Keith Ambachtsheer responds to an article on the negotiations by CalSTRS’ outgoing chief executive, Jack Ehnes, to achieve fully funded status by 2046.
I was surprised to see the recent article titled “CalSTRS’ CEO achieved fully-funded status”.
In fact, CalSTRS’ own 2020 funding report states that its DB plan is only 70 per cent funded using an aggressive 7 per cent liability discount rate. The funded ratio would drop to 55 per cent if a more realistic 5 per cent discount rate were used. In comparison, Ontario Teachers’ Pension Plan reported an almost double 103 per cent funded ratio with a 5 per cent liability discount rate at the end of 2020.
It is true that CalSTRS reached agreement in 2014 with California employers and the State to target 100 per cent funded status for the DB plan by 2046 by making additional contributions.
While this agreement clearly represents progress, its importance is easily overstated for two reasons.
The first is the assumption that fund assets (including the additional contributions) will earn an aggressive net investment return of 7 per cent per year over the next 25 years.
The second is that the agreement will actually stay in place that long. While this is not impossible, many things can happen over a 25 year period, including in the State of California. For example, a recent CalSTRS review document noted that California employers and the State are looking for COVID-related relief from making additional CalSTRS contributions.
Despite this problem and possible future ones, the CalSTRS report noted somewhat hopefully “we still expect to make progress towards full funding”. However, its authors clearly recognise there can be material gaps between hope and subsequent reality.
I thought your readers might appreciate this additional information on CalSTRS’ funded status.
Director Emeritus, International Centre for Pension Management, Rotman School of Management, University of Toronto and President, KPA Advisory Services Ltd.