Teacher pension trustees lower target rate of return to 7.25%

Administrators of the Arkansas teachers’ pension system last week slashed its target rate of return from 7.5% to 7.25% per year.

Executive Director Clint Rhoden said the cut is not expected to trigger another round of cost cuts or increases in premium rates for employers and employees.

“The possibility of future benefit adjustments can never be ruled out, but I do not expect that they will be necessary in the near future,” he said in a written statement.

The increase in system liabilities resulting from the reduction in the target rate of return is mainly offset by the 31% ROI recorded on June 30, 2021, Rhoden said.

Investments in the system were valued at $ 21.3 billion as of Nov. 15, Rhoden said.

The Teachers Pension System is the largest such agency in the state government, with over 100,000 active and retired members.

At its November 15 meeting, the board adopted all of the assumption changes recommended by the system actuary, Gabriel, Roeder, Smith & Co., based on the latest five-year experience study. of the actuary, said Rhoden. The system continues to assume wage inflation of 2.75% per year and price inflation of 2.5% per year.

Based on a target rate of return of 7.25% and wage inflation of 2.75%, Gabriel, Roeder, Smith & Co. estimated the system’s actuarial accrued liabilities at $ 24 billion. and an actuarial asset value of $ 19.3 billion to reach a funding ratio of 80.6% as of July 1, 2021.

The expected payback period for the system’s $ 4.6 billion in unfunded liabilities is around 33 years, Gabriel estimated. The actuary must deliver his annual actuarial report to the trustees in December.

The actuary is phased in accounting for investment gains and losses over four years with the goal of stabilizing the rate charged to employers, which are state and local governments.

As of June 30, 2020, the unfunded liability stood at $ 4.34 billion, with an expected payback period of 27 years, according to Gabriel. Actuaries often compare the expected repayment period of unfunded liabilities to a mortgage on a house.

In 2017, the board voted to implement several measures to raise funds and reduce costs over seven years in response to the system reducing its ROI target from 8% to 7.5% per year.

The employer’s contribution rate, which was 14% of payroll in fiscal 2019, is now 14.75% and is expected to reach 15% in fiscal 2023. The contribution rate of employees was 6% in fiscal 2019, is now 6.75% and is expected to grow to 7% in fiscal 2023.

The average target return on investment for 130 public pension systems was 7.11% per year and the median was 7% in July, according to information from the National Association of State Retirement Administrators, said Gabriel, Roeder, Smith & Co. in a written report. to teachers’ pension administrators. The average target return on investment for these systems has declined steadily over the past few years and was 7.53% in fiscal 2017.

“Given the ROI expectations, we suggest that ATRS consider an ROI assumption of between 6.23% and 7.23%,” Gabriel said in his report.

The system’s investment consultant, Chicago-based Aon Hewitt Investment Consulting, wrote in a report to the directors: “Based on our knowledge of the ATRS portfolio and the expectations of the capital markets, Aon finds the expected rate of return at long-term 7.2% be reasonable. “Driven by soaring stock markets, Teacher Retirement System investments rose $ 4.5 billion in value last year, Aon reported in September. In recent years, the system’s return has averaged 9.6 percent per year to rank among the top 9 percent of the nation’s large public pension systems, according to the company.

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