March 6, 2012 (PLANSPONSOR.com) – At the recommendation of its actuarial consultant, the board of the State Teachers Retirement System (STRS) of Ohio approved changes to actuarial assumptions used to calculate pension liabilities.
PricewaterhouseCoopers (PwC) presented the results of a three-year experience review used to evaluate the economic and demographic assumptions and recommended adjustments to assumptions about mortality, service retirement, inflation, expected investment returns and salary growth.
The system’s July 1, 2011, valuation showed STRS Ohio's funding period to be "infinite," meaning at the current contribution rates, the system would not be able to pay off its unfunded liability. The funded ratio stood at 58.8%. With the new actuarial assumptions, the system's funded ratio drops to 56.6% and the funding period remains "infinite."
Reducing the inflation assumption from 3% to 2.75% impacts economic assumptions including expected investment return and individual salary increases. Change to mortality assumption increases liabilities and reflects that STRS Ohio members are living longer and STRS Ohio is paying benefits for a longer period of time. Reducing the expected investment return from 8% to 7.75% also increases liabilities. STRS said assets are not expected to grow as fast, due primarily to lower inflation. Increasing the salary growth assumption increases liabilities slightly and reflects that individual teacher salary growth experience was slightly higher than previously assumed. The board directed staff to study additional revisions to pension plan design to strengthen the financial condition of the pension fund, and to provide implementation recommendations to the board at a future meeting. The revisions to be researched include smoothing the transition to new retirement eligibility rules for those nearing retirement and implementing a cost-of-living adjustment (COLA) cap or one-year COLA suspension. The changes are projected to save about $10.9 billion in accrued liabilities and bring the pension fund to a 30-year funding period.