US - The California State Teachers' Retirement System (CalSTRS) has reported a fall in its funding level of 7% to 71% in the fiscal year to June 30 2010.
The valuation marked the second year of funding declines, recognising the impact of the 2008-09 financial crisis which saw CalSTRS investments lose 25% of their value, the system's board said.
The $56bn funding gap represented a $15.5bn increase from the previous year, although the gap was $1.5bn smaller than last year's valuation predicted it would be for the system.
CalSTRS uses an averaging, or smoothing, process that recognises gains and losses over a three-year period, which is why the fund is still feeling the impact of losses incurred during the market downturn. The system is expected to continue reflecting that impact in next year's valuation.
The smaller-than-expected shortfall reflects the 12.2% investment return posted at the end of fiscal year 2009-10, a $34.8bn rebound from March 2009, the market low point. Another factor was the level of projected member earnings, which fell short of expectations, the board said. This had a $4.3bn downward impact on actuarial obligations compared to the prior year's valuation.
"The positive effects of last year's excellent investment returns were good to see as our fund rebounds from the worst market downturn since the Great Depression", said CalSTRS chief executive officer, Jack Ehnes.
"However, despite these gains, we continue to recognise those losses. While our recent gains are helpful in the short term, the larger situation underscores the need to recognize that the funding issues facing CalSTRS are primarily the result of the unprecedented collapse in the markets. It also speaks to the importance that the Legislature develop a gradual and predictable funding solution that is fair to the state's taxpayers, its educators, and their employers."
Using the three-year smoothing process, the latest valuation projects that the losses from the financial crisis added $12.7bn to the unfunded obligation, or funding gap. Another factor in the growing shortfall, also driven by the downturn, is the reduction of the assumed investment rate of return from 8% to 7.75% and a reduction in the assumed inflation rate from 3.25% to 3%. This increased the unfunded amount by $4.4bn.
The market downturn and its subsequent rebound has reinforced CalSTRS' view that it cannot invest its way to financial health, the board added. It is therefore currently working with stakeholders to help the Legislature develop a plan for bridging that funding gap over the long term.
The valuation also found the CalSTRS funding gap cannot be bridged without changes in contribution rates. The fund uses a 30-year time frame to determine the adequacy of the resources on hand to pay promised benefits and the report said contributions would have to increase by slightly more than 14% of payroll per year for the next three decades to successfully erase the funding shortfall.
Meanwhile, CalSTRS trustees unanimously elected Dana Dillon as chair and Harry Keiley as vice-chair for the 2011-12 term.
The 12-member Teachers' Retirement Board nominates and elects its chair and vice-chair annually, while trustees serve four-year terms. The new officers assume their posts immediately.
Most respondents in this week's Pensions Buzz do not think businesses should be able suspend AE contributions if in financial distress.
Former BHS owner Dominic Chappell has lost the appeal against his section 72 conviction and sentence for failing to hand over information to The Pensions Regulator (TPR).
This week's top stories include Marsh and McLennan Companies agreeing to buy JLT, and the home secretary calling for AE to be scrapped in a no-deal Brexit scenario.
Lesley Titcomb says the watchdog wants closer interactions with pension funds to spot problems sooner and act before having to use its more stringent powers