For Immediate Release: November 15, 2018
Contact: [email protected]
To: NHRS members, retirees, and other stakeholders
From: George P. Lagos, Executive Director
It has been some time since I shared an open letter with our members, retirees, beneficiaries, and other stakeholders. With the conclusion of the Decennial Commission in January 2018, and of our most recent fiscal year on June 30, I thought a look back at the significant changes made to NHRS over the past 10-plus years would be worthwhile.
Overall, the retirement system is in a much better position today than it was a decade ago, however, our journey is far from over.
To understand and appreciate the changes made in recent years, you need to look back to the early 1990s, when some poor public policy decisions created structural pension funding issues that were obscured by exceptional investment returns through most of the decade and only became apparent following the “dot-com” recession in the early 2000s. A significant, and previously unrecognized jump in unfunded pension liability eventually led to legislation in 2007 that addressed the statutory funding problems; created a closed, 30-year period to pay down unfunded pension liabilities; and created a commission to study the long-term viability of the retirement system.
Late in 2007, this commission issued a comprehensive report with a number of recommendations, many of which resulted in legislation that made a significant and positive improvement with respect to the funding and governance of NHRS. Among the key legislative changes made in 2008 as a result of the commission were:
- The creation of the Independent Investment Committee, a five-member body consisting of investment professionals that has, since its inception, performed better than 90 percent of our peer pension systems, translating into hundreds of millions of dollars of additional capital for the trust fund.
- The statutory requirement that the same sort of retirement system study (a “Decennial Commission”) be conducted every 10 years.
Not long after the original commission issued its report, financial markets tumbled in 2008-09, leading to the worst global economic downturn since the Great Depression. This “Great Recession” had a negative impact on all investors, including NHRS, which saw its trust fund assets fall and unfunded liabilities grow. This set the table for the adoption of House Bill 2 in 2011, which increased contribution rates for all members; reduced benefits for future hires and for NHRS members who had not yet vested; eliminated the longtime state contribution toward local employer retirement costs for teachers, police, and firefighters; and restructured the NHRS Board of Trustees. These changes, which resulted in benefit reductions for future hires and for NHRS members who had not yet vested, are projected to reduce future pension costs significantly as new members come into the retirement system and older workers retire.
Litigation followed, and ultimately, the NH Supreme Court upheld the legislative changes and adopted the “unmistakability doctrine,” permitting the Legislature to modify pension plan provisions prospectively unless there was clear evidence of an unmistakable intent by a prior Legislature to bind itself against any future changes.
While the Legislature was making statutory changes in its role as plan sponsor, the NHRS Board of Trustees – acting in its fiduciary role – made appropriate adjustments to the actuarial assumptions used to fund the plan by lowering the assumed rate of return to conform to long-term market expectations; improving mortality assumptions to recognize increasing lifespans; and adjusting member payroll growth assumptions to reflect economic reality. In the aggregate, these actuarial improvements have led to increased employer costs, but have also improved the financial health of the retirement system.
Fast forward to 2017 when the Decennial Commission met to review the sustainability of our pension plan and evaluate the progress made over the past decade. Once again, there were a number of recommendations made, several of which have already been enacted into law:
- After many years without any type of post-retirement adjustments, a one-time temporary supplemental allowance of $500 was granted to a group of eligible retirees.
- The Legislature took up the thorny issue of retirees working after retirement for participating employers and fashioned a compromise approach that will become effective in 2019.
- A bill was passed to institute “layered amortization,” a commonly used actuarial approach to recognize future gains and losses over closed periods of no more than 20 years. The current unfunded liability of approximately $5 billion will still be paid off by 2039, but this change will spread future actuarial gains and losses more evenly over time and help temper potential employer contribution rate volatility as 2039 approaches.
The Decennial Commission also hired the Boston College Center for Retirement Research (BCCRR) as a consultant to study the progress made over the past 10 years and to provide its insights and recommendations. As noted in the BCCRR report, the NHRS unfunded liability has increased in dollars over the past 10 years while the funded ratio has improved modestly. A substantial portion of the increase in the unfunded liability is attributable to the changes in actuarial assumptions noted above, which increased liabilities and required higher employer contributions. At the same time, the report observed that NHRS currently uses more conservative actuarial assumptions than many of its peers, has achieved better investment returns, and provides relatively modest benefits to its members at a percent of payroll cost to employers below the national average.
The decisions and recommendations of the Decennial Commission, together with the findings of the BCCRR report, validated many of the actions taken in recent years that have gone a long way toward improving the financial position and outlook of the pension trust.
Since 2009, assets in the trust have grown from $4.4 billion to $8.9 billion, the highest level ever. Employer contribution rates have begun to stabilize, and will decline in the next biennium for three of the four member groups (employee, police, fire). Employer contributions for teachers, however, will increase slightly, mainly due to the ongoing decline in the state’s school-age population, which has led to a corresponding drop in the number of active teachers over the past decade. NHRS now has a funded ratio of 63.6% – clearly not yet where we want it to be, but heading in the right direction following the Great Recession of 2008-09.
This funding progress has not come without sacrifices from all stakeholders: Members, who are contributing more to fund their future benefits; employers (and by extension taxpayers), who are paying down the unfunded liability; and retirees, who have not seen a cost-of-living adjustment since 2010, despite the ongoing pace of inflation.
While there can be no guarantees as to what lies around the next corner, there is a solid foundation in place and good progress is being made to ensure the long-term viability of NHRS.
We can assure you, our members, retirees, and beneficiaries, that whatever the future brings, all of us here at NHRS will work every day toward fulfilling our mission – to provide secure retirement benefits and superior service.
If you have a question, comment, or concern about the retirement system, please feel free to contact me directly at (603) 410-3520 or by email at [email protected].
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More background information on plan funding, employer contributions, and other NHRS-related topics is available in the “Now You Know” section of our website at: https://www.nhrs.org/about-nhrs/now-you-know