OPERS Board Votes to Lower Important Discount Rate

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December 11, 2018

OPERS Board Votes to Lower Important Discount Rate

(October 18, 2018)  Yesterday, the OPERS board took action to change the “discount rate” associated with future Defined Benefit Fund investments.  The change was important as it effectively dictates how much money OPERS expects to receive from investments and in turn, how much money is available to pay benefits.  The lower the expected rate of return, the less likely the fund is to keep their unfunded liabilities to under 30 years, thereby triggering a potential reduction in benefits or other plan design changes that could impact members and employers.

In September, the board was given a report by their actuary firm, GRS Retirement Consulting.  The report stated that their current discount rate of 7.5% was too high.  Failure to lower it to a level between 6.5% and 7.2% would result in the issuance of a “qualified letter” which is an indicator that the fund is in poor financial health and could have negative consequences for the fund in the future.  Needless to say, the board was not eager to receive this letter and wanted to take action to prevent it.

After a vigorous discussion and several failed motions to set the discount rate at various levels between 7.5% and 6.75%, the board settled on a rate of 7.2%.  In doing so, the board set a rate that will keep unfunded liabilities under 30 years, and thus avoid the need for legislatively mandated plan design changes.  PERI is hopeful that this action by the OPERS board will allow adequate time for our organization to work with OPERS, the legislature, and other stakeholders to address all the implications of reducing the discount rate.  We continue to work toward the goal of maintaining the long-term health of the fund while not jeopardizing the benefits PERI members have earned through their years of service.

16 Comments

  1. Ginny says:

    This will give the OPERS Board another opening to change current retirees COLA, and the legislature probably will go along with this. Eventually our healthcare fund will be gone as well. Question is, with this board running things, will we even have a pension 5-10 years from now?

  2. Lee Adams says:

    With the I will say arbitrary lowering of the so called rate of future return by OPERS’ Adminstrators,OPERS has effectively created the conditions for taking the action its administrators have appeared to have wanted to do for years. That action is the further lowering of not only direct pension benefits but also health care benefits to current retirees. It should not be surprising that after the election in November that OPERS will again go to the Ohio Legislature to get the legal OK for reducing direct pension benefits for current retirees.
    The legislators could easily do this in a ‘lame duck’ session. There will still be Republican majorities in the House and Senate. And, there will still be a Republican governor.
    PLEASE! Pay attention now!

  3. Dale Harmon says:

    Just two years ago the OPERS Board reduced the expected rate of return for the Defined Benefit Fund investments (DBFi) from 8.0% to 7.5%. Last year OPERS attempted to get the legislature to cut the COLA benefit of retirees. Last year OPERS earned a return of 16.82% on DBFi. As a result the COLA benefit cut bill is still in committee. According to OPERS, the 2016 return on the DBFi was 8.31%. Assuming that GRS Retirement Consulting was the OPERS actuary firm in 2016, how is it that their report of that year differs so much from this latest report. This just seems a bit too convenient for an OPERS Board that has wanted to reduce retiree benefits.

    As OPERS repeats ad nauseam, OPERS is not legally required to provide healthcare. However, the retiree COLA is legislatively mandated. Also, effective 1/7/2013, the COLA was removed from being legally vested. OPERS continues to ignore that the legislature does NOT have the right to alter contracts. In the case of “United States Court of Appeals, Sixth Circuit. John J. MASCIO, Plaintiff-Appellee, v. PUBLIC EMPLOYEES RETIREMENT SYSTEM OF OHIO, 11/4/1998, the court decided that “The retirement benefits of Ohio public employees vest, by statute, at the time when the retirement allowance or pension is granted by the public employees retirement board.” Further the court ruled that the effect of this vested rights statute is to make a contractual obligation founded upon a valid consideration, giving to the pensioner a vested right in his pension which cannot afterwards be impaired or revoked.

    • Jim says:

      Yes they keep saying that they are not legally required to provide health insurance, but I remember it differently.

      I started work under PERS before they became OPERS. At that time, if you worked 30 years you were promised 100 percent of your Final Average Salary (FAS), but health insurance was not offered. When PERS became OPERS this was changed to 66 percent of (FAS). But health insurance was the trade off for the 34 percent reduction.

      I know the contract they made at the time and I expect it to be honored. Even if Karen Carraher’s quarter million dollar salary needs to be slashed.

  4. Jim says:

    Here’s a good article on why public pensions are in so much trouble, including Ohio’s teachers. It also raises an important question as to why so many OPERS administrators are paid more than Ohio’s Governor.

    https://static-theintercept-com.cdn.ampproject.org/v/s/static.theintercept.com/amp/public-pensions-crisis-wall-street-fees.html?amp_js_v=a2&amp_gsa=1#referrer=https%3A%2F%2Fwww.google.com&amp_tf=From%20%251%24s

  5. Jerry M. says:

    I am glad to hear that Opers is willing to take a more gradual approach to address this issue. It now sounds that they are willing to work with retiree advocacy groups moving forward. Only time will tell.

  6. Daniel says:

    Thank You PERI , it’s appreciated how you present the information and make every effort to maintain our Benifits.

  7. Diane Mallory says:

    Does GRS Retirement Consulting know what they are talking about? Can they be trusted?

  8. Jerry M. says:

    I hope Opers learned their lesson with h.b.413. Opers must work with retiree advocacy groups to address this issue accordingly. Instead of rushing to the general assembly to alter retiree benefits.

  9. Jim says:

    If OPERS is in these dire straits, I think this is the proper time to examine why more than 60 employees at OPERS are paid more than Governor Kasich. This comes out of our pension fund and should be reduced by 2/3’s.

    Also, there seems to be a built-in incentive to keep reducing this discount rate. Last year when it was set at 7.5 percent and it came in at more than 16 percent, the bonuses must have poured out of our retirement accounts.

  10. PAT says:

    First a tip of the hat to Jim above for passing along a website that is pertinent to this topic. I did some additional follow up through it and found data comparing 73 of the largest public pension systems across all 50 states. These data were assembled by the Pew Research Center and while they are a couple of years old, I would doubt that much has changed in the past 2 years. If I am interpreting the data correctly it appears that OPERS is tied with CalPERS for having the 21st highest rate of administrative fees (51 had lower rates and 20 had higher rates). I added two columns of data related to fees together to come up with this. Further, it appears that OPERS was 65th in terms of return on investment over 10 years (64 higher; 8 lower). It gets worse. OPERS was 70th for return on investment over 5 years and 67th for 1 year. You can get to the data by clicking on Jim’s website above. It will bring up an article-click on “looked at 73 of the countries largest public pensions” at the end of the 9th paragraph. It brings up another article -go to the blue box at the bottom and click on “Pew Pension Investment Data” and finally click on Table 1 the bottom left corner. Bottom line-it appears to me that while OPERS is among the top one-third of major public retirement systems in the rate of administrative costs charged, they are dragging the bottom for returns on investment.

    A few thoughts-1) OPERS needs to get their ducks in a row before they even think about going for a benefit reduction to current retirees; 2) who is minding the store? If a technological Neanderthal like me can find this stuff in 15 minutes of searching on the internet, why isn’t OPERS Board of Trustees and the legislature’s Retirement Study Council aware of and making an issue of it? and, 3) I’ll be passing this info along to every OPERS retiree I know and recommend that they let their state Senators and Representatives know about this situation before we have to withstand another assault on our benefits.

  11. len says:

    My concern is…do our legislature realize this “manipulative move” that OPERS is making to “stack the deck” in their favor for this next go-around after the elections? Are we sending them all of this information in advance to alert them? I wrote my representative and senator many letters regarding my displeasure with H.B 413 as I know many of you did and we were successful. I would be more than happy to write more letters concerning this “manipulative strategy” that OPERS is using but to be quite frankly I am a real neophyte when it comes to these investing strategies and I would not even know how to begin to compile a letter to my legislature that would have any impact let alone make any sense. My question is does anyone have or would be willing to share a letter or a list of “talking points” that those of us that are not knowledgeable enough to comprise on our own letters might have so that we can begin to prepare our legislators for what we anticipate is to come in the next session of congress.

    I thank all of you for posting your thoughts on this and it has given me a superficial understanding of how OPERS is manipulating the system to accomplish their goal of stripping us of our hard earned income for their own personal gain. I like many would like to join the fight once more but this time I just don’t have the vocabulary needed to put it in writing and I fear that to try to do it without any help might do more damage than good.

    Thank you all and PERI for keeping us in the loop.

    • PERI says:

      PERI is well aware of how the OPERS Board decision to lower the discount rate to 7.2% could impact retirees on both the pension side as well as health care. We have reached out to OPERS in the hope of finding a reasonable long term solution that protects retirees. There is nothing yet to report.

      We are also concerned that over the past decade, OPERS Board has been overly conservative in their risk tolerance and as a result, has under performed against the major stock indices leaving billions in unrealized gains on the table. OPERS is a long term investor and as such, can definitely afford to make changes such as increasing their holdings in equities and exiting hedge funds.

      Had OPERS been more aggressive, yet remaining responsible in their asset allocation, it is likely we would not be having this discussion about COLA and health care benefits. Frankly, this is the conversation that needs to occur first . . . OPERS, set your risk tolerance and asset allocation differently so that you benefit from long bull market runs such as that we have experienced since 2009.

      If they take this action, OPERS could responsibly increase the expected annual rate of return to a level more in keeping with this revised asset allocation to 7.5% or perhaps even higher. Doing so would change the actuarial projections to levels that would not mandate plan design changes and allow for contributions to the health care fund to resume.

      For those who say they fear a market correction and potential losses that OPERS would experience, wouldn’t now be a good time for them to increase their holdings in equities since they are 10% off their all time highs? Remember, OPERS is a long term investor and should not be overly concerned with a one to three year time horizon.

      As mentioned previously, PERI is well aware of the current circumstances and will advise members to take appropriate action if and when it becomes necessary. We don’t believe it is needed at this moment. Stay tuned.

      • Ginny says:

        Thank you PERI for your vigilance and giving us information like this. I feel the PERI organization is our only advocate when it comes to healthcare, COLA and keeping our pensions. Question is, why does OPERS not respond back to PERI on these important issues. Does OPERS see PERI and its members as a threat or impediment to their agenda?

  12. Ginny says:

    Read yesterdays OPERS post about healthcare…it didn’t take them long, did it?

  13. Donna Waldorf says:

    Something has changed on the OPERS blog. They now seem to be posting all comments, even the negative ones. What changed? PERI, if you had any hand in this, I thank you. All of our voices have a right to be heard.

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