The South Carolina Public Employee Benefit Authority (PEBA) announced yesterday that employee and employer contribution rate increases will be necessary in the near future to maintain the solvency of the South Carolina Retirement System.  PEBA claims this is because of lower than expected investment earnings and expected future decreases in those earnings.

Curtis Loftis

Curtis M. Loftis, Jr., State Treasurer of South Carolina

About four years ago, in a Wall Street Journal article, South Carolina Treasurer Curtis Loftis is quoted as saying, “I question whether Wall Street’s interests are being protected or our interests are being protected.”  After the press release from PEBA, one only has to wonder – Was Curtis Loftis right?

Recently FITS News published an article concerning the crisis at the Retirement System Investment Commission.  Regardless of your political viewpoints, the issues with our retirement system are a serious concern.  Just four years ago, the General Assembly passed sweeping pension reform designed to strengthen the system.

Now were are faced with more shortcomings.  The system is in a slow downward spiral.  In a December 2013 article in Forbes, Edward Siedle writes, “If ever there was a state pension system in need of an in-depth forensic investigation, it’s got to be South Carolina’s. ”  Even in the state’s own audit published in December of 2015 classified the state’s pension fund as “significantly underfunded.”  The most disturbing information in the audit is the exorbitant fees.  The report identified that “from 2005 to 2014, fees increased from $22.4 million to $467 million (annually).”  However, the investment returns during that time frame were paltry in comparison to other large pension funds.

Jay Lucas

Representative James H. “Jay” Lucas

Speaker of the House Jay Lucas has introduced three bills to change the retirement system.  House bill 5006 deals with many topics; however, it requires a reduction of fees and prohibits buying into riskier investments.  House bill 5007 addresses the increase in contributions but also changes the amortization schedule from 30 to 20 years.  House bill 5008 deals with the assumed rate of return.

Our legislators need to stop playing games with our future.  We are forced to pay into a retirement system that is not delivering.  Stop the fat bonuses for an underperforming system.  Stop changing the system every few years.  Stop making investment bankers rich while screwing the public servant.

Is it too much to ask?


Text of article from PEBA

South Carolina Public Employee Benefit Authority (PEBA)Based on the results of regularly scheduled studies of South Carolina’s public pension plans, employee and employer contribution rate increases will be necessary in the near future. The anticipated increases are due in part to recent, lower than expected investment earnings and expected future decreases in investment earnings.

Each year, actuaries conduct an analysis to assess the financial condition of each defined benefit retirement plan. Actuaries are professionals who study uncertain future events and analyze the consequences of risk. When the actuaries conduct the annual studies, or valuations, of the retirement plans administered by the South Carolina Public Employee Benefit Authority (PEBA), they take into account when employees are expected to retire, how much benefit they are expected to earn, how much they will contribute, as well as projected inflation rates and returns on investment, among other factors.

The annual valuations also contain the actuary’s recommendations of the required employee and employer contribution rates necessary to fund the retirement plans on a sound actuarial basis in accordance with the applicable funding statutes and policies. Any recommended changes to the contribution rates must be adopted by the PEBA Board of Directors and are then subject to approval by the State Fiscal Accountability Authority. Contribution rate changes are typically scheduled to go into effect two years after the date of the annual valuation to accommodate employers’ budgeting cycles. Lawmakers also consider the results of the actuarial valuations to make public policy decisions to ensure adequate funding for the retirement plans.

The state’s defined benefit retirement plans have three sources of funding: employee contributions, employer contributions and investment earnings. By law, if investment returns fall short of the assumptions set for the plans, employee and employer contributions must increase to ensure adequate funding for the plans. The expected rate of investment return for the retirement plans is 7.5 percent. The actual investment return for fiscal year 2015 was 1.6 percent; therefore, the investments for the South Carolina Retirement System (SCRS), the largest of the state’s public pension plans, earned $1.5 billion less than expected in fiscal year 2015.

Based on the 2015 actuarial valuation, the minimum required contribution increase is .03 percent of covered payroll for employers and .03 percent of earnable compensation for employees beginning July 1, 2017. This increase recognizes only a portion of the lower than expected investment returns. To fully absorb the $1.5 billion investment loss from fiscal year 2015, participating SCRS employers would need to pay an additional 0.5 percent of covered payroll and employees participating in SCRS would need to pay an additional 0.5 percent of earnable compensation. Also, investment returns for fiscal year 2016 to-date are negative. If investment markets do not turn around in the relatively near future, further increases in employer and employee contribution rates will be necessary to make up for lower than expected investment earnings.

Beyond the annual actuarial valuations, PEBA’s actuaries conduct a more in-depth experience study of each retirement plan every five years. The experience study determines how closely the assumptions about the future used in the annual valuations line up with actual member behavior and experience, and economic variables. The experience study for the five-year period ending June 30, 2015, identified the need for higher contribution rates due to lower than expected investment earnings, increases in mortality and decreases in payroll growth. The study also contains recommendations for revisions to several assumptions, including a lowering of anticipated investment income. These recommendations must be adopted by PEBA’s Board of Directors and approved by the State Fiscal Accountability Authority or, in the case of the assumed rate of investment return, adopted by the South Carolina General Assembly.

If the recommendations are approved, the actuaries will use the new assumptions when completing the 2016 actuarial valuation, due in December of 2016. SCRS contribution rates for both employers and employees are expected to increase an additional 1.19 percent each as a result of the new assumptions. For employers, the increase is applied to covered payroll and for employees, the increase is applied to earnable compensation.

The results of the experience study (the 1.19 percent increase) do not fully take into account the investment losses the plan experienced in fiscal year 2015, nor the losses the plan has incurred so far in fiscal year 2016. This means total increases of approximately 2-3 percent in both employer and employee contribution rates may be necessary to ensure adequate funding of the retirement plans and preserve the plans’ ability to continue to pay benefits in the future if investment markets do not turn around soon.

The South Carolina General Assembly, the PEBA Board and the State Fiscal Accountability Authority are actively considering what action to take to sustain the state’s pension plans for public workers. As part of the regular legislative process, both the Senate and the House of Representatives will review the need for contribution increases for the plans. Both legislative bodies are discussing the issue and will be approving their respective proposals. Likewise, the Governor’s Office included funding for the 0.5 percent contribution increase for fiscal year 2016 in the Governor’s Executive Budget.

As policymakers discuss the financial requirements for the state’s defined benefit plans, PEBA will continue to keep stakeholders informed of what these discussions and decisions will mean for them. While the information in this article is primarily focused on SCRS, the largest of the plans, the other retirement plans will be affected as well.