Investment Return Volatility and the Pennsylvania Public School Employees’ Retirement System

Source: Yimeng Yin and Donald J. Boyd, Nelson A. Rockefeller Institute of Government, Pension Simulation Project Policy Brief, August 2017

The Rockefeller Institute of Government released a report that examines the potential implications of investment return volatility for the Pennsylvania Public School Employees’ Retirement System (PSERS) using the Institute’s state-of-the-art Pension Simulation Model. It also examines the implications of a recent reform that created a hybrid pension plan for new employees. PSERS was selected for study as part of the Rockefeller Institute of Government’s ongoing analysis of risks related to public pension systems.

PSERS is a defined benefit retirement plan for public school employees of the Commonwealth of Pennsylvania. The state and individual school districts are participating employers. As of June 30, 2016, PSERS had over 257,000 active members and approximately 225,000 retirees and other beneficiaries who receive over $476 million in pension and health care benefits each month. PSERS has an uncommon approach to funding under which some employees share partially in the plan’s investment risk, in certain circumstances.

PSERS is deeply underfunded and faces greater challenges than other pension funds we have examined recently. At the end of the 2016 fiscal year, it had a market-value funded ratio of 50 percent and an unfunded liability of approximately $50 billion.

PSERS currently uses a 7.25 percent earnings assumption. Recently it has fallen short of this assumption: its one-year, three-year, five-year, and ten-year annualized rates of return were 1.29 percent, 6.24 percent, 6.01 percent, and 4.94 percent, respectively, for periods ending on June 30, 2016.

In an effort to improve the overall fiscal health of the fund and reduce risks to employers, Pennsylvania lawmakers recently changed the retirement benefit structure available to new state employees. New members of PSERS hired on or after July 1, 2019, will be offered three options for retirement benefits: two hybrid benefit options that include a defined contribution component in addition to a defined benefit component, and a pure defined contribution option. The defined benefit options will provide lower benefits than the current defined benefit plan for existing workers.

The reform is intended to shift part of the funding risk, which is almost entirely borne by the state and school districts under the current defined benefit structure, to new employees…..