Archive for the ‘Operations’ Category

CalSTRS pensions grew faster than pay, inflation

November 10, 2014

A new look at how CalSTRS members changed during the last 15 years shows the average teacher working fewer years, retiring at an older age and collecting a pension that grew faster than pay or inflation.

Retirees grew much faster during the period than active workers, increasing from 27 percent to 36 percent of total membership and raising questions about the impact of longer life spans on projected pension costs.

The new CalSTRS demographics report issued last week, done in part to show differences among employer types, covers a period beginning in fiscal 1997-98 as a stock-market boom yielded big earnings for pension fund investments.

A brief pension fund surplus helped prompt legislation in the late 1990s and 2000 that increased pension benefits in several ways, while also cutting the annual employer and employee contributions to the pension fund.

According to the new report, the average final compensation of a K-12 teacher increased 54 percent during the 15-year period, growing from $52,200 in 1997-98 to $80,500 in 2012-13.

The average CalSTRS pension benefit for a K-12 teacher increased 70 percent during the same period, growing from $28,309 in 1997-98 to $48,094 in 2012-13. The California consumer price index grew 48 percent.

“The reason why the benefits went up is during that period of time there were changes in the benefit structure, which improved benefits for the majority of our members, so they are getting a bigger benefit,” Ed Derman, CalSTRS deputy chief executive officer, told the board.

“For people retiring after the benefit increase, the benefit is going to be greater for a given compensation than people who retired in 1997-98 — one-year final compensation, increased age factor, longevity bonuses, a whole variety,” he said.

In addition to a number of small benefit increases, the state CalSTRS contribution was cut from 4.6 percent of pay to 2 percent. For 10 years, a quarter of the teacher contribution, 2 percent of pay, was diverted to a new pension supplement for teachers.

The California State Teachers Retirement System funding level peaked in 2000 at about 110 percent of the projected assets needed to pay future pension obligations. In the latest actuarial report as of June last year, the funding level had dropped to 67 percent.

A Milliman actuarial report last year said CalSTRS would be 88 percent funded if it had continued to operate under the contribution and benefit structure in place in 1990, without the changes that began 15 years ago.

Now legislation last June phases in a $5 billion CalSTRS contribution over seven years. Most of the money comes from school districts, whose rates will more than double from 8.25 percent of pay to 19.1 percent of pay by July 2020.

Teachers in CalSTRS do not receive Social Security in addition to their pensions, unlike state workers and many local government employees. A report several years ago said CalSTRS pensions and supplements usually replace about 70 percent of job income.

STRS

Retirees living longer than expected is one way pension funding can fall short, much like overly optimistic investment earnings forecasts.

CalSTRS was told last month more than a dozen financial experts expect annual earnings of 7 percent or less next decade, below the 7.5 percent CalSTRS assumption.

The report last week that retirees are a growing percentage of the total CalSTRS membership led a board member, Paul Rosenstiel, to ask several questions about the accuracy of CalSTRS mortality projections.

Last month the Society of Actuaries released new mortality tables showing that males age 65 are expected to live to age 86.6, two years longer than expected in 2000. Women age 65 are expected to live to age 88.8, an additional 2.4 years.

“The Society of Actuaries estimates there could be a four to eight percent increase in private pension plan liability,” said its news release. “This average cost impact will vary greatly according to the design and demographic profile of each plan.”

With an eye on earlier versions of the Society’s first mortality update in 14 years, the California Public Employees Retirement System approved an employer rate increase in February to cover the cost of retirees living longer than previously expected.

The CalPERS rate increase, based on males living two more years and females 1.5 years, is expected to add $1.2 billion a year to the annual employer cost for state workers when fully phased in after three years.

The rate hike for increased longevity was the third CalPERS rate increase in the last two years, following a lowering of the earnings forecast from 7.5 to 7 percent and the adoption of a new actuarial methodology aimed at getting to full funding sooner.

CalSTRS lacks the power to set annual rates that employers must pay, needing legislation instead. The Legislature, willing to tolerate funding shortfalls, ignored CalSTRS pleas for a rate increase for years before approving the funding solution in June.

The new legislation gives CalSTRS limited power to raise rates: an employer increase (no more than about 1 percent of pay) after 2020 if needed for full funding by 2046; a state increase after 2016 if needed to eliminate benefit debt prior to 1990.

A CalSTRS board decision to lower earnings forecasts or increase longevity forecasts might have little impact, other than to alert the Legislature that a CalSTRS funding gap is reopening.

As part of a routine review every four years, CalSTRS is scheduled to look at the forecasts for investment earnings and longevity in 2016. It’s possible that the board, which has a long-term outlook, will make no change.

In the earnings review, as reported last month, CalSTRS will look at factors such as a 30-year investment horizon, what could happen during market booms and busts, and the possibility that inflation might offset a lower earnings forecast.

In the longevity review, the experience of CalSTRS members, who tend to have healthy lifestyles, and the Society’s new update will be used, said Rick Reed, CalSTRS actuary. He said teachers may have already made the gains shown in the new tables.

“We don’t know that our study is out of date,” Reed told the board. “As a matter of fact, because teachers have been living longer for a long period of time what we have found is that other groups are catching up.”

A Milliman actuary, Mark Olleman, agreed that the current longevity forecasts used by CalSTRS are not out of date. He said reviewing assumptions every four years is a “very responsible” schedule.

“CalSTRS is a very large, credible population to look at, and your mortality assumptions are based on the actual mortality of the California teachers,” he told the board.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 10 Nov 14


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