. The board may consider other benefit changes to balance this cost.

The Senate leaders also called for broad constituent support for the pension reform plan. The retirement systems are developing strategies for communicating the plan design changes to their memberships and how to make it easy for members to show their support for the needed reforms. STRS Ohio will continue to use its website, newsletters and eUPDATE email news service to keep members informed about these upcoming efforts.

Callan Associates Provides Asset-Liability Study Update; Retirement Board Approves New Asset Mix

At the State Teachers Retirement Board's February meeting, the Retirement Board selected a new asset mix for the system's total fund with a slightly higher risk-return portfolio. The new asset mix is designed to potentially achieve higher returns during the next five to 10 years. Callan Associates, the Retirement Board's investment consultant, said it could support the new target mix if the board's proposed pension reform plan changes are adopted in the near future. Below are the current and new asset mix targets.

(Click image to enlarge.)

Callan projects that the new asset mix could earn a return in excess of 8% over the long term (30-year projection), though in the short term (five to 10 years), the mix is projected to return about 7.6%. Callan reported to the board that if the proposed pension reform plan changes are not implemented in a prompt manner, a more conservative portfolio would be recommended to meet the system's liquidity needs to pay benefits.

The Retirement Board asked Callan to conduct the asset-liability study in August 2011 to help determine reasonable risk and return expectations. Asset-liability studies are typically conducted every three to five years to acknowledge change and uncertainty in the capital markets and to confirm an investment policy to meet return and risk objectives in relation to funding, accounting and policy goals. STRS Ohio's Investment staff will begin to develop acceptable target ranges for each asset class and will incorporate the newly approved asset mix target in its Investment Plan before implementing the changes.

PricewaterhouseCoopers Presents Actuarial Experience Review

Sheldon Gamzon of PricewaterhouseCoopers (PwC), the board's actuarial consultant, delivered the results of PwC's three-year experience review covering the period July 1, 2008–June 30, 2011.

An experience review is typically conducted every three to five years. In December 2011, the board requested this project so it could have up-to-date analysis as it continues discussion of STRS Ohio's financial condition. The project evaluates the economic and demographic assumptions about future experience that are used to calculate pension liabilities. The actuaries compared what actually happened during the three-year period versus what was expected to happen in the areas of mortality, service retirements, withdrawals, inflation, investment returns, salary growth and payroll growth.

Based on this review, PwC is recommending adjustments to mortality, service retirement, inflation, expected investment returns and salary growth assumptions. The Retirement Board will consider these recommendations at a meeting scheduled for March 2.

Health Care Valuation Shows Improvement in Funding Status

Plan changes to lower subsidy levels and additional savings due to changes in the structure of the prescription drug plan led to an improved financial picture for the Health Care Stabilization Fund as of Jan. 1, 2012. STRS Ohio's actuarial consultant, PricewaterhouseCoopers (PwC), presented the results of the annual actuarial valuation of the fund, showing the projected life of the STRS Ohio Health Care Program now extends to 2039 — an increase of about 15 years from last year's valuation. While the solvency of the health care program improved, the Health Care Stabilization Fund is projected to become insolvent without further changes to the program in the future. Changes in coverage features, program eligibility and/or premium subsidies will be needed.

Costs for the health care program are paid out of the Health Care Stabilization Fund. Currently, monies for the fund come primarily from premiums charged to STRS Ohio retirees and their family members who are enrolled in the program, 1% of payroll from employer contributions, government reimbursements and investment earnings on these funds. The balance in the fund as of Jan. 1, 2012, was $2.96 billion.

In December, the Retirement Board directed STRS Ohio staff to begin working on a strategic plan with the primary goals of establishing Medicare as the health care program's cornerstone, achieving 30 years of solvency by 2016 and extending the forecasted solvency to 65 or more years by 2025.

Retirements Approved

The Retirement Board approved 172 active members and 109 inactive members for retirement.

Other STRS Ohio News

Pension Trustee Advisors Updates Ohio Retirement Study Council on Pension Reform Review; Will Study SERS, OPERS Proposals First On Feb. 8, Flick Fornia of Pension Trustee Advisors (PTA) gave the Ohio Retirement Study Council (ORSC) an update regarding his firm's study of pension reform plans. He said due to the more modest nature of their plan revisions, PTA was asked to study the School Employees Retirement System (SERS) plan and the Ohio Public Employees Retirement System (OPERS) plan ahead of the other systems.

Fornia said he has interviewed each of the Council members, including the five Ohio retirement system executive directors, and some common elements emerged, including a desire to maintain defined benefit plans, the need to avoid any further risk to employers and a desire to see the health care needs addressed. Fornia plans to continue to collect information from each system and has set up additional meetings with the executive directors.

Council member Seth Morgan challenged Fornia to develop creative, aggressive solutions and present them to the Council in addition to evaluating the current plans before the legislature. Fornia said PTA is trying to balance the need to be able to measure the system's 30-year amortization plans with some Council members' desires for "out-of-the-box" thinking. He said his firm's final report for all five systems should be completed by July 11, 2012.

ORSC Hires New Director

Also at the Feb. 8 meeting, the ORSC hired Bethany Rhodes as the new director for the Council. Rhodes replaces Aristotle Hutras, who retired in December after serving as director for 22 years. Rhodes has been deputy legal counsel for the House Republican Caucus and was formerly an aide to Rep. Lynn Wachtmann (R-Napoleon), a long-time ORSC member who has served as both chair and vice-chair on the Council.