Message about PSERS Employer Contribution Rate for FY 2020-21
The ongoing COVID-19 pandemic has been stressful and fearful for all, both from a health and a financial perspective. PSERS understands those feelings are compounded as budgets are reexamined, re-adjusted, and projected for the coming fiscal years (FY). To that end, PSERS is providing this update to clarify any assumptions being made about the impact of the COVID-19 pandemic on the employer contribution rate (ECR) projections, specifically for FY 2020-21.
Current movements in the financial markets will have no impact on the ECR for FY 2020-21 that begins July 1, 2020.
As you know, each December the PSERS Board of Trustees sets the ECR for the next fiscal year. In December 2019, the Board set the ECR at 34.51% of payroll for FY 2020-21, which was lower than projected for the fourth year in a row. The ECR certified in December 2019 should still be used for FY 20-21 budgetary purposes. The June 30, 2020 final investment performance will not impact the FY 20-21 ECR but will be used to help set the FY 2021-22 ECR.
Current Financial Markets and PSERS' Diversified Investment Portfolio
PSERS' adherence to holding a diversified investment portfolio has been successful in keeping PSERS distribution of investment returns less volatile than PSERS' public pension peers since the Great Recession of 2008/2009. PSERS' investments were performing quite well before the COVID-19 pandemic impacted the financial markets in March. PSERS' diversified investment portfolio performed well relative to equities during the market downturn in the 4th quarter of 2018 and has continued to provide downside protection during the current COVID-19 market volatility. The positive earnings securely positioned the Fund going into the current situation. Financial markets, however, continue to be very fluid and it is premature to predict what PSERS' net investment return will be at PSERS' fiscal year-end close on June 30, 2020. Much can occur in the markets during this last quarter of the current fiscal year.
PSERS' actuarial assumptions and cost methods are strategically designed to reduce volatility and curb the impact of any single year of investment gains or losses on the ECR.
PSERS utilizes actuarially sound practices such as asset smoothing and amortization of gains and losses over multiple years to keep the ECR in both good and bad markets more stable from year to year for budgeting purposes. Such techniques are designed to keep the ECR from sharply increasing during any one year. You can also find additional information on how the ECR is calculated in the annual PSERS Budget Hearing Reports in Section 1 – PSERS Overview.
Rest assured that PSERS is closely monitoring the situation and will continue to prudently invest the assets of the Fund. For more information on PSERS' response to COVID-19's effect on the markets, please visit psers.pa.gov.