Thursday, June 15, 2017

Bob Buerkle's speech to STRS Board June 15, 2017

STRS has always used the More Conservative Entry Age Normal (EAN) Actuarial System

Under EAN, the total Normal Cost for the plan is the sum of each individual’s Normal Cost. The Actuarial Liability for the plan is the sum of each individual’s Actuarial Liability. This Entry Age Normal methodology is well established.  EAN is based on sound principles that came originally from level premium whole life insurance pricing and reserving--way back in the 19th century. 

Entry Age Normal is a great invention that prevents plan sponsors from claiming that pension costs are rising faster than pay--and therefore they have to cut benefits or get rid of the plan.  

Projected Unit Credit is another actuarial invention designed to secure the proper funding to deliver on promised pension benefits.

What's the difference between the Projected Unit Credit method and the Entry Age Normal method? Both methods create a distinction between past service liability, and current normal cost, as a part of the total projected liability. Stated one way, the EAN method is a level cost over all years, while the PUC method changes the cost as the person gets older.

As life insurance actuaries understand, Projected Unit Credit (PUC) is like Annual Renewable Term (ART) Life Insurance, where the premium costs go up every year. Entry Age Normal (EAN) is more like whole life, where the premiums are levelized, higher than Annual Renewable Term in the early years and lower thereafter. The projected benefit with salary increases makes the relationship more complicated, but if the actual increases match actuarial expectations, then Entry Age Normal can be determined to be a level percent of salary. If the premiums are level, the insurance company, or STRS in our case, would also hold a higher reserve in the early career years that can be invested longer. 

The problem at STRS is that they changed the Earnings Assumption rate to less than the 8% level in 2013 even though it had been fine for a decade, and reduced it to 7.45% on 04/20/17.  Our pension COLA benefit has been eliminated because of this action. Why do this when the 8% average earned by STRS has always exceeded 8% over past thirty consecutive year periods? 

The OP&F plan still uses an earnings assumption rate of over 8%; why don’t we? If they also reduced their earnings assumption to 7.45% they would have to cut their COLA and make other drastic pension changes, but they chose not to.

The current 30 year STRS investment return average is still over 8% and that includes several recessions. The one in 2001 was bad but the 2008 recession was the worst in a century and unlikely to be repeated in our life time. 

With STRS cutting our COLA they are taking an unnecessary step towards “Ultra Conservatism” and denying the true facts which are that no benefits would need to be cut and none would be in danger of default, if the investment returns continue to exceed the 8% level that they are actually averaging, and are projected to average, over the next 30 years. This was even confirmed recently by Callan Associates, STRS’ own investment advisers.   

Bob Buerkle’s STRS speech on June 15, 2017
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