US - The California State Teachers' Retirement System (CalSTRS) is set to consider a number of options to resolve the long-term funding deficiency of its defined benefit pension plan in the New Year.
Earlier this year, the CalSTRS Board adopted an actuarial valuation of the DB plan that indicated the under-funded status of the DB plan likely required changes to the existing financing and benefit structure.
At its December meeting, the Board was presented with a number of options to bridge the deficiency over time including: distributing the impact among members, employers and the state, distribution between member contributions and benefits and distribution of changes in member benefits among different benefit programs.
“The biggest issue to confront is how to allocate the responsibility for addressing the problem between increased contributions and reduced benefits, primarily to future members,” CalSTRS noted in its agenda report.
“The entire unfunded obligation could be eliminated by increasing contributions paid by members, employers and/or the General Fund. However, all three stakeholders are confronting their own budget issues. If the primary focus to address the problem is to reduce benefits, the objective should be to minimise the impact on member’s long-term financial security.”
The fund said the Board had 12 options to consider, none of which presented a “painless road” out of the funding deficiency. Discussions on the options are due to begin at the May, 2005 Board meeting.
The report noted two “fundamental approaches” to resolving the current situation – no change to the funding and liabilities of the DB program or long-term changes to the plan structure including additional resources, reduced liabilities or a combination of the two.
The first approach relies on a dramatic increase in investment returns, with an increase from 8 to 8.25% reducing the funding deficiency by more than 36%.
“However, in order to achieve a higher assumed rate of return, the allocation of CalSTRS investments would have to be modified to place a greater emphasis on private equity, alternative investments and hedge funds,” the fund said.
“CalSTRS could not prudently invest in those asset classes at that higher level to achieve a rate of return that could be reasonably assumed to be 25 basis points higher than the current assumed rate.”
Alternatively, if in the future the plan did not have sufficient resources to pay current benefits, additional funds would have to be paid by the state, with the DB plan funded on a pay-as-you-go basis similar to the US social security system, CalSTRS said. According to the report, this is the “most expensive” option because a larger burden is placed on contributions made to the program, while investment returns represent a much smaller resource.
The second approach, which uses time as a factor, has the lowest impact on plan financing, CalSTRS said.
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