December 10, 2014

School Employees Pension Board Certifies FY 2015-16 Contribution Rate

The Public School Employees’ Retirement System (PSERS) Board of Trustees met Tuesday and certified an annual employer contribution rate of 25.84 percent for fiscal year (FY) 2015-2016, which begins on July 1, 2015.
The 25.84 percent employer contribution rate is composed of 0.84 percent for health insurance premium assistance and a pension rate of 25.00 percent. The rate collars established under Act 120 of 2010 remain in effect for a fifth year and continue to suppress the pension rate and underfund the System.
Based on current projections FY 2015-2016 would be the last fiscal year the rate collars will be in place. Total employer contributions of $3.45 billion are estimated in FY 2015-2016. The Commonwealth directly reimburses school employers for no less than 50 percent of the total employer contribution rate.
PSERS is also funded through investment earnings and mandatory member contributions. Investment earnings are the largest source of funding for PSERS. For the most recent fiscal year ended June 30, 2014, PSERS’ investments added approximately $7.1 billion in net investment income to the Fund.
PSERS members contribute from 5.25 percent to 10.30 percent of pay depending on their membership class and when they joined PSERS. Members will contribute an average of 7.49 percent or approximately $1 billion in FY 2015-2016.
PSERS Executive Director Jeffrey B. Clay commented on the funding issue and reported on the improved funding projections.
“Difficult budget issues remain for both the Commonwealth and school employers. The employer contribution rate continues to increase to the actuarially-required level necessary to begin to make payments on the principal and pay down existing debt. The majority of the employer contribution rate for FY 2015-2016 represents the cost of interest on the unfunded liability. That said, a number of funding projections have improved over the past fiscal year,” said Clay.”
The improved funding projections include:
-- Total employer contribution dollars through 2047 are projected to decrease by $13.7 billion due to PSERS strong FY 2014 investment performance and lower employer payroll.
-- The pension debt or the unfunded accrued liability (UAL) is $500 million less than projected for this year due to PSERS strong FY 2014 investment performance and lower employer payroll. It was projected at $35.6 billion but decreased to $35.1 billion.
-- The peak UAL dollar amount projected for FY 2018 is $2 billion less than what was projected last fiscal year. The peak amount decreased from $45.1 billion to $42.9 billion.
-- The annual employer cost for benefits for current service (the employer normal cost) continues to decrease. It decreased from 8.66 percent in FY 2012-13 to 8.38 percent in FY 2015-2016 as more new members join the system under the reduced benefit structure of Act 120 of 2010. It is projected to be less than 3 percent once all members are under the Act 120 benefit structure.
Additional resources about the employer contribution rate, including 30 year rate projections, are available on PSERS’ website.
In other business, PSERS Chief Investment Officer James H. Grossman, Jr. reported positive investment returns of 0.58 percent for the quarter, 12.30 percent for the one year, 10.21 percent for the 3 year, 10.26 percent for the 5 year, 7.25 percent for the 10 year, 8.47 percent for the 20 year, 8.54 percent for the 25 year, and 9.50 percent for the 30 year periods ended September 30, 2014.
Detailed investment performance for individual asset classes as of September 30, 2014 is available on PSERS’ website.