Retirees Association

Annual actuarial valuation shows improvement in STRS’s funding period

At its October meeting, the State Teachers Retirement Board received a report of the annual pension valuation results from its actuarial consultant, Segal Consulting. The report provides a “snapshot” of the financial position of the retirement fund as of July 1, 2015. This year’s valuation report shows the funding period for the pension fund — that’s the amount of time needed to pay off any unfunded liability — decreased to 28.4 years from 29.5 years and the funded ratio remained steady at 69.3 percent.

Earlier this year, the board approved a 30-year closed amortization period — effectively targeting a date when the unfunded actuarial accrued liability (UAAL) will be paid off and the pension fund will be fully funded. The steady improvement in the funding period this year keeps the system on track to meet its goal. The UAAL represents the difference between STRS Ohio’s actuarial value of assets and the actuarial accrued liabilities.

The valuation report measures two sets of assumptions — demographic and economic — against actual experience from the past year. Demographic measures include retirements, disability inceptions, withdrawals and mortality (the number of deaths among active members and benefit recipients). Economic measures include the rate of inflation, return on assets, salary increases and payroll growth.
 
The primary driver for the improvement in the funding period in fiscal year 2015 was better than expected investments during the four-year smoothed period. STRS Ohio uses a common actuarial technique called “smoothing” to spread investment market volatility over four-year periods. This method helps pension funds recognize investment returns for a given year over a four-year window rather than a one-year “spike.” Strong investment returns, particularly in fiscal years 2013 and 2014, helped offset demographic losses experienced in 2015. Other key points from this year’s actuarial valuation report include:

  • STRS Ohio’s Defined Benefit Plan paid about $6.9 billion in benefits during the fiscal year.
  • The unfunded actuarial accrued liability increased to $30.4 billion from $29.5 billion.
  • The pension fund has a net $2.7 billion in unrecognized investment gains (due to four-year smoothing) being deferred to future years.
  • The retirement system experienced a demographic loss of $1.3 billion — primarily due to more retirements than expected and increasing lifespan among benefit recipients.
  • Total covered payroll increased by 2.1%. This is the first growth in payroll in the past four years; however, it is still below the expected payroll growth rate of 3.5%. The 2015 valuation report shows a drop in the number of active teachers, but this reduction may reflect the large number of retirements during June and July 2015 and the fact that not all active teachers were hired by July 1, 2015, to replace those who retired.