September Board News

(The text below is reprinted from the news release by STRS on 09/20/2013.)

STRS Ohio Finance Staff Details New Pension Reporting Rules

At the September meeting of the State Teachers Retirement Board, STRS Ohio’s Finance Department reviewed with the board how new Governmental Accounting Standards Board (GASB) rules will impact the way pension funds report unfunded pension liabilities in published financial statements beginning later this fiscal year. One of the more significant changes affects the discount rate used by pension funds with projected cash flows that are not sufficient to pay all projected future benefits. STRS Ohio currently uses a 7.75% discount rate (the assumed rate of return on investments). Many public pension plan administrators across the United States use discount rates in the 7.5%–8% range because that has been the typical historic average return for long-term investors with asset allocations primarily invested in stocks. If plan assets are not sufficient to cover projected future benefit payments, the new rules will require pension funds to use a blended rate that combines their long-term expected rate of return and a lower short-term rate. A lower discount rate increases the net pension liability.

Another new GASB rule that will impact pension funds and sponsoring employers becomes effective in 2015, and will require the net pension liability to be reported in the financial statements of sponsoring employers. In STRS Ohio’s case, the proportionate share for employers throughout the state will be substantial. It is not yet clear how credit rating agencies will react to these new reporting requirements. While the amounts that employers are required to report will be large, STRS Ohio expects the retirement system’s funding to improve over time — due to pension reform changes — which would lower these liabilities for employers. Employers are paying these liabilities over a long period of time through their annual contributions of 14% of member compensation.

STRS Ohio has been communicating these reporting changes with employers through bulletins, emails and its website and will continue communication efforts in the months ahead with employers, members and other system stakeholders.

Board Reviews Cost Increases for Service Purchases

Pension reform laws passed in 2012 (Sub. S.B. 342) called for members to pay the full projected liability cost for certain types of service purchases. This will result in costs significantly higher than under the current rates. Member Benefits staff reviewed with the Retirement Board the types of service included in this change and the deadlines for purchasing credit under the current rates.

The types of credit subject to the 100% of liability cost are:

• Out-of-state teaching and public service
• Private teaching service
• Federal civilian service
• Waived service
• Prior military service
• Ohio service for which contributions were not made
• Pregnancy leaves or resignations before July 1982
• School board service

Members who purchase service for these categories will pay the 100% liability cost beginning Jan. 1, 2014. However, members who have their purchasable service certified by Dec. 31, 2013, will not be charged the 100% liability until July 1, 2014 — these members will have untilJune 30, 2014, to purchase the credit at the current cost.

Staff also explained that, due to the nature of the liability being created by the purchase, service purchased under the new 100% liability calculation will need to be purchased in whole-year increments.

Executive Director Provides Enterprise Risk Management Review

STRS Ohio executive director Michael Nehf discussed with the Retirement Board how the pension system identifies and mitigates enterprise-wide risks. Nehf described enterprise risk management (ERM) as the process of coordinating risk management throughout the organization to manage a full range of operational risk. He explained that ERM provides a framework and a systematic approach for effectively evaluating and managing operational uncertainty, allows STRS Ohio to respond and mitigate risks appropriately, and to more fully recognize risks as they arise.

Nehf reviewed how STRS Ohio’s ERM framework is centered on the following core risk areas:

• Investment returns
• Regulatory/statutory compliance
• Actuarial results
• Member satisfaction
• Constituent/public relations
• Legislative change
• Security and technology issues
• Business continuity and disaster preparedness

Nehf provided examples of ongoing policies and processes that provide risk management monitoring tools and feedback, including annual independent actuarial studies, the Annual Investment Plan, asset allocation and experience studies, the Statement of Investment Objectives and Policy and internal and external audits.

Retirements Approved

The Retirement Board approved 1,279 active members and 81 inactive members for service retirement benefits.

STRS Ohio Launches Updated Member Website

On Sept. 6, STRS Ohio launched its updated, responsive member website to improve members’ access to information about their pension system on multiple devices. The new site was a long-term project, done completely in-house as a collaboration between the Communication Services, Information Technology Services and Member Benefits departments. The updated site will now “detect” how members are connecting to it and display content appropriately on their smart phone, tablet or desktop computer. The site also was restructured to guide members to information related to the two key phases of their STRS Ohio membership — “During Your Career” and “Receiving Benefits.”

Annual Statement Testing Completed for Benefit Projections

With the passage of pension reform, projections of various retirement scenarios based on age and service will once again appear on members’ Annual Statements. These projections will help members understand the personal impact of the pension changes.

In particular, members will be better able to understand the transition benefit, which is designed to ensure that members who retire after July 1, 2015, under the new 2.2% benefit formula, will receive the same or higher benefit than if they retired July 1, 2015, or earlier under the current formula. All members who are eligible for a July 1, 2015, as well as a July 1, 2016, retirement will be presented with both estimated benefits. If the transition benefit is the higher benefit, the member will see a July 1, 2016, benefit that is the same as the July 1, 2015 benefit. Staff tested numerous age and service combinations to ensure the accuracy of the Annual Statements that will be mailed beginning in late September.