The following information was supplied by Agency 338 - Pension Review Board:
ACTUARIAL EFFECTS
The bill would increase the unfunded actuarial accrued liability for the Teacher Retirement System of Texas (TRS) by approximately $4 million.
The actuarial review states under the current PRB Pension Funding Guidelines, funding should be sufficient to cover the normal cost and to amortize the unfunded actuarial accrued liability (UAAL) over as brief a period as possible, but not to exceed 30 years, with 10 to 25 years being the preferable target range. TRS statute defines actuarial soundness, for purposes of making modifications to benefit and contribution levels, as no more than 31 years. TRS is currently actuarially sound. The bill would have no material impact on the soundness of the fund.
SYNOPSIS OF PROVISIONS
The bill would change retirement eligibility for peace officers by removing previous changes put in place for TRS members with less than five years of service as of August 31, 2014, or who were hired afterward. The change is a reduction in the earliest unreduced retirement age from 62 to 60.
Currently, members with less than five years of service as of August 31, 2014, or who were hired on or after September 1, 2014, receive unreduced retirement benefits if they are either age 65 at retirement with five years of service or at least age 62 with age plus service totaling 80 or more.
After bill enactment, such members would receive unreduced retirement benefits if they were either age 65 at retirement with five years of service or at least age 60 with age plus service totaling 80 or more.
The bill would take effect September 1, 2023.
FINDINGS AND CONCLUSIONS
The actuarial analysis states there would be 4,300 members who would receive enhanced retirement eligibility under the bill. It notes the change is economically meaningful for the current impacted members but, because the group is small, the aggregate impact to TRS is minimal. However, if future proposals were to change the retirement conditions in a similar way for other, larger groups, there would be a more significant impact.
METHODOLOGY AND STANDARDS
The TRS analysis relies on the participant data, financial information, benefit structure and actuarial assumptions and methods used in the TRS actuarial valuation for February 28, 2023. According to the PRB actuary, the actuarial assumptions, methods and procedures are reasonable for the purpose of this analysis. All actuarial projections have a degree of uncertainty because they are based on the probability of occurrence of future contingent events. Accordingly, actual results will be different from the results contained in the analysis to the extent actual future experience varies from the experience implied by the assumptions. This analysis is based on the assumption that no other legislative changes affecting the funding or benefits of TRS will be adopted. It should be noted that when several proposals are adopted, the effect of each may be compounded, resulting in a cost that is greater (or less) than the sum of each proposal considered independently.
SOURCES
Actuarial Analysis by Joseph P Newton, FSA, and Dana Woolfrey, FSA, EA, MAAA, Gabriel, Roeder, Smith & Company, March 24, 2023.
Actuarial Review by David Fee, ASA, EA, Staff Actuary, Pension Review Board, March 25, 2023.
GLOSSARY
Actuarial Accrued Liability (AAL) -The current value of benefits attributed to past years.
Actuarial Value of Assets (AVA) - The value of assets used for the actuarial valuation. The AVA can be either the market value (MVA) or a smoothed value of assets.
Amortization Payments - The portion of the total contribution used to reduce the unfunded actuarial accrued liability (UAAL).
Amortization Period - The specified length of time used when calculating the amortization payment portion of an actuarially determined contribution, or as the time it would theoretically take to fully fund the UAAL or fully recognize a surplus. The State Pension Review Board recommends that funding should be sufficient to cover the normal cost and to amortize the UAAL over as brief a period as possible, but not to exceed 30 years, with 10-25 years being the preferable target range.
Actuarial Cost Method -An actuarial cost method is a way to allocate pieces of a participant's total expected benefit to each year of their working career. In other words, it is a technique to determine how much of the present value of future benefits (PVFB) to assign to past service (AAL) vs. future service (present value of future normal costs, or PVFNC).
Funded Ratio (FR) - The ratio of actuarial assets to the actuarial accrued liabilities.
Market Value of Assets (MVA) - The fair market value of the system's assets.
Normal Cost (NC) - Computed differently under different actuarial cost methods, the normal cost generally represents the current value of benefits attributed to the present year. The employer normal cost equals the total normal cost of the plan reduced by employee contributions.
Present Value of Future Benefits (PVFB) - The current value of all benefits expected to be paid from the plan to current plan participants.
Present Value of Future Normal Costs (PVFNC) - The current value of benefits attributed to the present year and all future years (includes the normal cost as the first year).
Unfunded Actuarial Accrued Liability (UAAL) - The difference between the actuarial accrued liability and the actuarial value of assets; therefore, the UAAL is the amount that is still owed to the fund for past obligations.