Tuesday, July 10, 2012

The actuarial report has arrived -- here is a summary

Below is an excerpt (pages 142-143) from Final Report to ORSC: Analyzing Retirement Systems' 30-Year Plans and Alternative Pension Reform Solutions
William B. Fornia, FSA
Linda L. Bournival, FSA
R. Paul Schrader, ASA (Ret)
July 2012
PTA Pension Trustee Advisors
KMS Actuaries
From pages 142-143
5.7 Overall Findings and Recommendations
Significant changes in the STRS benefits were proposed in order to nearly meet the 30-year requirement. Additional modest changes will likely be required in the near future in order to satisfy the twin objectives of 30-year retirement funding and long-term health care solvency because of the recent investment results.
STRS had recommended a comprehensive 30-year plan that impacts existing and new employees as well as current retirees, and includes changes to retirement ages, employee contributions, the COLA for current and future retirees, final average pay, and the benefit formula. The STRS approach to extending retirement eligibility requirements for both current members and future hires is very beneficial to both the retirement plan and the health care program and addresses the cost pressure from improved life expectancy. The proposed 30-year plan is a reasonable approach given the funded status of the system. Although it does not technically satisfy the dual objectives of 30-year funding and long-term health care solvency as of June 30, 2011, this is due to the items noted above and the delayed actuarial asset smoothing of recent strong investment returns, and not a material concern in our opinion. However the STRS 30-year plan is likely to fall somewhat short of the dual funding objectives as of June 30, 2012, due to poor returns in the fiscal year ending June 30, 2012.
We recommend that the STRS Board have the authority to make additional retirement benefit reductions so that the funding objectives can be met. The 30-year plan does not provide any margin for future adverse experience. As a result, frequent changes would be required in a poor investment return cycle to meet the funding standards.
The total normal cost rate for the current benefit structure means that current employees are receiving a much smaller share of the employer funding than have employees nearing retirement and retirees. This is a result in part of the very significant contributions required to amortize the unfunded obligations.
STRS is a very mature retirement system. 57% of the present value of future benefits is due to currently retired and inactive members. As a result, a 1% required reduction in benefits must be 2.4% if the reduction is limited to currently active employees. Because the total normal cost of the revised benefit structure will be significantly less than the increased employee contributions, it is not likely that significant additional benefit reductions can be justified for current, and particularly new, employees. If additional benefit reductions are required, equity may suggest that benefits for current retirees (i.e., the COLA) must by necessity be reduced further and/or accrued benefits or retirement eligibility requirements be reduced for existing employees.
Other overall recommendations and alternative approaches for the future that are applicable to all systems are summarized in Chapters Two and Chapter Eight.
Larry KehresMount Union Collge
Division III
web page counter
Vermont Teddy Bear Company