RD615 - Virginia Retirement System Stress Test and Sensitivity Analysis – September 2021

Executive Summary:

The purpose of this report is to assist the VRS Board of Trustees, the Virginia General Assembly, the Governor, stakeholders, and the public to better understand and assess the risks inherent in the funding of the pension system. This year’s report investigates various possible risks faced by VRS and measures their potential impact on the defined benefit programs.

Although market returns for fiscal year 2021 exceeded expectations, several risks remain along with opportunities to further strengthen the health of the plans, particularly the statewide retirement plans.

Key results and findings of this report:

• While economic markets rebounded to provide strong returns for fiscal year 2021, COVID-19 continues to create uncertainty in global markets and unpredictable impacts on future market returns.

• New valuation assumptions will be reflected in the June 30, 2021, rate-setting valuation including generational mortality assumptions that will help counter longevity risk by increasing contribution requirements to cover expected longterm costs. Although COVID-19 may affect longevity expectations, it is too early to have any relevant data related to those potential impacts.

• Significant resources must remain dedicated to addressing the amortization of the legacy unfunded liabilities.

• Analysis suggests that accelerating the payback of the legacy unfunded liabilities could provide significant long-term savings and better position the statewide plans to weather future volatility in investment returns, thereby serving to reduce investment risk. However, available resources to take such action are limited at this time due to the current economic climate, limitations on the use of certain resources and uncertainty regarding future revenue.

• As roughly two-thirds of benefits are funded by investment income, receiving 100% of the Board-certified actuarially determined contributions not only avoids adding liabilities to the plans, but also ensures timely availability of assets to be invested and take advantage of compound interest. Of note, the Governor and General Assembly met and even accelerated the statutory requirement to fund 100% of the Board-certified contribution rates.

• Pension reforms, specifically plan design changes over the past decade, have reduced the future costs of benefits. In addition, these reforms have reduced employers’ risk by introducing shared risk through the defined contribution component of the Hybrid Retirement Plan. Approximately 30% of a hybrid plan member’s benefit has no future investment or longevity risk for employers.

This report is intended to assist policymakers and stakeholders in assessing the soundness of the System. To better understand the risks associated with funding the System, this report examines a range of potential outcomes, both economic and demographic, that could endanger the long-term funding of the System and prevent the System from reaching full funding. Again, this report focuses primarily on analyzing negative outcomes, since such outcomes would result in the greatest challenges for the plan sponsors and System.

This report is based on the June 30, 2020, Annual Actuarial Valuation and reflects the changes to actuarial assumptions adopted by the VRS Board of Trustees in April 2021. In this report, the focus is on:

• The continued impacts of COVID-19 and resulting forward looking expectations after robust investment returns for fiscal year 2021.

• Risks to long-term funding, including investment volatility, contribution risk, and longevity risk.