The Pew Charitable Trusts “Stress Test" Finds NC Pension Well-Positioned to Weather Economic Uncertainty

Raleigh

Nov 21, 2019

State Treasurer Dale R. Folwell, CPA, and the North Carolina Retirement Systems Division today announced the results of a “stress test" that gave high marks to the state pension plans. The test was conducted by The Pew Charitable Trusts (Pew) and presented to the Teachers' and State Employees' Retirement System (TSERS) and Local Governmental Employees' Retirement System (LGERS) Boards of Trustees during a recent meeting.

Pew said that compared to other states they tested, North Carolina's state pension fund is well-positioned to maintain solvency during tough economic times.

Pew is an independent, nonprofit and nonpartisan research and policy organization that seeks to improve public policy, inform the public, and invigorate public life. Their well-respected research spans many aspects of public policy and is often noted for insightful research of public sector retirement systems.

Stress testing is a simulation technique that forecasts the potential impact of investment risk and contribution risk on pension balances and government budgets. It analyzes the need for higher state pension appropriations to offset lower investment returns during an economic downturn, and how that might impact funding for core government services such as schools, public safety, and infrastructure.

Pew found that, even in downside scenarios (e.g. recession), the North Carolina pension system's current funding policy positions it well to withstand economic headwinds. These policies include the North Carolina General Assembly's full funding of the Actuarially Determined Employer Contribution (ADEC) and providing millions more in additional funds through the Employer Contribution Rate Stabilization Policy (ECRSP) adopted by the Board of Trustees. However, the Pew researchers found that in a severe recession scenario, the state would need to commit a larger share of its revenue to pension contributions. Otherwise, pension funding levels would decline

“I want to thank Pew for their insightful analysis of North Carolina's pension system," said Treasurer Folwell. “It showed that at the end of the day, we're one of the best funded pensions in the country. However, we have to continue to save and make money as well as have a realistic expectation that future challenges remain. This includes enforcing laws that prevent money from leaving the system, and supporting additional legislation that reduces complexity and preserves the benefit for present and future public sector employees."

Treasurer Folwell noted that the pension system has not made its assumed rate of return on average in the last 20 years and will have less than a 50% chance of achieving it for the next 20 years. To have a more realistic expectation of returns, the Boards of Trustees lowered the interest rate assumption from 7.25% to 7.20% in 2017, and then to 7.00% in 2018. The ADEC or “employer contribution" for TSERS was recently set at 12.97% of payroll and is expected to exceed 16.0% of payroll by July 2021.

“Pew's stress test analysis of the North Carolina Teacher and State Employee Retirement System found that the system's strong funding policy, if followed, would ensure funding levels continue to improve and help insulate against sudden spikes in employer contribution rates, even if returns end up lower than expected," said David Draine, senior officer, The Pew Charitable Trusts.

“We're obviously pleased," added Treasurer Folwell. “But as you look at the combination of historically low interest rates, unrealistic investment returns and increased longevity, there are some very real challenges going forward. Every dollar that has to go to servicing the pension systems cannot be used for education, public safety and the other core functions of government. Despite this good news, we need to work with policy makers and stakeholders to make real changes to the system that will preserve and sustain it for the future."

The North Carolina Retirement Systems, the formal name for the Fund, is the ninth largest public pension fund in the country and is currently valued at more than $100 billion. It provides retirement benefits and savings for more than 950,000 North Carolinians, including teachers, state employees, local governments, firefighters, police officers and other public workers.

For more information go to https://www.myncretirement.com/