OPERS Board lowers discount rate

Results of 5-year experience study reveals need for adjustment

By Michael Pramik, Ohio Public Employees Retirement System

Oct. 19, 2021 – OPERS’ external actuary, Gabriel, Roeder, Smith & Co., presented the results of its 5-year experience study to the trustees at the September Board meeting. The study is a systematic review of how closely the actuarial valuation assumptions used to fund OPERS’ liabilities matched our actual experience.

The review is performed every five years and covered the period 2016-2020. The purpose of the experience study is to review historical results in conjunction with forward-looking expectations and adjust funding assumptions as necessary.

Demographic and economic expectations change over time as member behavior and market conditions evolve. That means they must be periodically reviewed to ensure our funding plans are based on the best assumptions. The actuaries explained their recommended changes and presented the impact that the changes are expected to have on the system’s key funding measures.

Demographic assumptions relate to things that happen to members and include member withdrawals, or turnover, from the system, disability rates, retirement rates and mortality rates. Economic assumptions relate to things that impact money and include the expected investment return earnings rate, wage inflation, price inflation and the cost-of-living adjustment rate.

Following a review of these assumptions and the actuary’s recommended changes, the trustees voted, in addition to other changes, to decrease OPERS’ assumed pension investment rate of return from the current 7.2 percent to 6.9 percent.

During the past two years, the investment markets have rebounded and delivered very strong returns above the assumed rate. As such, OPERS’ funded ratio (the measure of how well OPERS’ accrued liabilities are funded) improved from 77.5 percent in 2018 to a preliminary funding (before the experience study changes) of 82.9 percent at the end of 2020.

While this is a significant improvement over a two-year period, it is important to remember that OPERS relies on investment returns to fund about 70 percent of pension benefits and that years of excess returns are needed to offset years when the assumed return was not met. Over this same two-year period, the future capital market outlook has fallen, necessitating a downward adjustment in the assumed investment rate of return going forward. Assuming too high of an investment rate of return increases the risk of underfunding.

Decreases in the assumed investment rate of return increase the actuarial liability. Therefore, the Board’s decision to reduce the assumed long-term investment rate of return was offset by the strong investment return of 2020. The funded ratio after the experience study was 81.5 percent as compared to 79.53 percent in 2019. The decrease in the assumed investment rate of return is a better reflection of current and expected market conditions and the outlook of the OPERS investment portfolio.

Michael Pramik

Michael Pramik is communication strategist for the Ohio Public Employees Retirement System and editor of the PERSpective blog. As an experienced business journalist, he clarifies complex pension policies and helps members make smart choices to secure their retirement.

Michael Pramik

Communication Strategist

  • Even though I understand your reasoning, it doesn’t help the fact that as of 1/1/2022 I will take a cut each month and after my COL raise, I’m still going backwards. With inflated insurance costs and inflated costs of everyday living, it’s a lose-lose situation. Something has to give!!!!

    • my $337 is reduced to $178 per month beginning 1/1/22…….where is my Part B of Social Security going? I’m not receiving it. Via Benefits Advisor says it goes into my health account. No explanations. Please help.

      • Debbie,
        Please forward you questions through the online message center or contact our Member Service Center at 800-222-7377, there we can review your account and answer your account specific question.
        Thanks, MS

    • George,

      Not at all. The pension investment rate of return applies only to the Defined Benefit Fund, not our Health Care Fund.

  • As everyone else is likely asking: What does it mean for me? I think it is also necessary to re-consider the freeze on our COLA in 2023, because of the unanticipated extreme increase of the actual cost-of-living in excess of 5%. Reconsideration needs to take into account the fact that a 3% freeze in a single year will result in an actual real-world loss of well over 5% to the retiree. Certainly, inflation also negatively impacts OPERS funding levels, but an increased rate-of-return is highly likely and can provide an offset to that negative impact. It is important to recognize that retiree’s have no way of making-up their losses to inflation with a COLA freeze.

    • Most annuities do not increase year after year. The cola only robs from future retiree’s. The Pension fund is already under funded. They need to permanently freeze current and all future retiree’s monthly payment. This would drastically help everyone.

      • “Freeze current and all future retiree’s monthly payment” — that seems rather harsh. We may all have to apply for Federal assistance if we use Mr. Oldiges recommendation.

    • We cannot afford any freeze with inflation as high as it is. Generous market returns in 2020 and 2021 YTD do not support a freeze.

  • Same here, I am going to receive a downward adjustment from OPERS. Cutting my RMA by 45 % that’s about $2,000 a year. However I still will get a 3% raise but on the original amount received in 2005. Now that 3% is great, but in just 9 months of 2021, the government has valued inflation at 5.6 %. 2022 will be greater ! Please correct me if I am wrong.

  • In plain language, simple words — is this an improvement to Hooray! about? Or short term. If I may speak for others also — no course in investment or basic finance helps me understand.

    • Pat,

      It’s neither something to “Hooray!” or “Boo-hoo!” about. It’s mostly our best judgment about how investments are going to perform, as a whole, in the next decade or so.

  • I wish you would summarize and simplify, in layman’s terms and language, into one (1) or two (2) paragraphs all that has been stated in the blog. As an example, some of us retirees have no idea what “actuarial valuation assumptions” are. Most of us are neither Philadelphia lawyers nor CPAs. Your assistance in summarizing and simplifying the language will be greatly appreciated!

    • Howard,

      It’s not really easy to put this in layman’s terms, because it’s a complicated subject. However, maybe this will help:

      The assumed investment rate of return is a measure of how much we expect our Defined Benefit Fund to earn annually, on average, over time. It allows us to take a snapshot of our assets and liabilities and thus assess how well our liabilities are presently funded.

      This rate of return is expressed as a percentage and in our industry generally is synonymous with the “discount rate” of future benefits used in our actuarial valuation to determine our liability. By “discounting,” we mean saying what the future value of something (money, liabilities, etc.), would be in today’s values.

      This “discount rate,” which our Board just lowered to 6.9 percent, is important because a lower/higher rate acts to increase/decrease our liability. If the discount rate is lowered, our unfunded liability increases.

      As of the recent experience study mentioned in the blog, the Board’s investment consultants feel, as do we and our external actuaries, that a lower discount rate is warranted because of changing capital market assumptions (investments won’t do as well) in the intermediate and long terms.

      No matter what we change the discount rate to, however, the actual pension benefits we pay to current and future retirees does not change.

      • Michael,
        As a re-employed retiree, how does the discount rate effect the Money Purchase Plan rate of return or accumulation.

        • Fran,

          Those are based on our stable value fund rate, so the discount rate doesn’t affect the Money Purchase Plan at all.

  • The cost of Medicare goes up and the Health Care Fund goes down. The cost of living goes up and 2/3 of it is taken away from social security. You grandfather me and then take it away.

  • The fixed simple interest 3% COLA for those people who retired prior to 1/7/2013 would seem to be part of their retirement package. It certainly was easy enough to calculate the future cost of the COLA. Decreasing the OPERS’ assumed pension investment rate of return with was 7.5% to first the current 7.2% to 6.9% will increase the calculated funding years from 18 to ??. (Page 29 of the 2020 comprehensive report.) Yet, on page 103 the 10 year average total investment return is 8.39%. The reduction in the assumed pension rate of return seems designed to create a situation in which OPERS can justify reducing or eliminating the COLA of people who have been retired for about a decade or more. However, these are the oldest OPERS retirees and as a group less and less able to defend our benefits. Further, according to NBC news, U.S. men saw life expectancy fall by nearly 2.3 years. Women lost more than 1.6 years of life expectancy in 2020. The COLA for those who retired prior to 2013 is protected by law. Cut health care if needed, it was never guaranteed.

    • Dale,

      As are many other public pension systems around the country, OPERS has moved recently to lower its assumed investment rate of return. As we stated in the blog, the 6.9 percent rate “is a better reflection of current and expected market conditions and the outlook of the OPERS investment portfolio.”

      This action was not taken to create a justification for action on the COLA.

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