At the December meeting of the State Teachers Retirement Board, actuarial consultant Segal Consulting presented the preliminary results of the experience study it is conducting for STRS Ohio. An experience study is typically completed every five years to compare the system’s economic and demographic assumptions to the actual experience. The economic assumptions include the rate of inflation, salary increases, overall payroll growth and the investment return on assets. Demographic measures include retirements, disability inceptions, withdrawals and the number of deaths among active members and benefit recipients. Segal reviews past experience and tries to determine trends to help set long-term assumptions for the future. Segal’s role is to make appropriate “best estimate” recommendations to the board for each assumption.
Segal’s preliminary results included a recommendation to lower the inflation assumption to 2.50% from the current 2.75%. Inflation is a component in the economic assumptions noted above, so this reduction would impact each of these areas. Segal weighed a number of studies and factors when developing its investment return assumption, indicating a possible return range of 6.95% to 7.45% before settling on its preliminary recommendation of a 7.00% investment return assumption. This is comprised of a 2.50% inflation component and 4.48% of expected real return. Segal also recommended lowering the payroll growth assumption to 3.00% for all future years and lowering the assumed rate of individual salary increases.
On the demographic side, Segal’s most meaningful recommendation addressed STRS Ohio’s mortality assumptions. The experience review showed that benefit recipients are living longer and collecting benefits for longer than expected. Segal recommends that assumptions should account for future mortality improvement.
Changes to the assumptions noted above — especially to the mortality and investment return assumptions — could increase the system’s liabilities by several billion dollars and decrease its funded ratio. The Retirement Board is expected to continue its discussion with Segal during its annual education and planning meeting on Jan. 26–27. Staff will model the potential financial impact these various changes could have on the Retirement System. This will allow the board to evaluate the possible need for benefit plan design changes to remain within Ohio’s statutory 30-year funding period target.
The Retirement Board will use the results of the experience review, along with the results of the asset-liability study (see story below) to adopt new actuarial assumptions and a new asset mix, most likely in March 2017.
Asset-Liability Study Update: Investment Policy Alone Not Sufficient to Close Current Funding Gap
The Retirement Board’s investment consultant, Callan Associates, presented an update on its ongoing work on the asset-liability study. Callan has been working closely with STRS Ohio staff and Segal Consulting to integrate the results of Segal’s recently completed actuarial valuation into the asset-liability model. STRS Ohio conducts an asset-liability study every five years to establish reasonable rate of investment return and risk expectations. The study also uses these projections to evaluate the impact on assets, liabilities and funded status. Each of these factors plays an important role in measuring the financial condition of the pension fund.
Callan shared that its 10-year return projection is 7.0% using STRS Ohio’s current target asset mix — comprised of 2.25% for inflation plus an expected real return of 4.75%. This projection falls short of STRS Ohio’s 7.75% return assumption used in the actuarial valuation. Callan’s presentation included projections on five asset mixes the board could consider.
Callan noted that STRS Ohio took significant steps in 2012 pension reform to reduce its funding deficit through contribution and benefit policy changes. Callan went on to say that STRS Ohio investments will need to retain a strong orientation toward growth in pursuit of return to achieve its funding goals, but added that investment policy alone will not be sufficient to close the current funding gap. The board is expected to continue its discussion at its annual education and planning meeting on Jan. 26–27.
Study Shows STRS Ohio Has High Investment Returns, Low Costs Compared to Peer Retirement Systems
CEM Benchmarking, a leading global research company, presented the results of its 2015 investment benchmarking study to the board. The report compared investment data for the five-year period ending Dec. 31, 2015, from 17 large U.S. public fund sponsors. Results of the study showed STRS Ohio ranked second best in the peer group for lowest investment costs. STRS Ohio’s strategy of using internal investment managers for about 71% of the system’s assets was the primary reason for its low overall costs. The report stated that STRS Ohio saved about $102 million in 2015 by using the internal management approach. The savings is based on the peer group’s median external management costs.
The report also provided performance data and showed that STRS Ohio’s five-year total net return of 8.3% was in the top 25% of CEM’s U.S. public fund universe. This is based on calendar year results. The five-year return exceeds STRS Ohio’s assumed rate of return of 7.75%. CEM said STRS Ohio’s strong performance was due largely to its asset mix, which has a higher weighting in U.S. stocks and a lower weighting in fixed income than the peer group.
CliftonLarsonAllen Completes 2016 Annual Financial Statement Audit and Reports “Clean” Opinion
STRS Ohio’s external auditor, CliftonLarsonAllen, reported the results of its audit of the STRS Ohio financial statements for the fiscal year ended June 30, 2016. The report noted that the system’s financial statements were fairly stated in accordance with generally accepted accounting principles; further, no material weaknesses in internal controls or instances of statutory noncompliance were found. As a result, STRS Ohio received an unqualified audit — also known as a “clean” opinion — which is the highest level of opinion that an organization can achieve.
STRS Ohio’s financial statements are included in the 2016 Comprehensive Annual Financial Report, which will be posted on the STRS Ohio website at www.strsoh.org by Dec. 30, 2016. This report can also be requested by calling STRS Ohio’s Member Services Center toll-free at 888‑227‑7877. In addition to the financial statements, the report includes investment, actuarial and statistical information about STRS Ohio.
The Retirement Board approved 64 active members and 65 inactive members for service retirement benefits.