The trustees for the Arkansas Teacher Retirement System last week reduced its target rate of return from 7.5% to 7.25% a year.
Executive Director Clint Rhoden said the reduction is not expected to trigger another round of cost cutting or increased contribution rates for employers and employees.
“The possibility of future benefit adjustments can never be ruled out, but I do not expect any will be needed in the near future,” he said in a written statement.
The increase in the system’s liabilities as a result of reducing the target rate of return is mostly offset by the 31% investment return experienced June 30, 2021, Rhoden said.
The system’s investments were valued at $21.3 billion as of Nov, 15, Rhoden said.
The Teacher Retirement System is state government’s largest such agency, with more than 100,000 working and retired members.
During its meeting Nov. 15, the board adopted all assumption changes recommended by the system’s actuary, Gabriel, Roeder, Smith & Co., from the actuary’s latest five-year experience study, Rhoden said. The system continues to assume wage inflation of 2.75% a year and price inflation of 2.5% a year.
Based on a target rate of return of 7.25% and wage inflation of 2.75%, Gabriel, Roeder, Smith & Co. estimated the system’s actuarial accrued liabilities at $24 billion and an actuarial value of assets at $19.3 billion to reach a funded ratio of 80.6% as of July 1, 2021.
The projected payoff period for the system’s $4.6 billion in unfunded liabilities is about 33 years, Gabriel estimated. The actuary is scheduled to deliver its annual actuarial report to the trustees in December.
The actuary phases in the recognition of investment gains and losses over four years in an attempt to stabilize the rate charged employers, which are state and local governments.
As of June 30, 2020, the unfunded liabilities totaled $4.34 billion, with a projected payoff period of 27 years, according to Gabriel. Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a house.
In 2017, the board of trustees voted to implement several measures to raise money and cut costs over seven years in response to the system reducing its target investment return from 8% to 7.5% a year.
The employer contribution rate, which was 14% of payroll in fiscal 2019, is now 14.75% and is scheduled to reach 15% in fiscal 2023. The employee contribution rate was 6% in fiscal 2019, is now 6.75% and is scheduled to reach 7% in fiscal 2023.
The average target investment return for 130 public retirement systems was 7.11% a year and the median was 7% as of July, based on information from the National Association of State Retirement Administrators, Gabriel, Roeder, Smith & Co. said in a written report to the teacher retirement trustees. The average target investment return for these systems has been declining steadily over the past few years and was 7.53% in fiscal 2017.
“Given the investment return expectations, we suggest that ATRS consider an investment return assumption in the range of 6.23% to 7.23%,” Gabriel said in its report.
The system’s investment consultant, Chicago-based Aon Hewitt Investment Consulting, wrote in a report to the trustees, “Based on our knowledge of the ATRS portfolio and expectations from the capital markets, Aon finds the 7.2% long-term expected rate of return to be reasonable.” Buoyed by soaring stock markets, the Teacher Retirement System’s investments gained $4.5 billion in value last fiscal year, Aon reported in September. In the past 10 fiscal years, the system’s return has averaged 9.6% a year to rank in the top 9% of the nation’s large public pension systems, according to the firm.