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​COVID-19 and Its Impacts to the Washington State Retirement Systems

The Office of the State Actuary (OSA) has curated this content in order to help interested parties understand how COVID-19 may impact Washington State retirement systems. Also see the Inside Olympia interview with the State Actuary, Matt Smith.

Content will be updated as this situation evolves and as we complete up-to-date analysis, such as when 2020 Fiscal Year investment returns are known in the fall. It is important to note that actuarial work takes time and the full scale of the impacts will not be known until many months in the future.

EXECUTIVE SUMMARY

This webpage provides education on the following topics:

  • How the Pandemic Impacts Pensions
  • Pension Plan Health Prior to COVID-19
  • Investment Returns and Asset Smoothing
  • Timeline on COVID-19 Impacts to Pension Systems
  • General Policy and Risk Considerations; and
  • Stress Tests

In summary, COVID-19 will most likely impact our state pension systems by reducing investment returns below expectations and reducing the revenue available to meet contribution requirements. Fortunately, our state has many factors working in our favor as we respond to COVID-19. Our state pension plans entered 2020 in a relatively good position with a forecasted decline in contribution rates prior to COVID-19 and with $4.4 billion of deferred asset gains, in total, at June 30, 2019. In addition to these deferred asset gains that will dampen future contribution rate increases, we also have time lags built into our standard funding cycle that will delay the initial contribution rate impacts of COVID-19 until the start of the 2023 25 Biennium under current law.

Despite all these positive factors, required contributions for our state pension systems may come at a time when employers’ financial resources are limited. If required contributions are deemed unaffordable, the Legislature may provide short-term funding relief. The basic policy decision (or tradeoff) rests with the choice of paying for pensions now or paying more for pensions later.

If the choice is to pay more later, the ultimate costs will depend on the duration and magnitude of the funding relief (underfunding) along with any additional funding requirements due to a market downturn from COVID-19. In the stress testing we performed in this area, we found that our systems appear to be in a good position to weather a certain level of short-term underfunding in absence of a market downturn. However, we observe that poor investment experience, especially when coupled with underfunding, does markedly decrease plan solvency and markedly increase future funding requirements. We recommend additional actuarial analysis for any policy option that addresses the short-term affordability of the retirement systems in response to COVID-19.

See the following sections for more details on these topics.

HOW THE PANDEMIC IMPACTS PENSIONS

Generally, the word “pandemic” doesn’t stir up thoughts of pensions but, like most other sectors, the downstream impacts will certainly be felt here too.

Pensions are funded through investment returns and contributions. As outlined in Commentary on Risk, pension funding is significantly influenced by investment returns which historically have comprised approximately 70 percent of plan funding in our state. The other 30 percent of funding has come from annual contributions from plan members and their employers.

Investment returns that do not meet long-term expectations have financial impacts on the retirement systems. The extent of the financial impacts are dependent on how far the actual investment returns deviate from expectations. The financial impacts due to COVID-19 have been significant and are still evolving. Poor market performance is expected in Fiscal Year 2020 and could extend to future years. The negative investment experience will noticeably impact the amount of funds available to pay out future benefits, funded statuses of plans, and raise contribution requirements.

Furthermore, the ability to pay the contribution requirements is dependent on state and local government revenue. Due to the lockdown put in place to mitigate the spread of COVID-19, and the potential for a significant drop in consumer confidence, the amount of revenue collected is expected to fall significantly short of the revenue forecasts published before the pandemic. This may create a situation where more contributions are required during a time when they are least affordable.

It is hard to say today just how far reaching the COVID-19 impacts will be on pension funding including the more subtle changes to factors such as retirement behavior, salary growth, Cost Of Living Adjustment (COLA)s, and life expectancy. Fortunately, pension plans are funded over a very long time period and engineered to be less reactive to current climates. This funding design gives contributing members and employers time to prepare for any increases in funding requirements and legislators and local government leaders time to prepare for the impacts in budget planning.

PENSION PLAN HEALTH PRIOR TO COVID-19

The Washington State retirement systems entered 2020 in a relatively good position due to two main factors.

  1. The Legislature recently made a commitment to reach full funding by adopting historically high contribution rates over the past few biennia. Over the short-term this led to lower affordability (as defined in our 2019 Report on Financial Condition However, it allowed for a phase-in of new assumptions that more closely match expectations for the future, including lower assumed investment returns and longer assumed lifespans. In addition, it assisted the lower funded plans to recover from past periods of funding shortfalls.

  2. High investment returns experienced over the past few years helped. Not all assets are recognized immediately under the current funding policy, so some asset gains were deferred to future years. As of the preliminary 2019 valuation, there were 4.4 billion dollars, or 4 percent of total assets, in deferred investment gains.

The combination of these factors led to a forecasted decline in contribution rates prior to COVID-19 impacts. These factors will still be present going into the pandemic and will help partially offset increases in contributions rates and reduce the impacts on plan solvency.

As of the 2019 preliminary Actuarial Valuation Report (AVR), with a June 30, 2019, measurement date, all open plans are more than 90 percent funded. The closed PERS and TRS Plans 1 are between 60-70 percent funded with a plan in place to reach full funding by 2030 if all assumptions are realized and all required future contributions are made.

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It can be difficult to fully grasp how the projected financial state of the retirement systems may look due to COVID-19 impacts without first examining the history and current status.

The Washington State retirement systems entered Fiscal Year 2020 with employer contribution rates that have steadily increased since the 2009-10 Biennium. Pension costs have become a larger part of the state budget and, likewise, the estimated General Fund-State (GF-S) pension contributions as a percent of GF-S budget has increased each year since 2005. However, the pension systems were in a comparatively good health going into the pandemic with all projections, prior to COVID-19 impacts, showing a decrease in future contribution rates. Past funding history can help explain why this is.

When an individual is saving for retirement, they have three main factors to consider:

  1. How much money is needed for their future retirement;
  2. How much money is already in savings; and
  3. How much should be contributed each month in the future to reach their target.

Individuals not able to adequately contribute to their retirement fund during their 20s or 30s are forced to play catch up later. Others might realize closer to retirement that increasing prescription costs or a desire to travel make retirement expenses higher than originally planned.

Pensions work under a very similar format. When evaluating a pension system:

  1. Assumptions are made about the amount of future benefits to be paid out based on factors such as salary growth, life expectancy, and retirement behavior;
  2. Assets are evaluated to determine how much of the future benefits are expected to be covered by current savings plus expected future investment returns; and
  3. Contribution rates are set to achieve future full funding.

Like an individual realizing they originally underestimated the cost of retirement, contribution rates increased in response to the adoption of new assumed mortality rates as part of the 2007 12 Demographic Experience Study. Those new rates reflected increasing lifespans and more accurately predict the amount of benefits that are expected to be paid out over a lifetime. The Legislature elected to phase in the higher contribution rates over three biennia.

Additionally, like an individual playing catch-up during their 50s, employers are currently paying an Unfunded Actuarial Accrued Liability (UAAL) rate for PERS and TRS Plans 1. A general goal of pension plan funding is to fully fund benefits during a worker’s career. When this isn’t achieved, additional funds are required to cover both contribution shortfalls and any lost investment returns. Due to these payments, both the PERS 1 and TRS 1 UAAL rates are declining towards the Plan 1 UAAL rate floor. Once there, the minimum rate is collected, under current law, until full funding occurs.

The Legislature’s commitment to fully funding the pension systems by adopting full normal cost and UAAL rates for most systems decreases the chance of falling into the cycle of funding shortfalls due to COVID-19 impacts. This cycle is demonstrated in the graphic below.

Funding Shortfall

Assumptions aligning closer to future expectations, including longer assumed lifespans and lower investment returns, and the catch-up from prior periods of underfunding put the retirement systems in a better position to weather the COVID-19 impacts. These practices have also led to the historically high contribution rates that, presumably, had reached their peak as outlined in the projection below, developed before COVID-19 impacts.

Pension Contributions

These past practices are also reflected in the higher funded statues of the plans going into the pandemic. As of the 2019 preliminary AVR,

  • All public safety plans were at least 100 percent funded, except for WSPRS at 95 percent.
  • All of the open, non-public safety plans were at least 90 percent funded.
  • Only PERS and TRS Plans 1 remain less than 70 percent funded, but greater than 60 percent funded.

The other major component leading to increased funded statuses, and lower projected contribution rates, was the positive market experience over the past few years which exceeded assumptions. As of the preliminary 2019 valuation, there were 4.4 billion dollars in deferred investment gains. These deferred gains will help cushion some negative impacts due to COVID 19. The following section, INVESTMENT RETURNS AND ASSET SMOOTHING, will outline how investment gains and losses are deferred under the current asset smoothing method and how it helps with contribution rate volatility.

In summation, the incorporation of assumptions that more accurately project what is expected to occur, the adoption of historically high contribution rates over the past few years, and the deferral of past asset gains all served to help protect the Washington State retirement systems from becoming unaffordable or increasing solvency risk to potentially unacceptable levels due to the pandemic.

For more detailed information on the financial condition of the Washington State retirement systems, please see the 2019 Report on Financial Condition. For the latest plan metrics, please see the Pension Funding Valuations. Information on actuarial cost methods, and how rates are developed, can be found in the Actuarial Methods.



INVESTMENT RETURNS AND ASSET SMOOTHING

The current asset smoothing method helps limit immediate contribution increases due to the lower than expected investment returns caused by COVID-19 impacts in two ways: deferred gains prior to the pandemic and distributing any losses that follow over time.

  1. Leading into the current market decline, the CTF had consistent positive experience since the great recession. As of the June 30, 2019, AVR, preliminary assets for all plans had investment gains being deferred, totaling 4.4 billion dollars or 4 percent of total assets. As discussed in the PENSION PLAN HEALTH PRIOR TO COVID-19 section, future contribution rates were expected to decline under our assumptions before the pandemic due in part to these deferred investment gains.

  2. Any investment losses that follow will be deferred for up to an eight-year period when determining future contribution rates and funded status. As a result of this asset smoothing method, the plans will recognize a minimum of 1/8 of the loss in any single year.

To put the current amount of deferred asset gains prior to the pandemic in perspective, we can compare two funded status measures: one using the Actuarial Value of Assets (AVA) and one using the Market Value of Assets (MVA).

We can rely on the preliminary June 30, 2019, funded statuses of the plans to make this comparison. Based on that preliminary measurement, the total funded status of all plans under the AVA, or smoothed assets, is 92 percent. The same metric increases to 96 percent using the MVA.

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Investment returns are a key funding component for Washington State retirement systems. As outlined in Commentary on Risk, pension funding is significantly influenced by investment returns which historically have comprised approximately 70 percent of plan funding in our state. The other 30 percent of funding has come from annual contributions from plan members and their employers.

Historical Pension Fund

A 7.5 percent annual return on investment is assumed for every year in the future when calculating contribution requirements (7.4 percent for LEOFF 2). When actual returns fall below or above of the assumed 7.5 percent, funding requirements based on a single point-in-time measurement can be heavily impacted.

Investment Returns

Impacts due to fluctuations in the market can run counter to the funding goals set forth by the Legislature for stable, predictable contribution rates. In order to help achieve this goal during market swings, Washington State retirement systems use an asset smoothing method when calculating contribution rates. Asset smoothing defers the recognition of the difference between actual and expected annual investment returns over a period not to exceed eight years. As outlined in the Actuarial Methods, actual returns that are more than 7 percent lower or higher than our assumption get deferred over 8 years.

The Actuarial Value of Assets (AVA), or smoothed value of assets, equals the Market Value of Assets (MVA) less the total deferred investment gains and losses at the valuation date. The AVA must fall within 70 and 130 percent of the MVA. This method helps smooth the assets used to calculate contribution rates, thereby also smoothing the contribution rates. If the market value was used, contribution rates would be volatile like the market. The graphic below outlines how the AVA follows the MVA without being overly reactive to market swings starting with its adoption in Fiscal Year 2004 shortly after the dot-com bubble.

Comparison MVA AVA

As of the preliminary 2019 AVR, the AVA made up 96 percent of the MVA. In other words, while the MVA was 100.3 billion dollars, the AVA was 96.0 billion with 4.4 billion dollars in asset gains.

These 4.4 billion dollars in asset gains, or 4 percent of total assets, will help offset some of the losses that come with market returns below our assumed 7.5 percent (7.4 for LEOFF 2) due to COVID-19 impacts. Additionally, any investment losses that follow will be deferred for up to an eight-year period when determining future contribution rates and funded status. As a result of this asset smoothing method, the plans will recognize a minimum of 1/8 of the loss in any single year. These coupled factors will help mitigate the future impacts from a sudden market decline.

Furthermore, there are deliberate and natural time lags built into funding cycles that allows stakeholders time to prepare for adverse experience as discussed in the next section.



TIMELINE ON COVID-19 IMPACTS TO PENSION SYSTEMS

Predictable and stable contribution rates are one of the funding goals for the Washington State pension systems. This means, by design, the systems are not as reactive to current economic conditions with deliberate and natural time lags in the funding cycle. To understand when COVID-19 may start to impact contribution rates, one can look at the typical rate setting process over three biennia.

Contribution Rate-Setting Process

As illustrated above, under the standard rate-setting process, the impacts from COVID-19 will not start to be incorporated in employer and Plan 2 member contribution rates until the 2023-25 Biennium subject to any changes made by the Legislature. Additionally, the more subtle changes that impact funding, such as long-term changes in salary growth or retirement behavior that may emerge, may not be fully captured until well beyond the 2023-25 Biennium.

This delay in increased funding requirements due to COVID-19 combined with the asset smoothing described above gives stakeholders time to prepare and makes it more likely that any increased funding requirements will begin during a recovery period rather than the downturn.

Additionally, not all members will be impacted by changes to the calculated contribution rates. For instance, members of Plan 1 have a fixed 6 percent contribution rate and members of Plan 3 make defined contributions to their personal retirement accounts.

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Changes in employer and Plan 2 member contribution rates fall into one of three categories and the category informs how quickly the cost or savings materialize.

  1. Updating plan experience. All funding is based on long-term assumptions. When short-term plan experience is different from our assumptions, it results in a cost or savings to the plan. For example, if Fiscal Year 2020 and 2021 investment returns fall below our expectations then this may result in a contribution rate increase. We may observe other short-term changes in experience to materialize such as changes in salary, retirement behavior, cost of living adjustments, and longevity.
  2. Updating assumptions. COVID-19 may have impacts that go beyond the next year. Long-term economic assumptions are studied once every two years and demographic assumptions are studied once every six years. A paradigm shift caused by COVID-19 could result in new expectations for the future and updated long-term assumptions.
  3. Change in member benefits or funding. Any contribution rate adoption by the Pension Funding Council (PFC) or LEOFF 2 Board is subject to change by the Legislature. Additionally, new legislation may be passed changing member benefits. When these changes are incorporated into contribution rates is largely up to the discretion of the lawmakers. However, changes in benefits typically result in supplemental rates in September of the same calendar year as described in the Contribution Rate-Setting Page.

Any immediate COVID-19 impacts in the first category will be incorporated more quickly than changes in the second category. However, both categories will be reflected in rates through an actuarial valuation report.

Every actuarial valuation uses a measurement date, or valuation date. As the name would imply, all the information contained within the valuation is measured using data and assets as of that specific date, usually June 30. For example, the 2019 Actuarial Valuation Report was based on financial and plan membership data as of June 30, 2019. From there, all plan assets and liabilities, using the most recent assumptions, are compiled to calculate an actuarially determined contribution based on current funding policy.

These calculated contribution rates are presented, along with the recommendation from the Select Committee on Pension Policy (SCPP), about a year after the valuation date to the PFC and LEOFF 2 Board. The PFC and LEOFF 2 Board then adopt rates for the following biennia – a full two years after the measurement date. The graphic below illustrates the full process during a rate-setting year.

Rate Adoption Process During Even Numbered Years
Rate Adoption Process

Using this standard cycle, COVID-19 impacts will be reflected in the data and assets starting June 30, 2021 (for example., changes that fall into the first category as outlined above). This will flow into the 2021 AVR to be completed by the summer of 2022, when the PFC and LEOFF 2 Board adopts rates for the 2023-25 biennium.

Please see our Contribution Rate-Setting Page for more details on this timeline and our Education Page for more information on Washington Plan Governance.

Some impacts due to COVID-19, including assumption changes that fall into the second category above, may not be incorporated for many biennia in the future. Examples of the more subtle impacts include long-term changes in salary growth and life expectancy that determine the amount of total lifetime benefits a member receives. We may see retirements being pushed back and fewer new hires for many years. There could be extended changes in inflation that impact the cost-of-living tied to the COLAs retirees receive every year. Federal spending and additional debt to support the economic recovery from COVID-19 could depress future interest rates and dampen long-term economic growth.

These more long-term impacts will be analyzed during future studies and assessments conducted on a cyclical basis. Any changes to assumptions will be incorporated as part of the valuation cycle outlined above. The table below outlines the studies and valuations we conduct, when, and their purpose.

Cyclical OSA Studies/Valuations
Report Title Purpose Frequency Next Publication*
Actuarial Valuation Report (AVR) Determine contribution requirements based on the funding policy established by the Legislature. It also provides information on funding progress and developments in the plans over the past year. Every one to two years Summer of 2020
Report on Financial Condition (RFC) Study on the financial health of the Washington State retirement systems. Every two years Fall of 2021
Economic Experience Study (EES) Study on economic assumptions including investment return, general salary growth, and inflation. We compare our economic assumptions to actual economic experience and consider future expectations. Studied at the same time as RFC Fall of 2021
Demographic Experience Study (DEXTER) Study on demographic assumptions including mortality and retirement behavior. We compare our demographic assumptions to actual experience and consider future expectations. Every six years Summer of 2020**
Risk Assessment** Demonstrate and assess the effect of unexpected experience on pension plans. Every one to two years Winter of 2020
Risk Assessment Assumption Study (RAAS)** Review assumptions used for on-going risk assessments. Some of these assumptions include population growth, future benefit improvements, real wage growth, and nominal revenue growth. Once every six years Fall of 2022

*Subject to change

**Excludes COVID-19 impacts. Next study will be completed in 2026.

**Not used for funding purposes



GENERAL POLICY AND RISK CONSIDERATIONS

As illustrated in prior sections, the Washington State retirement systems have many factors to help counteract the negative impacts of COVID-19. The pension systems were in relatively good health entering the pandemic, the asset smoothing method in place will help mitigate contribution rate swings due to poor market experience, and there are time lags in the typical rate setting process that allows time to prepare. Despite these factors, required contributions may come at a time when employers’ available financial resources are limited. If required contributions are deemed unaffordable, the Legislature may provide funding relief. Typically, this results in lower pension contributions than required for full funding. Lowering pension contributions today will help with short-term affordability but it comes with long-term costs.

At the most basic level, decision makers must ask themselves if they would like to pay for pensions today or pay more for pensions later. If the choice is made to pay more later, the ultimate costs will be determined by the duration and magnitude of the underfunding along with any additional funding requirements due to a market downturn from COVID-19. Under a best-case scenario, short-term underfunding can lead to manageable increases in future pension costs and a modest short-term decline in the overall health of the pension systems. Under a worst-case scenario, chronic and significant underfunding can lead to unaffordable and ultimately insolvent pension systems. Risk management supported by actuarial analysis can support informed decisions in this area.

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As of our latest measurement, GF-S pension contributions made up approximately 6 percent of current GF-S budget, excluding higher education. In an unofficial update to the state’s revenue forecast, shared by the Office of Financial Management, the state’s chief economist projected revenue collections over the next three fiscal years will be about $7 billion lower than was forecast in February 2020. Given this revenue shortfall, there is an increased risk for pension contribution rates to become unaffordable for the state.

Local government revenue collections have also been negatively impacted by COVID-19. In addition to the state, there is an increased risk for pension contribution rates to become unaffordable for participating local government employers.

If the legislature decides to lower contribution requirements from employers, it will provide some relief in their budgets. However, this will result in longer-term costs. Historically 70 percent of the pension fund used to pay benefits in this state is from investment returns. As discussed in the PENSION PLAN HEALTH PRIOR TO COVID-19 section, past underfunding is partially why contribution rates are at a historically high rate today. Making up both missed contributions and lost investment earnings those contributions can be very costly in the long run. For example, if assumptions are correct, it is similar to taking a loan with a 7.5 percent annual interest rate.

Furthermore, the downstream impacts of COVID-19 may necessitate additional funding in isolation of costs due to any contribution shortfalls. As discussed in the INVESTMENT RETURNS AND ASSET SMOOTHING section, lower than expected investment returns will also increase future contribution requirements. Long-term affordability of the pension systems could deteriorate to an unsustainable level when underfunding is coupled with unexpected additional costs.

In order to balance short-term relief with long-term impacts, three steps should be taken.

  1. Identify potential costs and risks in both the short and long term before adopting any short-term relief,
  2. Closely monitor the status of the pension systems during the relief period, and
  3. Increase contribution requirements in a timely manner, if necessary.

These steps will help avoid creating unaffordable or unsustainable pension plans. Additionally, if funding relief is provided during bad economic times, employers and Plan 2 members should be prepared for the opposite during the recovery period in order to maintain the good overall financial health of the pensions systems. If these actions are not performed, the options available during the next economic downturn will be more limited and there is an increased chance of falling into the cycle of underfunding as outlined in the section PENSION PLAN HEALTH PRIOR TO COVID-19.


STRESS TESTS

There are several methods for measuring or assessing risk. One such method, a stress test, assesses the impact of an adverse change in one or relatively few factors affecting a plan’s financial condition. A stress test can be used to determine how reactive key measurements of the retirement systems are to adverse changes in areas likely impacted by COVID-19. They are not predictive and should not be used to determine future plan costs or health. We recommend additional actuarial analysis for any policy option that addresses the short-term affordability of the retirement systems in response to COVID-19.

For this section, we selected four tests in increasing severity for illustration. In these tests, we evaluated the change in long-term contributions (affordability) and change in funded status (solvency) from the baseline case. Please note that these tests are not our prediction for what will take place in the future.

  1. A short-term period of underfunding (i.e., adopting contribution rates below those determined for full funding).
  2. A short-term market downturn (i.e., lower-than-expected investment returns).
  3. The combination of short-term underfunding and market downturn.
  4. A prolonged period of poor investment returns and underfunding without an adjustment to the assumed long-term rate of return.

In summary, each stress test above will lead to an increase in plan cost, but we found that Test 1, in isolation, can largely be counteracted by current deferred asset gains to prevent a decline in pension plan health metrics. However, this would only happen if the assumed rate of return is realized all years in the future. Those mitigating factors [see the Investment Returns and Asset Smoothing section] are overcome when we introduce a short-term market downturn in Test 2. Poor short-term investment returns, especially when coupled with underfunding, leads to notable increases in required contribution rates and decreases in funded ratios in Test 3. We observe the highest negative impacts to contribution rates and funded ratios when there is a prolonged period of poor investment returns, underfunding, and no change to the assumed long-term rate of return in Test 4.

The above stress tests are for illustrative purposes and do not consider a “bounce back period” that typically occurs following a period of negative market returns. Under a bounce back period, we would see a period of higher-than-expected investment returns following the lower-than-expected returns we modeled in Tests 2-4 above.

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Detailed Description of Stress Tests
Base Plan metrics based on 2019 AVR (pre COVID-19 impacts)
Test 1 75% of Actuarial Required Contributions (ARC) in 2021-23 Biennium
Test 2 Investment returns of 3% and -10% in Fiscal Year 2020 and 2021, respectively
Test 3 Test 1 + Test 2
Test 4 Test 2 + Four additional biennia through June 30, 2029, of 6.5% returns with 75% of ARC and no change to the assumed long-term rate of return

All remaining assumptions in these tests are consistent with those outlined in our 2019 AVR and projection disclosures. These tests are based on current funding policy and follow the TIMELINE ON COVID-19 IMPACTS TO PENSION SYSTEMS.

The magnitude of the impact under each test will vary by retirement system, but the key measurements will all change in the same direction (i.e., where applicable, funded ratios will decrease for all systems). Below is an overview of how projected funded ratios will change for all systems combined under each test. A funded ratio is one way to measure plan health and it compares the plan’s assets to the actuarial accrued liability of its members. A funded ratio of below 100 percent represents a deficit of plan assets to cover expected earned plan benefits.

All Systems Combined Funded Ratio

Note: Total funded ratio exceeds 100% under our base projections because LEOFF 1 is over 100% funded and the funding policy for LEOFF 2 can lead to funding ratio in excess of 100%. All other plans’ funding policies target a funded ratio of 100%.

As illustrated above, the short-term underfunding modeled under Test 1 doesn’t introduce a substantial change to long-term plan health in the absence of a market downturn. This is largely due to the counteracting factors described in PENSION PLAN HEALTH PRIOR TO COVID-19 that are contributing to an increase in future funded ratios. However, we observe that poor investment experience, especially when coupled with underfunding, does markedly decrease plan funding. This is particularly noticeable under the prolonged stress test (Test 4) where the combined funded ratio drops to as low as 75 percent.

Stakeholders may be interested in how this impacts long-term plan cost and the overall affordability of the plans. The table below highlights the estimated total budget impacts (the estimated increase above baseline costs) under each stress test over a 25-year period. These budget impacts include any savings associated with short-term funding relief (underfunding).

Estimated 25-year Budget Impacts

To provide context in how affordability is impacted under each test, we provide the GF-S impacts relative to the projected GF-S budget as a whole over the next 25 years.

Estimated Percentage Total 25-year GF-S Budget

So far, we have shown how the aggregated retirement systems react to stress tests in the areas of funded status and future long-term contribution requirements. However, we note that each retirement system has unique characteristics that changes how they react to new environments and these stress tests. We note some of the key differences below:

  • Under current funding policy, an increase to the PERS and TRS Plans 1 UAAL will typically result in an extension of the pay-off date rather than an increase in short-term UAAL rates. For example, if current funding policy is continued, the PERS 1 UAAL will be paid off in Fiscal Year 2034 under Stress Test 4 rather than 2027 as projected using the 2019 AVR as a base. Likewise, the TRS 1 UAAL will be paid off in Fiscal Year 2031 rather than Fiscal Year 2025.
  • WSPRS and TRS employers experience a higher cost burden under poor environments because WSPRS and TRS Plan 2 employees have maximum contribution rates set in statute. The employee maximum rate only increases with benefit improvements and not with assumption changes or plan experience. Once the maximum employee rates are reached, all remaining cost that would normally be shared 50/50 will be shifted to the employers.
  • LEOFF Plan 1 and 2 experience no increase in costs under some of these stress tests. Both plans currently have a funded ratio above 100 percent. This means the plans can experience a degree of adverse deviation from expectations and still pay out all earned benefit payments without increasing plan contributions.
  • Plan Size and Maturity will also determine how reactive the retirement systems’ metrics are to change. Typically, the smaller and more mature plans experience more volatility in contribution requirements. For example, WSPRS experienced a more sizeable change in required contribution rates than the larger PERS system under these stress tests. On the other hand, PSERS did not experience as large of an impact compared to other systems because it is a younger plan (i.e., members have less earned service credit than the more mature systems). Please see Commentary on Risk for more information around plan maturity measures.

Ultimately, the future funded status and costs for each system will depend on a multitude of factors and actual future events. As a result, future funded status and costs will likely look very different from any of these stress tests. However, these tests illustrate that short-term stresses appear more manageable than periods of prolonged underfunding or below-expected investment returns. We recommend additional actuarial analysis for any policy option that addresses the short-term affordability of the retirement systems in response to COVID-19.

Please see the actuarial certification letter for additional information and disclosures related to the material contained within this section.


ADDITIONAL RESOURCES

Plan members looking for more information related to their retirement benefits should visit the Department of Retirement Systems.

More information regarding Commingled Trust Fund returns and the most recent investment reports is available through the Washington State Investment Board.

The Washington State Economic and Revenue Forecast Council provides information on the latest revenue forecasts.

Additional educational resources and actuarial measurements for Washington State pensions of interest may include: