Pension Update: Employers should prepare for changes to TRA fund

By Kirk Schneidawind, MSBA Executive Director

The Teachers Retirement Association (TRA) recently completed an “experience study” to evaluate the system’s actual experience, and look forward to predict future experience, especially economic assumptions such as inflation and investment returns. The study also took into consideration other economic and demographic factors.

The TRA Board of Directors is looking at study results to formulate a plan to alleviate some of the economic and demographic factors that are impacting the TRA funds.

The guiding principles for the TRA Board include: shared sacrifice, phase-in changes, intergenerational equity and long-term financial stability.

The TRA Board is considering a number of options. MSBA expects that the TRA Board will be moving forward with an initiative for the 2016 legislative session that will, at least, include:

  1. Cost-of-living adjustment (COLA) changes for retirees
  2. Benefit changes
  3. Contribution increases
  • A 1 percent increase for employers (school districts)
  1. State aid to pay for employer increase
  2. Longer amortization period
  • Move from 22 years to 30 years
  1. Lowering of assumed rate of return from 8.5 percent to 8 percent

As school boards enter into negotiations with their bargaining units, school boards should factor in at least a 1 percent employer increase related to a TRA contribution for fiscal year 2017 and beyond.

Please view the key findings below from the TRA’s Experience Study Results from Summer 2015:

Economic Assumptions

Inflation

  • Actuary recommends a 0.25 percent decrease in the inflation assumption based on lower inflation expectations from the Social Security Administration and the State Board of Investment.
  • Lower inflation assumption has a ripple effect on other economic assumptions.

Payroll/salary growth

  • Due to lower inflation, payroll/salaries are not growing as much. This slightly reduces the liabilities for benefits but increases contribution requirements because it is also TRA’s revenue base to pay off its unfunded liability.

Investment return

  • Based on lower inflation and lower investment return expectations, actuary recommends a decrease in the long-term investment return to 8 percent.

When combined, these changes will increase TRA’s costs.

Other economic assumptions

  • Accuracy of investment assumption is critical. It is used to discount future benefit liabilities.
  • Investment earnings are largest share of pension revenue.
  • If rate is set too high, liabilities are understated, shifting costs to future generations of members and taxpayers.
  • If rate is too low, liabilities are overstated, causing current members and taxpayers to bear a higher burden than necessary.
  • Minnesota’s statewide systems are the only systems using 8.5 percent. A National Association of State Retirement Administrators (NASRA) study shows that the average assumed rate for other state systems is 7.69 percent.

Demographic Assumptions

Experience studies evaluate demographic trends in a retirement fund’s member population.

Largest drivers:

  • Mortality — How long are members expected to live and collect benefits?
  • Retirement rates — Are members retiring before full retirement age?

Less impactful:

  • Termination of employment before eligible for retirement benefits
  • Disability rates
  • Election of optional payment methods (for survivor protections)

Mortality

  • Study showed longer life expectancies which means benefits are paid for longer periods

Why the big change?

      • TRA’s active-member population is 75 percent female; life expectancy is greater in the Midwest and among those more highly educated.
      • Where once the average life expectancy of an age 65 female TRA member was age 88.6, it is now 90.3. For an age 65 male, it was 86 and now is age 87.7. TRA has 499 benefit recipients age 95-plus and 78 are 100-plus.

Retirement rates

  • Members hired before 1989 are retiring earlier than expected while members hired after 1989 are retiring later. Actuary recommends retirement rate assumptions that are tailored to each group. The net effect is cost neutral.

About mnmsba

The Minnesota School Boards Association, a leading advocate for public education, supports, promotes and strengthens the work of public school boards.
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