Aug. 6, 2021
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Public School Employees' Retirement System
PSERS Board Adopts 5-year Experience Study Review Results
Fund lowers earnings assumption to 7.00% and updates
demographic and financial/economic assumptions
HARRISBURG – The Board of Trustees of the Pennsylvania Public School Employees’ Retirement System (PSERS) voted Friday to accept the results of a 5-year actuarial experience review study for the period July 1, 2015, to June 30, 2020, and adopted new demographic and economic assumptions.
PSERS new assumptions are effective in the June 30, 2021, actuarial valuation and will be used by PSERS Board to set the FY22-23 employer contribution rate when it meets in December 2021.
The study, completed by Buck Global LLC, is required by state law, Section 85029(j) of the Retirement Code. The study included actuarial assumptions for non-mortality and mortality membership demographics, and employer payroll and member wage growth. It also dealt with financial and economic forecasts, including inflation and interest rates.
The Board resolution lowered the current 7.25% assumed investment rate of return to 7.00%, estimated the inflation rate at 2.50%, and projected future salary increases at 4.5% and employer payroll growth at 3.25%.
PSERS new assumptions will have an impact on employers in the FY22-23, however, that impact will be partially offset by the System's anticipated investment return of more than 25% for the recently ended 2020-21 fiscal year. PSERS will provide updated employer projections by the end of August to help employers with their budgetary planning.
“The PSERS Board knows and understands how difficult any employer increase can be,” said state Sen. Pat Browne, a PSERS trustee who chairs the Board’s Budget Finance Committee, which led the review process. “These new assumptions represent sound actuarial practices and responsible fiduciary oversight for the members, employers and Commonwealth.”
For more information on the processes and findings the PSERS Board of Trustees used for the 5-year review see the below factsheet:
Five-Year Actuarial Review Fact Sheet
Legal Requirement for Review: Section 8502(j) of the Retirement Code provides that in every five-year period, the actuary of the System is to make an actuarial investigation and evaluation of the mortality, service and compensation experience of the members and beneficiaries covered under the System during the preceding five years. The review covered July 1, 2015 through June 30, 2020.
Purpose of Review: The review covers several actuarial datapoint forecasts: to non-mortality membership demographics, mortality membership demographics, employer payroll and financial market economic forecasts, including inflation and interest rates, that affect investment returns.
The datapoint assumptions, by law, are collectively used to set the System’s estimated costs to pay benefits to current and retired public school employees in the June 30, 2021 actuarial valuation. The Board sets those assumptions by adopting a resolution that establishes assumed inflation, investment return, member salary increase and employer payroll growth rate.
Steps Taken in Review Process:
1. The Board’s contracted actuary, Buck Global, LLC. and PSERS staff began the five-year review in December 2020.
2. At the March 4, 2021, public meeting, the Board of Trustees approved Buck’s non-mortality demographic assumptions. These assumptions were: Withdrawal, Retirement, Disability, Withdrawal Annuity Benefit Commencement and Optional Forms of Payment Elections.
• Net changes to the non-mortality assumptions were estimated to decrease the System’s unfunded liability by $926 million, which in turn would decrease the employer contributions by $196 million in the 2022-23 fiscal year.
3. At the June 11, 2021, public meeting, the Board approved Buck’s mortality assumptions that reflect members are living longer.
• Net changes to mortality are estimated to increase the System’s unfunded liability by about $1.3 billion, which in turn would increase the employer contributions by about $106 million in the 2022-23 fiscal year.
4. At a July 12, 2021, meeting, the Board’s Budget Finance Committee heard economic assumption presentations by three consultants: Buck, Verus Investments and Aon.
5. At the Aug. 5 public meeting of the board’s Budget Finance Committee, the investment consultants did a recap of their economic market assumption presentations given to the Board on July 12, 2021. The presentations estimated how inflation, interest rates, and domestic and international financial markets could affect PSERS net investment returns over the next 30 years.
• All consultants predicted PSERS current asset allocation most likely would not be able to generate a 7.25% assumed rate of return.
• Buck also gave a separate presentation on Economic assumptions and provided a range of acceptable options for the inflation assumption, investment rate of return assumption, member salary increase assumption and employer payroll growth assumption for the Board’s consideration.
• The Budget Finance Committee adopted a resolution that took into account both actuarial experience over the past five years as well as forward looking expectations.
6. At the Aug. 6, 2021, public meeting, the full board of Trustees approved the Budget Finance Committee resolution, setting the inflation rate at 2.50%, the assumed rate of investment return at 7.00%, and member salary increase at 4.5% and employer payroll growth 3.25%. The new assumptions will be implemented in the June 2021 actuarial valuation, and along with the actual experience results from FY 20-21 will be used to establish an employer contribution rate for FY 22-23.
1. PSERS will provide updated employer projections by the end of August to help employers with their budgetary planning.
2. The full effect of the new assumptions on employers (school districts and Commonwealth) will not be known until December 2021 when the PSERS Board of Trustees accepts the System’s 2021 Valuation, which will be used to set the employer contribution rate for the 2022-23 fiscal year.
About the Pennsylvania Public School Employees’ Retirement System
PSERS, founded in 1917, began operations in 1919 to oversee a statewide defined benefit pension plan for public school employees. PSERS' role expanded upon the passage of Act 5 of 2017 to include oversight of two new hybrid options consisting of defined benefit and defined contribution (DC) components and a stand-alone DC plan. As of March 31, 2021, PSERS had net assets of $65.9 billion and a membership of about 256,000 active, 240,000 retired school employees and 26,000 vested inactive members.