PSRS Contribution Rate Set for 2009-2010 School Year
Each year, the Public School and Education Employee Retirement Systems of Missouri (PSRS/PEERS) Board of Trustees is required by law to set the contribution rate to be paid by members and school districts during the next fiscal year. As fiduciaries of the PSRS trust fund, the Board is legally required to establish a contribution rate that will adequately fund the benefit promises made to PSRS members.
As required by law, the Board retains an actuarial firm to review the fund at the close of each fiscal year, determine the value of the benefit promises made and calculate a contribution rate to fund those. Each year, the PSRS consulting actuary presents the Board of Trustees with the results of this review in its annual actuarial valuation. This report, which might be called the System’s annual fiscal check-up, assesses the solvency of the Retirement System and determines the level of employer and employee contributions required to maintain or improve the solvency of the plan.
This year, as the System transitioned to a new actuarial firm, the members of the Board had the opportunity to review both the results of the regular annual valuation study performed by previous actuarial firm, Gabriel Roeder Smith & Company (GRS), and also that of the System’s newly retained actuarial firm, PricewaterhouseCoopers (PwC).
Employee and employer contributions have increased for the last several years, as the System continues to work toward reaching a 100% pre-funded status. Based on information and recommendations provided in both studies, the Board voted to increase each side of the required employer and employee contribution rate from 13.0% to 13.5% for the 2009-2010 school year. This change will become effective July 1, 2009.
The largest factor behind rising contribution rates is the System’s unfunded actuarial accrued liability (UAAL). UAAL essentially means the System has more in long-term liabilities than current assets to cover those liabilities. The UAAL is primarily a result of the current market decline, legislative benefit increases in the mid- to late-1990’s affecting both active and retired members, and current contribution rates that are below those needed to adequately fund the System. But it is important to note that the system is currently 83.4% pre-funded, which is a stronger funded status than the average public pension plan in the United States.
The Board and staff have worked diligently in structuring an investment program that will provide a competitive rate of return at the lowest possible cost and risk.
“Negative investment returns such as those experienced by PSRS in fiscal year 2008 do have a direct impact on future contribution rate increases,” said PSRS Chief Investment Officer, Craig Husting. “It is important to note that the primary driver for additional contribution rate changes in future years beyond 2009-2010 will be dependent on how much, if any, investment returns can be generated above the System’s actuarially assumed return of 8%.”
The June 30, 2008 PSRS actuarial valuation done by GRS showed a UAAL of $5.7 billion and a required contribution rate of 14.2% (matched by the employer) to fund the PSRS benefits currently in place for PSRS members. The study done by PwC confirmed those findings. While the actuarially required contribution rate is 14.2%, a 2003 law prohibits increasing the rate any higher than .5% for members and .5% for employers (or 1% total) each year. As discussed above, this, in effect, increases the UAAL each year. In order to address the UAAL, the Board must legally continue to reconsider the contribution rate on an annual basis to be certain the System remains adequately funded. While the Board strives to keep the contribution rates as low as possible, governmental accounting standards require that the unfunded actuarial accrued liability be funded over a period not to exceed 30 years.
Consideration of a contribution rate increase is not something the PSRS Board of Trustees takes lightly but the Board and administration are deeply committed to maintaining the financial solvency and strength of our Retirement System.