US - California State Teachers' Retirement System (CalSTRS) has lowered its long term assumptions on the rate of investment returns from 8% to 7.75% and its inflation assumptions by 0.25%
The move, agreed by the board yesterday, acknowledges an expectation of reduced future earnings and lower inflation and was the culmination of ten months of comprehensive analysis of the long-term economic assumptions affecting the CalSTRS defined benefit, following recent market declines.
The $141.3bn fund said it was no longer comfortable assuming its current long-term assumptions of investment returns and inflation, while the board also expressed concern that recent economic events were having an undue impact on perspectives about the long-term economy. At the same time, the board recognised it would be re-evaluating all of its economic and demographic assumptions as part of the June 30, 2011 valuation of its benefits programmes.
"The board wanted to have as much input and information as possible before making a decision because changing these assumptions has wide-ranging impacts on our members, their employers and the State of California," said CalSTRS chief executive officer Jack Ehnes.
"Board members faced a difficult decision and have been careful in evaluating the recommended adjustments to the investment return assumption, especially in today's volatile market environment. Reviewing future investment assumptions is an important and prudent move toward finding a solution to the long-term financial challenges facing CalSTRS."
The assumed rate of return is used to help determine CalSTRS liabilities and the assets needed to pay future benefit costs. Revising the assumption downward increases the cost of fully funding the benefit. However, CalSTRS said the increase had been partially reduced by the corresponding lowering of the wage inflation assumption from 4.25% to 4%.
Lowering the assumed investments rate of return and rates of inflation for the defined benefit programme to the new assumptions lowers the long-term funding level of the system from 78% to 76.5%.
At its September meeting, the board adopted the actuarial valuation presented by Milliman showing the fund's financial health as of June 30, 2009. CalSTRS is funded at 78%, down from a funding ratio of 87% a year earlier. The unfunded portion of future benefits has grown to $40.5bn from the previous year's $22.5bn.
The CalSTRS board began discussing the recommended adjustments at its February 2010 meeting. The board requested additional information on the impact to members if the assumptions were lowered and, in June, postponed a final decision to November.
Since 2003, the amount of money contributed has not been sufficient to fully fund the benefits in accordance with GASB standards. The gap widened with the global market collapse in 2008.
CalSTRS generally evaluates its actuarial assumptions every four years, but the historic market downturn in fiscal year 2008-09 prompted an earlier review.
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