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 VRS-administered post-retirement benefits. This year’s report investigates various possible risks faced by VRS and analyzes their potential impact on the benefit programs.

The analysis in this report is based on the results of the June 30, 2025 actuarial valuation which was used for rate-setting for fiscal years 2027 and 2028. The 2025 valuation also included updates to actuarial assumptions based on the quadrennial experience study which included experience from fiscal years 2021-2024.

To better understand the risks associated with funding the System, this report examines a range of potential outcomes 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.

Key results and findings of this report:

• Consecutive years of higher than assumed rates of return have lowered employer contribution rates and improved the funded status of both the retirement and Other Post-Employment Benefits (OPEB) plans.

• Recent uncertainty in the markets highlights the need to explore opportunities to further strengthen the health of the plans.

o Markets started strong in fiscal year 2026, but as of this writing geopolitical uncertainty is creating volatility in the markets.

o Uncertainty also exists related to a variety of causes, including tariffs, inflation concerns, lower net immigration, and the potential for an AI bubble.

• Cash flow requirements across all benefit plans are expected to trend higher over the next ten years as more members are expected to retire and employer contributions are expected to trend lower as new members are enrolled in the hybrid retirement plan which is a lower cost tier for employers.

• 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.

o Shortening amortization periods or maintaining higher prior employer contribution rates provides long-term savings by reducing interest paid on outstanding balances.

• As plan health has improved, legislative proposals looking to expand benefits have begun to increase. Expansion of benefits across pension and OPEBs without corresponding immediate funding to cover the increases in liabilities is not recommended, especially while plans remain funded below 100%.