CalSTRS Adopts New Economic and Demographic Assumptions and Continues Progress Toward Long-Term Funding Goal
WEST SACRAMENTO, Calif. – Consistent with its commitment to ensuring a financially sound retirement system, the California State Teachers’ Retirement Board today voted to adopt a new set of actuarial assumptions that reflect members’ increasing life expectancies and current economic trends. Today’s decisions were based on the multi-year CalSTRS Experience Analysis, commonly referred to as the experience study, spanning July 1, 2010, through June 30, 2015.
“The updated assumptions more closely match CalSTRS recent actuarial experience.”
CalSTRS Chief Executive Officer
In preparing the experience study, CalSTRS’ actuarial consultant, Milliman, closely evaluated various economic and demographic factors affecting the system and made recommendations to changes in both actuarial methods and assumptions. CalSTRS ensured the validity and independent verification of Milliman’s findings by contracting with Cheiron, an external actuarial firm, to conduct a thorough review/audit of the study in advance of its release to the board.
In addition to the expertise and analysis provided by the actuarial firms, the board also considered input on the forward-looking economic and market trends from their investment consultants, Pension Consulting Alliance (PCA) and Meketa, to make today’s decision.
“The updated assumptions more closely match CalSTRS recent actuarial experience and provide an updated perspective of progress toward the ,” said CalSTRS Chief Executive Officer Jack Ehnes. “Additionally, the board’s adoption of a generational mortality methodology will result in a more dynamic projection of improvements in life spans and reduce the need for future mortality assumption changes. Having these factors in place further reinforces that CalSTRS will continue to meet the financial needs of our more than 914,000 members and their beneficiaries.”
After a thorough discussion, the board took the following actions today:
- Adopted a revised generational mortality methodology that not only reflects past improvements in life expectancies but also provides a more dynamic assessment of future life spans. Based on the latest trend data, early career members are now expected to live two to three years longer than those who retire today.
- Decreased the investment return assumption over a two-year period:
- Decrease from 7.50 to 7.25 percent for the June 30, 2016 actuarial valuation to be presented at the April 2017 board meeting.
- Decrease from 7.25 to 7.00 percent for the June 30, 2017 actuarial valuation to be presented at the April/May 2018 board meeting.
- These changes reflect the less than 50-percent probability that current return assumptions will be met over the long term. CalSTRS last changed the investment return assumption, also known as the discount rate, from 7.75 percent to 7.50 percent, in 2012.
- Decreased some of the economic-related assumptions to reflect ongoing trends. The wage-growth assumption dropped to 3.50 percent from 3.75 percent while the price inflation factor was also reduced to 2.75 percent from 3 percent. The price inflation assumption was a factor in the lowering of expected investment returns as it reflects the diminishing observed and expected yield of U.S. Treasury bonds.
“With the funding plan in place, the board has the ability to determine if contribution rate changes are necessary.”
CalSTRS Chief Executive Officer
The actuarial assumptions and various economic factors adopted today will now be used to calculate the actuarial valuation report (for the period ending June 30, 2016), which is scheduled to be presented to the Teachers’ Retirement Board at the April 2017 meeting. The actuarial valuation provides a snapshot in time of the system’s financial health, in addition to monitoring continued progress toward the long-term funding of the system.
According to the actuarial experts, it is projected the April 2017 valuation discussion, using the 7.25 percent investment return assumption, will show a decrease in CalSTRS overall funded ratio from 68.5 percent to approximately 64 percent, which also absorbs the 1.4 percent net investment return in 2015-16.
“With the funding plan in place, the board now has the ability to determine if any contribution rate changes are necessary at this time. Their deliberation process will also include thoughtful consideration of the upcoming actuarial valuation so they can prudently take actions within the statutory parameters of the law to ensure the long-term financial soundness of the fund,” added Mr. Ehnes.
Additional Information – Overview of Potential Contribution Rate Changes:
(NOTE: This information is dependent on the board’s discussion of the actuarial valuation in April 2017)
- State of California contributions:
The experience study findings suggest the state could see a contribution rate increase effective July 1, 2017. Under the 2014 funding plan, the Teachers’ Retirement Board has the authority to adjust the state’s contribution rate, currently at 8.828 percent of payroll, upward by 0.5 percent from the previous year, based on the funding status of the plan. Governor Brown’s 2017-18 fiscal year budget summary (page 127) already designated $2.8 billion in General Fund contributions to CalSTRS. Included in that amount, $153 million is allocated in anticipation of the 0.5 percent rate increase, noting that it is “consistent with the funding strategy signed into law in 2014, and positions CalSTRS on a sustainable path forward, eliminating the unfunded liability in about 30 years.”
- Employer contributions:
There will be no additional impact on employer contribution rates in 2017-18 from this study or as a result of the valuation in April. The employer rates are currently adjusting upward, consistent with the statutory limits set in the 2014 funding plan, and will reach 19.1 percent of payroll in July 2020.
- CalSTRS “2% at 62” members:
(First hired on or after January 1, 2013)
- The findings of the experience study suggest there will be an impact on CalSTRS “2% at 62” members who were first hired on or after January 1, 2013, under the Public Employees’ Pension Reform Act (PEPRA). These members are required by law to pay at least one-half of the normal cost of their defined benefit pension. Normal cost is the annual cost that is necessary, applied to each year of service, to adequately fund the benefit over time. Normal cost does not include any costs associated with amortizing or paying down unfunded liabilities.
- Under the experience study’s assumption changes, and dependent on the upcoming actuarial valuation discussion, any increase in the 2% at 62 members’ contribution rates due to an increase in the normal cost is not expected to exceed the following:
- July 1, 2017 = potential increase of 0.5 percent of payroll (adjusting from 9.205 percent to 9.705 percent).
- July 1, 2018 = potential increase of 0.5 percent of payroll (adjusting from 9.705 percent to 10.205 percent).
- Actuarial staff project that, by July 2017, close to 20 percent of CalSTRS active members (roughly 80,000 out of more than 435,000 educators) will be in the “2% at 62” pension formula. This number grows by approximately 20,000 members each year.
- CalSTRS “2% at 60” members:
(First hired before January 1, 2013)
The vast majority of CalSTRS “2% at 60” members were first hired before January 1, 2013 and therefore will see no additional changes to their contribution rates, regardless of the assumption changes or the upcoming actuarial valuation discussion.
The California State Teachers’ Retirement System, with a portfolio valued at $196.4 billion as of December 31, 2016, is the largest educator-only pension fund in the world. CalSTRS administers a hybrid retirement system, consisting of traditional defined benefit, cash balance and voluntary defined contribution plans. CalSTRS also provides disability and survivor benefits. CalSTRS serves California’s 914,000 public school educators and their families from the state’s 1,700 school districts, county offices of education and community college districts.
See how CalSTRS demonstrates its strong commitment to long-term corporate sustainability principles in its annual Global Reporting Initiative sustainability report: Fostering a Secure Future.