During its regular monthly meeting Wednesday, December 9, the SCERS Board of Retirement adopted the annual actuarial valuation, a report that serves as a “health check” on how the pension fund is doing at the end of the fiscal year (June 30), and arguably the most important financial document reviewed each year.

The Board uses the annual actuarial valuation to make adjustments to employer and employee contribution rates for the upcoming fiscal year to ensure that funding is on track to support benefit payments over the long term.

Here are the highlights:

• SCERS ended the 2019-20 fiscal year with approximately $10 billion in assets, as of June 30, 2020.
• The funded status dropped from 83% to 79%. The funded status measures the percent of assets we have on hand as a percent of our long-term pension obligations. 
• The funding gap between the assets and our pension obligations, or “unfunded liability”, grew from about $2.1 billion to $2.7 billion; that amount is amortized and paid down over the next 20 years.
• The main reasons for the increase in unfunded liabilities were twofold:
  • The 2019-20 market downturn due to the pandemic — SCERS’ investment return was 3% for the fiscal year, below the assumed rate of return, though the market has significantly rebounded since the summer.
  • The SCERS Board adopted new assumptions earlier this year, reducing our long-term investment rate of return from 7% to 6.75%. This means SCERS expects investment returns in future years to be slightly lower than what was previously expected. The low-inflation environment is driving the assumption change.
• Contribution rates are planned to increase modestly in July 2021 by 2% of payroll on average for employers and 0.8% on average for employees, though the detailed rates will vary by employer and member retirement tier.

Here’s the big picture: SCERS remains in very good shape and continues on a strong path. 

We have good years and bad years for investments that, over time, even each other out. In fact, only 6% of the annual payment for unfunded liabilities is tied to recent investment underperformance. More than half of the unfunded liability is still tied to pre-2012 events: benefit enhancements that increased liabilities followed by the financial crisis that severely impacted assets. 

Since then, SCERS has built back the fund and made conscientious decisions to tighten up the assumptions we use in our funding model to keep our plan solvent and healthy for decades. 

Importantly, more than 40% of the unfunded liability is actually due to assumption changes adopted by the Retirement Board that better take into account variables such as increased lifespans/longevity for our members and a more prudent investment outlook.

The valuation report can be found here.

The summary contribution rates can be found here.