Forecast for state’s pension system lowered

State and county employers likely will have to contribute more money into the Hawaii Employees’ Retirement System as early as July 1.

The ERS board of trustees voted Monday to lower the pension plan’s assumed rate of investment return to 7 percent from 7.5 percent because of a less optimistic investment outlook over the next five to 10 years.

That means employers would need to pay more to make up the difference if the state Legislature approves the board’s recommended employer contribution increase. The ERS’ investment target in the current fiscal year is 7.55 percent and was scheduled to drop to 7.5 percent July 1.

“The board has to consider the long-term capital market assumptions going forward, and all of the information we’ve received from our consultants and actuaries suggests that returns over the next five to 10 years likely will be significantly lower than the period prior,” ERS Administrator Thom Williams said in a phone call after the meeting.

Williams said the lower investment target is likely to have a negative impact on the pension plan’s unfunded liability as well as increase the required contributions from employers.

The unfunded liability is the amount that the pension plan is short to fully meet its financial obligations.

The ERS pension plan provides retirement, disability and survivor benefits to 118,993 active, retired and inactive state and county employees. Williams said more information will be available Jan. 9 at the next ERS board meeting.

State Finance Director Wes Machida, the predecessor to Williams at the ERS and a current member of the board, said during the phone call that the unfunded liability, or shortfall, likely will increase from the $8.77 billion as of the fiscal year that ended June 30, 2016. At that time the fund had just 62.2 percent of the amount it needed to pay all the pensions promised.

The ERS board of trustees, state governors and the Legislature have taken several steps over the last six years to try to shore up the pension shortfall and will consider even more measures in the upcoming session that begins in January.

“Dropping (the targeted investment return) from 7.5 to 7 means we’re going to be managing the fund on a more conservative basis, and that reflects our fiduciary responsibility to make sure the plan is sustainable,” Machida said. “By setting a more realistic return rate of assumption going forward, we’ll be able to get the kind of contributions we need earlier and not push the can down the road, which would make it more difficult later on.”

The ERS pension plan had $14 billion in assets as of the end of the fiscal year on June 30 and improved that amount to $15 billion as of Sept. 30.

Williams said Hawaii’s mortality rate is also likely to have a significant impact on the pension plan because the life expectancy of the ERS members in Hawaii is the highest in the nation.

“Our membership is living longer on average than many of our mainland peers,” Williams said. “Our membership will live two to three years longer, which means we’ll have to pay our members benefits for that additional period of time.”