TRS Board votes 5-4 to lower return rate assumption for… | TCTA
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TRS Board votes 5-4 to lower return rate assumption for pension fund

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The TRS Board of Trustees voted at its July 2018 meeting on a 5-4 vote to lower the return rate assumption for the pension fund from the current 8 percent to 7.25 percent. The employee representatives on the board, including former TCTA presidents Dolores Ramirez and Nanette Sissney, as well as Greg Gibson and Dick Nance, voted against the 7.25 percent rate. This group of trustees supported a 7.5 percent rate at the April meeting, and proposed a 7.35 percent rate at the July meeting.

TCTA testified, as it had at two previous meetings, to request that if the board chose to lower the rate, it adopt a moderate change (such as 7.5 percent) and implement the change incrementally to avoid a major drop in the fund’s actuarial health. However, the board opted to make the immediate change to 7.25 percent.

The board’s actuary, Joe Newton of Gabriel Roeder Smith & Co., provided updated information showing an even more bleak economic picture than had been presented at previous meetings. Under the new projections it appeared increasingly unlikely that investments could achieve close to a 7.5 percent rate in either the near or long term. Newton said he could previously have justified a 7.5 percent assumption in his actuarial report, but no longer believed that would be acceptable, particularly to outside auditors, as it would not be based on the available data.

The actuary and TRS staff noted that with this change the Texas Legislature would need to increase state contributions to the fund considerably (from the current 6.8 percent to more than 8.6 percent) in order to get to the point where a cost-of-living increase would be feasible.

Will this affect my benefits?

The change will not directly affect any retiree’s current benefits or the calculation of benefits for future retirees. Its main impact will be felt on the ability of TRS and the legislature to provide benefit increases in the future. Since TRS does not have an automatic cost-of-living adjustment, any raises must be approved by the legislature and are dependent on the fund’s ability to pay for them. The new rate’s negative impact on the fund’s financial health makes it less likely that benefit increases could be afforded in the near future unless either the fund outperforms the assumed rate (significantly) or the legislature approves increased contribution rates.

What is the return rate assumption?

The return rate assumption is a measure used by pension actuaries as part of the calculation of a fund’s ability to pay off its liabilities. For many years, TRS has assumed that it can achieve an 8 percent return on its investments, and that was the norm among similar pension funds across the country. But recently, other funds have lowered their rates in response to projections by investment experts that actual returns are likely to be well under 8 percent in the coming years.

The TRS actuarial firm recommended a 7.25 percent rate, but had originally noted that a more moderate rate of 7.5 percent would be reasonable as long as the board re-evaluated the rate in two years to see if further adjustment would be necessary. Some other states, when making a significant change in their rate, have phased in the new rate (for example, going from 8 percent to 7.75 percent, then to 7.5 percent, etc.). The TRS board did not take this route, in large part because of the updated, less optimistic projections.

What now?

School employees and retirees will not see any change in their benefits as a direct result of the new rate assumption. However, the fund’s next actuarial valuation will be significantly worse than it would have been using the 8 percent figure. The legislature will base any policy decisions regarding TRS structure and benefits on this valuation. TRS officials and board members have expressed hope that this will place pressure on the legislature to increase the state’s contribution to the TRS pension fund. TCTA will advocate for a higher state rate next session, but given the more immediate needs that policy makers will be facing in 2019, which include funding for active employee health insurance, TRS-Care and school finance, it seems unlikely that legislators will make increased pension funding a high priority.