Pension System Actuarial and Investment Strategies Trending Favorably

Date: Mar 20, 2014


There is no shortage of news media coverage focused on how public pension funds, in California and across the country, are yielding significant investment returns while simultaneously growing liabilities even faster. A UT opinion-editorialist recently posed the question, “How can an investor earn at such a healthy rate yet develop such an unhealthy deficit?”

The author suggested two questions that plan sponsors and trustees should ask themselves to determine if a plan is in danger of developing an unhealthy deficit. SDCERS long ago asked itself these same questions and implemented a series of actuarial practices and funding strategies to reduce unfunded liabilities and ensure the long-term health of the system.

The first question is, are pension liabilities (benefits owed) growing faster than pension assets (contributions plus earnings)? Over the past 10 years, SDCERS’ actuarial assets have grown at an annualized rate of 8.4 percent, compared to actuarial liabilities at 7.9 percent. As of June 30, 2013, SDCERS’ 10-year and 25-year annualized investment returns, both which include periods of high market volatility and two major market downturns, totaled 8.1 percent and 9.1 percent. In November 2013, SDCERS’ investments surpassed the $6.5 billion milestone -- the highest level in system history.

Throughout that same ten year period, the Board of Administration put in place a series of policies designed to significantly strengthen the funding of the plan, including lowering the discount rate three times.  Despite these policy changes, which have increased actuarial liabilities, SDCERS’ assets have still grown at a faster percentage. Of course, it will take several years of sustained asset growth higher than liability growth to work off the pension deficit, but recent trends are encouraging. SDCERS’ 2013 calendar year results were also strong, earning 17.1 percent (net of fees) with asset growth of more than $900 million.

The second question is, how do actual contributions compare to the recommended actuarially determined contributions? SDCERS’ three plan sponsors - the City of San Diego, the San Diego Unified Port District, and the San Diego County Regional Airport Authority - have met or exceeded the Actuarially Determined Contribution (ADC) for the past nine years.

Pension funds rely on a combination of investment returns and contributions from employers and employees to pay benefits. On an annual basis, actuaries determine a contribution that, when combined with investment earnings, will meet current and future pension obligations. When these recommended contributions are not made, or not fully made, pension deficits rise. When contributions are paid in a timely manner, as they have by SDCERS’ sponsors, the unfunded liability is lowered and eventually paid off.

The SDCERS Board of Administration is doing an outstanding job managing the actuarial and funding affairs of our three plan sponsors, with disclosures that rival any pension plan in California. And while the City of San Diego’s pension plan is not out of the woods, the funding ratio is now above 70 percent and has been climbing every year of the past four years. SDCERS administered plans are financially sound and well-positioned to administer benefits to current and future retirees for decades to come.

The following two charts, provided in the June 30, 2013 City of San Diego actuarial valuation, show the annual growth of actuarial assets and liabilities over each of the past 10 years and depict the 10 year history of actual contributions versus the ADC.

Document Under Categories: Board, Investments, Pension, Retirement Resources