PERS Funding and Financial Status
A: Assuming a 25 to 30 percent investment loss for 2008, PERS’ funded status would range between 76 and 81 percent as of December 31, 2008. That means that the system would have 76 to 81 cents on hand for every dollar of benefits promised, with the remainder needing to be collected from additional employer contributions and investment earnings over the next 20 years.
At the end of 2007, PERS was 112 percent funded. For comparison, PERS was 65 percent funded before PERS reform and the 2003-2007 market recovery.
Q2: What are the sources of funding for PERS retirement benefits?
A: PERS benefits are paid solely from a trust fund known as the Oregon Public Employees Retirement Fund (OPERF). Historically, 73 percent of the dollars in the OPERF come from investment income with approximately 7 percent coming from member contributions and 20 percent from through employer contributions.
Q3: Based on the 2008 market downturn, what is the current market value of the Oregon Public Employees Retirement Fund (OPERF)?
A: As of December 31, 2007, the OPERF was valued at approximately $65 billion. As of December 31, 2008, the OPERF was valued at approximately $46 billion. For comparison, the OPERF had dropped to about $31 billion in value during the 2000-2002 downturn. The Oregon Investment Council (OIC) oversees OPERF investments with staff support from the Oregon State Treasury.
OPERF annual investment returns averaged over 11 percent from 1970-2007, and over 15 percent from 2003-2007.
Q4: With the 2008 investment losses, does PERS have enough money to pay retirement benefits?
A: Yes. Member retirement benefits are protected by law. Even with the current investment losses, as of December 31, 2008 the Oregon Public Employees Retirement Fund (OPERF) was valued at approximately $46 billion. Those funds, combined with future investment earnings and additional member and employer contributions, will be used to pay member retirement benefits.
Q5: How does PERS’ current revenue compare to current benefit payments?
A: Oregon PERS brings in approximately $2.9 billion per year in contributions, interest, and dividends, which is nearly the same amount paid in retirement benefits for 2008.
According to PERS’ actuary, total PERS benefit payments will increase to about $5 billion per year during the next 10 years. Increasing benefit payments are normal for a retirement system as it matures, and these cash flow needs will be planned for in management of the Oregon Public Employees Retirement Fund (OPERF).
Tier One Member Regular Accounts
Q6: How will the 2008 market downturn affect Tier One member regular accounts?
A: By law, Tier One member regular accounts must be credited annually at the assumed earnings rate, currently 8 percent. Likewise, by law, any earnings above 8 percent are reserved to ensure this 8 percent annual crediting until the last Tier One member retires.
The PERS Board set aside approximately $1.9 billion in the Tier One Rate Guarantee Reserve from good investment returns in 2005-2007 that will be used to pay earnings to Tier One member accounts for 2008. Only earnings on Tier One member regular accounts fund that reserve. Such earnings are also used to pay off reserve deficits, like the 2000-2002 deficit of some $1.9 billion was paid off with Tier One earnings in 2003 and 2004.
Since January 1, 2004, all Tier One member contributions have been placed in the Individual Account Program. These accounts receive actual earnings and losses of the OPERF regular account, which is a diversified investment portfolio (see Question 9).
Tier Two Member Regular Accounts
Q7: How will the 2008 market downturn affect Tier Two member regular accounts?
A: Tier Two member regular account earnings crediting reflects Oregon Public Employees Retirement Fund (OPERF) regular account investment gains or losses. Since regular account investments lost value in 2008, those losses will be allocated proportionally to Tier Two accounts. The PERS Board will determine final 2008 earnings crediting for Tier Two member accounts in March 2009.
Like Tier One members, all Tier Two member contributions since January 1, 2004 have been placed in the Individual Account Program and receive actual earnings and losses of the OPERF regular account, which is a diversified investment portfolio (see Question 9).
Variable Annuity Program Accounts
Q8: How will the 2008 market downturn affect Variable Annuity Program accounts?
A: Variable Annuity Program account earnings crediting reflects Oregon Public Employees Retirement Fund (OPERF) variable account investment gains or losses. The OPERF variable account is invested solely in public equities. Since variable account investments lost value in 2008, those losses will be allocated proportionally to participating Tier One and Tier Two member variable accounts when the PERS Board determines final 2008 earnings crediting in March 2009.
Individual Account Program
Q9: How will the 2008 market downturn affect Individual Account Program (IAP) accounts?
A: IAP account earnings crediting reflects Oregon Public Employees Retirement Fund (OPERF) regular account investment gains or losses. Since the OPERF regular account diversified investment portfolio lost value in 2008, those losses will be allocated proportionally to IAP accounts when the PERS Board determines final 2008 earnings crediting in March 2009.
OPSRP Pension Program
Q10: How will the 2008 financial downturn affect Oregon Public Service Retirement Plan (OPSRP) Pension Program members?
A: OPSRP members do not have regular or variable accounts and their pension benefits are based solely on a formula reflecting years of service and final average salary. As such, the pension portion of an OPSRP member will not be affected by the financial downturn.
OPSRP Pension Program members do have an IAP account, which is affected by investment gains and losses (see Question 9).
Q11: Does the 2008 financial downturn affect retiree benefits?
A: Retiree benefits are not affected by the market downturn unless the retiree participated in the Variable Annuity Program and stayed in that program at retirement.
Q12: How does the 2008 financial downturn affect retirees who stayed in the Variable Annuity Program at retirement?
A: For some 11,000 PERS retirees who remained in the Variable Annuity Program at retirement, the variable annuity portion of their monthly retirement benefit is adjusted every January for payments beginning February 1.
The adjustment is based on the variable account’s gains or losses over the 12-month period of the preceding October 31 (e.g., November 1, 2007 to October 31, 2008). For most affected retirees, this year’s adjustment will be approximately negative 48 percent applied to the variable annuity portion of the retiree’s monthly benefit.
This adjustment will affect individual retired members differently, because each person has a different proportion of his/her total benefit funded by their Variable Annuity, depending on his/her participation pattern, contribution level, and earnings credited. The adjustment is also affected by what the assumed earnings rate was when the member retired (that rate has been 8 percent since June 1, 1992).
Employer Contribution Rates
Q13: How will the 2008 financial downturn affect PERS employer contribution rates?
A: Employer contribution rates are set every two years, changing July 1 of the odd numbered year. Employer rates taking effect July 1, 2009 were based on the system’s valuation as of December 31, 2007, so those rates will not be affected by the 2008 market downturn. On average, employer rates effective July 1, 2009-June 30, 2011 are about 3 percent less than the previous biennium’s rates because of the good investment returns in 2006 and 2007.
Employer rates effective July 1, 2011- June 30, 2013 will be based on Oregon Public Employees Retirement Fund (OPERF) investment returns for calendar years 2008 and 2009. Unless investment returns in 2009 make up for the 2008 losses, employer rates will increase on July 1, 2011. However, the rate of increase will be controlled to help mitigate the impact of investment volatility.
The PERS Board has adopted an actuarial method of collaring employer rates to limit the amount those rates can increase or decrease over any two-year period. Depending on the cumulative investment returns over calendar years 2008 and 2009, the rate collar would limit the increase in average employer contribution rates for most employers to either an additional 3 percent or 6 percent of payroll beginning July 1, 2011. Employer-specific side account offsets will also be affected by any cumulative investment losses, which could further impact those respective employer budgets.
are posted on the PERS website on the Employer homepage.