Report on February 2013 STRS Board meeting

From STRS, February 15, 2013

February Board News

Funding Status Improves for STRS Ohio’s Health Care Fund
Changes in plan costs and a better than assumed investment return on assets were two key factors that led to a strengthening financial picture for STRS Ohio’s Health Care Fund as of Jan. 1, 2013. At the February meeting of the State Teachers Retirement Board, 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 Fund now extends to 2060 — an increase of about 21 years from last year’s valuation. Though the report showed improved solvency, the health care program still requires changes in coverage features, program eligibility and/or premium subsidies to attain the three primary goals set by the board.

Costs for the health care program are paid out of the Health Care Fund, which is currently funded through premiums charged to enrollees, 1% of payroll from employer contributions, government reimbursements and investment earnings on these funds. The balance in the fund as of Jan. 1, 2013, was $3.12 billion.

At its November 2012 meeting, the Retirement Board affirmed the three primary goals of the health care strategic plan, which include establishing Medicare as the health care program’s cornerstone — helping the largest number of retirees for the longest period of time, achieving 30 years of solvency for the health care program by 2016 and extending forecasted solvency to 65 or more years by 2025.

Board Approves Changes to the Defined Contribution and Combined Plans
The Retirement Board approved several changes that will affect members enrolled in STRS Ohio’s Defined Contribution (DC) Plan and Combined Plan, including a move to improve the investment options for participants and a decision to change the portion of employer contributions used to help pay off the retirement system’s unfunded liability. As of June 30, 2012, about 14,500 active members were enrolled in these plans, compared to about 168,000 members enrolled in the Defined Benefit Plan.

The board has discretion to transfer any portion of employer contributions necessary to offset the negative financial impact of participation in a DC plan, as determined by the board’s actuary. This amount, known as the “mitigating rate,” recognizes that employer contributions are a required and vital part of the long-term funding of the STRS Ohio retirement plan. The current mitigating rate of 3.5% has been in place since DC Plan inception in 2001. Beginning July 1, 2013, that amount will increase to 4.5% of the 14% employer contribution. Using three different approaches, STRS Ohio’s actuary, PricewaterhouseCoopers, recommended a mitigating rate range from 4.85%–12.57% for the 2013–14 fiscal year. This change will impact members enrolled in STRS Ohio’s Defined Contribution Plan and may affect higher education faculty who are enrolled in an alternative retirement plan through a private vendor. Similarly, the 1% increase in member contributions for Combined Plan participants will be used to help pay for the defined benefit portion of their retirement rather than their DC accounts.

Beginning July 1, 2013, DC Plan participants will contribute 11% of their salary and will receive employer contributions of 9.5% of salary into the DC account. The new employer contribution rate reflects a 1% decrease from the current rate, but the overall 20.5% that will go into the members’ accounts remains the same.

In addition, the Retirement Board voted to lower investment fees charged on most investment allocation choices and to add eight new allocation choices to its lineup. The new allocation choices include a Russell Midcap Index and seven “target choice” options — also known as “target-date funds” — whose asset allocation changes over time. These “target choice” allocation options generally target a year in the future that would roughly match a participant’s expected retirement date. The closer to the target date, the more conservative the investment mix becomes — moving from a substantial allocation toward stocks in the early years to less risky bonds as the target date nears. The target choice options will consist of blends of domestic and international equities, as well as fixed income and real estate investments.

The Retirement Board also approved a change to the employer contribution vesting schedule for new members who enroll in the Defined Contribution Plan on or after July 1, 2013. These members will now vest 20% per year in employer contributions to their DC accounts.

More details about these plan changes and new investment options will be provided in upcoming STRS Ohio newsletters.

Board Approves Change to Reemployed Retirees’ Lump-Sum Payments and Monthly Annuities  

Reemployed retirees make contributions to the retirement system that provide a lump-sum payment or monthly annuity that is paid when their employment ends. The Retirement Board has authority to set the amount of employer contributions that can be added to this benefit. The Retirement Board voted to reduce the amount of employer contributions that are added to the reemployed retiree benefit to 0% from the current 5% rate. This brings equity between the funding of the reemployed retiree benefit and participants in the Defined Benefit Plan. This change will become effective for compensation earned on or after July 1, 2013. Reemployed retirees will retain the employer contribution match for previous years of service. Beginning July 1, 2013, 13% of the employer contribution on a reemployed benefit will be used to pay off the unfunded liability and 1% will be allocated to the Health Care Fund.

Retirements Approved
The Retirement Board approved 205 active members and 104 inactive members for service retirement benefits.