TEACHER RETIREMENT SYSTEM (TRS)
The State of Texas has joint contributory retirement plans for substantially all its employees. One of the primary plans in which the System participates is a cost-sharing multiple-employer defined benefit pension plan with a special funding situation administered by the Teacher Retirement System of Texas. TRS is primarily funded through State and employee contributions. Depending upon the source of funding for a participant’s salary, the System may be required to make contributions in lieu of the State.
All System personnel employed in a position on a half time or greater basis for at least 4½ months or more are eligible for membership in the TRS retirement plan. However, students employed in positions that require student status as a condition of employment do not participate. Members with at least five years of service have a vested right to unreduced retirement benefits at age 65 or provided they have a combination of age plus years of service totaling 80 or more. However, members who began TRS participation on or after September 1, 2007 must be age 60 to retire with unreduced benefits and members who are not vested in TRS on August 31, 2014 must be age 62 to retire with unreduced benefits under the second option. Members are fully vested after five years of service and are entitled to any reduced benefits for which the eligibility requirements have been met prior to meeting the eligibility requirements for unreduced benefits. The TRS Plan provides retirement, disability annuities and death and survivor benefits. The benefit and contribution provisions of the TRS Plan are authorized by state law and may be amended by the Legislature. The pension benefit formulas are based on members’ average annual compensation and years of service credit. The standard annuity is 2.3 percent of the average of the five highest annual salaries multiplied by years of service credit. For grandfathered members who were hired on or before August 31, 2005 and meet certain criteria, the standard annuity is based on the average of the three highest annual salaries. The plan does not provide automatic cost of living adjustments.
Contributions by employees were 6.7 percent of gross earnings for 2015 and 6.4 percent of gross earnings for 2014 and 2013. Depending upon the source of funding for the employee’s compensation, the State or the System contributes a percentage of participant salaries totaling 6.8 percent of annual compensation for 2015 and 2014 and 6.4 percent of annual compensation for 2013. The System’s actual contributions excluding the State match to TRS for the years ended August 31, 2015, 2014 and 2013 were $244,723,301, $230,251,025 and $210,973,194, respectively.
The total pension liability is determined by an annual actuarial valuation. The table below presents the actuarial methods and assumptions used to measure the total pension liability as of the August 31, 2014 measurement date.
Summary of Actuarial Methods and Assumptions – TRS Plan
Actuarial Valuation Date August 31, 2014 Actuarial Cost Method Entry Age Normal Amortization Method Level Percent, Open Actuarial Assumptions:
Discount Rate 8.00%
Investment Rate of Return 8.00%
Inflation 3.00%
Salary Increase 4.25% to 7.25% including inflation Mortality:
Active 1994 Group Annuity Mortality Table set back 6 years for males and females Post-Retirement Client specific tables multiplied by 80% Ad Hoc Post-Employment Benefit Changes None
The actuarial assumptions used in valuation were primarily based on the result of an actuarial experience study for the four-year period ending August 31, 2010 and adopted on April 8, 2011. With the exception of the post-retirement mortality rates for healthy lives and a minor change to the expected retirement age for inactive vested members stemming from the actuarial audit performed in the summer of 2014, the methods and assumptions are the same as used in the prior valuation. When the mortality assumptions were adopted in 2011, they contained significant margin for possible future mortality improvements. As of the date of the valuation there has been a significant erosion of this margin to the point that the margin has been eliminated. Therefore, the post-retirement mortality rates for current and future retirees have decreased to add additional margin for future improvement in mortality in accordance with the Actuarial Standards practice No. 35.
There have been no changes to the benefit and contribution provisions of the plan since the prior measurement date. The discount rate of 8.0 percent was applied to measure the total pension liability. There has been no change in the discount rate since the prior measurement period. The projected cash flows into and out of the pension plan assumed that members, employers, and non-employer contributing entity make their contributions at the statutorily required rates. Under this assumption, the pension plan’s fiduciary net position is projected to be sufficient to make all future pension benefit payments of current plan members. Therefore, the 8.0 percent long-term expected rate of return on pension plan investments was used as the discount rate without incorporating the municipal bond rate.
The long-term expected rate of return on plan investments was developed using a building-block method with assumptions including asset class of investment portfolio, target allocation, real rate of return on investments, and inflation factor. Under this method, best estimate ranges of expected future real rates of return (net of investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long-term expected rate of return by weighing the expected future real rates of return by the target asset allocation percentage and by adding expected inflation.
The target allocation and best estimates of geometric real rates of return for each major asset class for the plan’s investment portfolio are presented below:
Asset Class Target Allocation Long-Term Expected Geometric Real Rate of Return Global Equity U.S. 18% 4.6% Non-U.S. Developed 13% 5.1% Emerging Markets 9% 5.9% Directional Hedge Funds 4% 3.2%
Private Equity 13% 7.0%
Stable Value
U.S. Treasury 11% 0.7%
Absolute Return 0% 1.8%
Stable Value Hedge Funds 4% 3.0%
Cash 1% -0.2%
Real Return
Global Inflation Linked Bonds 3% 0.9%
Real Assets 16% 5.1%
Energy and Natural Resources 3% 6.6%
Commodities 0% 1.2%
Risk Parity
Risk Parity 5% 6.7%
Total 100%
Sensitivity analysis was performed on the impact of changes in the discount rate on the System’s proportionate share of the net pension liability. The result of the analysis is presented in the table below:
Sensitivity of System’s Proportionate Share of the Net Pension Liability to Changes in the Discount Rate
1% Decrease Current Discount Rate 1% Increase
(7%) (8%) (9%)
$4,114,929,424 $2,302,987,541 $947,992,489
The pension plan’s fiduciary net position is determined using economic resources measurement focus and the accrual basis of accounting, which is the same basis used by TRS. Benefits and refunds of contributions are recognized when due and payable in accordance with the terms of the plan. Investments are reported at fair value. The framework for measuring fair value is based on a hierarchy that gives the highest priority to the use of observable inputs in an active market and lowest priority to the use of unobservable inputs. More detailed information on the plan’s investment policy, assets, and fiduciary net position, may be obtained from TRS’ fiscal 2014 Comprehensive Annual Financial Report. Further information regarding actuarial assumptions and conclusions, together with audited financial statements are included in the TRS’ annual financial report, which may be obtained from the Teacher Retirement System of Texas, 1000 Red River Street, Austin, Texas 78701 or found on the TRS website at www.trs.state.tx.us.
At August 31, 2015, the System reported a liability of $2,302,987,541 for its proportionate share of the collective net pension liability. The collective net pension liability was measured as of August 31, 2014, and the total pension liability used to calculate the net pension liability was determined by an actuarial valuation as of that date. The System’s proportion at August 31, 2014 was 8.6199871 percent. The System’s proportion of the collective net pension liability was based on its contributions to the pension plan relative to the contributions of all the employers and non-employer contributing entity to the plan for the period September 1, 2013 through August 31, 2014. At August 31, 2015, the amount of the net pension liability related to the System reported by the State was $892,687,939. The amount reported by the State is related to the on-behalf contributions, which are recognized as State appropriation general revenue on the System’s financial statements in the fiscal year that the State contributed the amounts to TRS on the System’s behalf. For the year ending August 31, 2015, the System recognized pension expense of $212,894,767. At August 31, 2015, the System reported deferred outflows of resources and deferred inflows of resources related to pensions from the following sources:
Deferred Outflows of Resources
Deferred Inflows of Resources
Difference between expected and actual experience $ 35,609,182 -
Changes of assumptions 149,666,214 -
Net difference between projected and actual investment return - 703,743,453 Change in proportion and contribution difference - 201,453 Contributions subsequent to the measurement date 244,723,301 -
Total $ 429,998,697 703,944,906
The $244,723,301 reported as deferred outflows of resources resulting from contributions subsequent to the measurement date will be recognized as a reduction in the net pension liability for the year ending August 31, 2016. Amounts reported as deferred outflows and inflows of resources related to pensions will be recognized in pension expense in the following years:
Fiscal Year Increase (Reduction) of Pension Expense 2016 $ (144,781,781) 2017 (144,781,781) 2018 (144,781,781) 2019 (144,781,781) 2020 31,154,083 Thereafter 29,303,531 Total $ (518,669,510)
OPTIONAL RETIREMENT PROGRAM (ORP)
The State has also established an optional defined contribution retirement program for institutions of higher education. Participation in the ORP is in lieu of participation in the TRS. ORP is available to certain eligible employees who hold faculty positions and other professional positions including but limited to director-level and above, librarians and coaches. The ORP provides for the purchase of annuity contracts and mutual funds. Participants are vested in the employer contributions after one year and one day of service. Depending upon the source of funding for the employee’s compensation, the System may be required to make the employer contributions in lieu of the State. Since these are individual annuity contracts, the State and the System have no additional or unfunded liability for this program. The employee and employer contribution rates are established by the State Legislature each biennium. The State provides an option for a local supplement on top of the state base rate. Each institution within the System can decide to adopt and fund a local supplement each year to provide each ORP employee the maximum employer rate. The chancellor then approves the employer rates each fiscal year. The contributions made by participants (6.65 percent of annual compensation) and the System (6.6 percent state base rate for 2015 and 2014 and 6.0 percent state base rate for 2013) for the fiscal years ended August 31, 2015, 2014 and 2013, respectively, are provided in the following table.
2015 2014 2013 Participant Contributions $ 145,565,462 137,902,022 133,016,555 System Contributions 191,455,373 177,123,850 170,719,638
Total $ 337,020,835 315,025,872 303,736,193
EMPLOYEES RETIREMENT SYSTEM (ERS)
Certain employees at U. T. Medical Branch - Galveston participate in the Employees Retirement System of Texas. The Board of Trustees of the Employees Retirement System of Texas is the administrator of the ERS, which is considered to be a single employer defined benefit pension plan. ERS covers the eligible System employees who are not covered by the TRS or the ORP. Benefits vest after five years of credited service. Employees may retire at age 60 with five years of service or any combination of age plus years of service that equals 80.
The ERS plan provides a standard monthly benefit in a life annuity at retirement as well as death and disability benefits for members. Additional payment options are available. The benefit and contribution provisions are authorized by State law and may be amended by the Texas Legislature. Contribution requirements are not actuarially determined. The ERS contribution requirement, calculated using entry age normal actuarial cost method, is established through State statute. The funding policy requires monthly contributions by both the State and employees. For the year beginning September 1, 2014, the required contribution for the State and the employee is 7.50 and 6.90 percent of pay, respectively. For Law Enforcement and Custodial Officers Supplemental Retirement Fund eligible employees, the State and the employee contribution is an additional 0.50 percent of pay, respectively.
The Texas State Comptroller’s Office has decided not to allocate ERS pension to proprietary funds due to immateriality, as a result, there is no ERS pension net pension liability reported in the System’s financial statements. Additional information can be obtained from the separately issued ERS Comprehensive Annual Financial Report which can be obtained from the Employees Retirement System of Texas, 200 East 18th Street, Austin, Texas 78701 or found on the ERS website at www.ers.state.tx.us.