The SCERS pension fund is on solid footing to pay out benefits for decades to come, with a low probability of falling into financial distress, according to a new report presented to the Board of Retirement in February 2020.

“This means that the Board’s funding policy is very effective in achieving the general policy goal of achieving the long-term full funding of the costs of the benefits paid by SCERS,” according to the analysis by SCERS’ consulting actuary, Segal.

The funded status at SCERS was 83% as of June 30, 2019, meaning SCERS has 83% of assets on hand to cover its long-term pension obligations. Though the $10 billion fund carries a $2.1 billion unfunded liability, Segal found that SCERS can successfully close the gap in line with the Retirement Board’s policy to reach 100% funded status within 20 years.

Because the funded ratio reflects a point-in-time analysis, SCERS conducted a deeper risk assessment that examined 10,000 potential scenarios of future market returns to see how SCERS’ funding holds up under different economic cycles and events. While the range of outcomes can lead to extreme underfunding or surpluses, the model skews toward a healthier system overall.

The analysis found at the end of 20 years, there is a 50% chance the funded ratio would fall between 82% and 141% funded, with a 53% chance the system will be 100% funded. There is a 39% chance SCERS could be fully funded in just 10 years.

The report found a low chance that the funded ratio would drop significantly at any point in the next 20 years:

While the funding path remains strong, there is a small chance of an uptick in contribution rates over the next 20 years. The report examined if the aggregate employer contribution rate would cumulatively increase by the following amounts over the next 20 years:

However, there was a very low chance that the employer contribution rate would significantly spike in
any single year over next 20 years:

SCERS to Examine Underlying Assumptions

While funding is moving in the right direction, SCERS also recognizes that contribution rates are sensitive
to market conditions and plan experience. That’s why SCERS regularly monitors and adjusts the
underlying assumptions that are used to develop—and ensure—contribution rates keep long-term
funding on track.

This spring, SCERS will be examining its economic and demographic assumptions, including mortality and
salary expectations, and long-term inflation and investment projections. SCERS last updated its actuarial
assumptions in 2017, lowering the investment return assumption from 7.5% to 7% and recognizing that
members are living longer.

Those changes led to higher contributions rates from employers and employees. As SCERS begins
reviewing its assumptions again, it is possible that contribution rates could increase in July 2021.

While the Retirement Board takes the cost impact into consideration, the process is fundamentally
driven by the Board’s fiduciary obligation to fully fund the pension plan over the long term. The goal is
not to choose assumptions that are conservative or optimistic, but to adopt assumptions that are
reasonable, accurate, and informed.

Long-Term Investment Return Under Review

One key area under this year’s review is the long-term inflation assumption, which factors into the
overall investment return.

In its report, Segal provided a sensitivity analysis of making a modest reduction in the investment return
assumption from 7% to 6.75%. The analysis found that the change could increase employer and
employee rates by 1.7% and 0.3% of payroll, respectively.

Segal will present its actuarial recommendations to the Retirement Board at the May 20, 2020, meeting,
which will be used to set contribution rates for 2021-22.