The Funding Level

Our funding level is the ratio of our assets to liabilities. Our liabilities (the Fund’s benefit promises) grow annually in a fairly predictable fashion, while the growth of our assets is a result of our net investment returns in any given year.

In order to support the Fund’s benefit promises and administrative expenses, a net investment return of roughly 6.4% per year (we refer to this as our hurdle rate) has been required in past years in order to credit 3% interest while maintaining our funding level. The hurdle rate is a calculation, combining our discount rate plus controllable expenses.

The discount rate is used to calculate the present value of future benefit obligations. Once a year, our actuary values our future benefit promises. The next step by the actuary is to convert those future benefit promises back into today’s dollars, which is called the present value. The Fund’s liabilities are calculated as the sum of all of our future benefit promises, in present value terms. The conversion from future value to present value requires an assumed interest rate, which is the discount rate.

The Discount Rate and the Hurdle Rate

When our investment returns exceed the hurdle rate, the excess bolsters our funding level. Alternatively, in a year when our investment returns do not exceed the hurdle rate, the shortfall causes our funding level to drop. Those two scenarios are modeled on the accompanying chart.

Discount Rate and Hurdle Rate

In May 2018, Fund Management recommended, our Actuary supported, and the Board approved a reduction of the discount rate to reflect the expected future growth of the investment environment. This lowered our hurdle rate for the future from roughly 6.4% to 6.1%. This chart shows the lower hurdle rate as compared with the same two investment return scenarios.

Hurdle Rate Returns

Reducing the discount rate also had the short-term impact of decreasing our funding level below 100% at the end of the fiscal year. However, this will not affect the Fund’s ability to deliver on its benefit promises.

The chart below compares the net investment returns to the hurdle rate since FY 10 and the resulting funding level of each year. In past years, in order to maintain the funding level when interest credits of 3% were granted, the Fund’s net investment returns needed to exceed 6.4% (the hurdle rate). With the reduction of the discount rate, the hurdle rate is now 6.1%.

Hurdle Rate and Funding Level

In years when net returns (the measurement of our asset growth) did not exceed the 6.4% hurdle (fiscal years 2012, 2015 and 2016), the funding level decreased. When net returns did surpass 6.4% (fiscal years 2010, 2011, 2013, 2014 and 2017), the funding level improved.

In addition to the discount rate, other factors can also impact the funding level, and one of those factors is the mortality table used by the Fund to value its liabilities.

In FY 14 we completed our recovery from the Financial Crisis of 2008-09 and achieved a funding level of 104%. In the following year, as a result of a nation-wide study conducted by the Society of Actuaries, a new mortality table, better reflecting the life-span of participants was developed and required to be adopted in the valuation of pension liabilities. As a result, the liabilities increased, and along with an investment return below the hurdle rate, our funding level decreased from 104% to 98%.

The reduction of the hurdle rate to 6.1% at the end of Fiscal Year 2018 will, over time, put the Fund in a better position to manage its pension liabilities in a low investment return environment.