Category Archives: Public employers

How can public pension plans provide sustainable levels of benefits despite rising costs?

When forced with rising pension costs, many public pension plan sponsors are pressured to freeze plan benefits. However, a look into five key pension plan provisions that are the biggest drivers of pension costs can help sponsors set a sustainable level of benefits. This Dear Actuary column provides perspective.

Public pensions hammered by COVID-19 economic volatility, shedding $419 billion in market value in Q1

Milliman today released the first quarter (Q1) 2020 results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit (DB) pension plans. During Q1 2020, the overall funded ratio for these plans suffered the single largest quarterly drop in the history of the PPFI, decreasing from 74.9% to 66.0% between January 1 and March 31. Economic volatility from the COVID-19 pandemic resulted in a $419 billion loss in the market value of assets for these pensions, which in aggregate experienced investment returns of -10.81% in Q1. Individual plans in the PPFI had estimated returns ranging from -17.41% to 4.76%.

Coming on the heels of what was a stellar fourth quarter in 2019, the economic fallout from the COVID-19 pandemic has completely wiped out any public pension funding gains we saw last year. While these pensions now have a long way to go to return to pre-pandemic funding levels, it’s important to remember that most public pension plans use some sort of asset smoothing mechanism to dampen the impact of market gyrations. This gives plan sponsors some breathing space to explore and plan for how this market downturn will impact contributions.

Breaking down the plans by funded ratio, four plans now remain at 90% funded or higher, down from 20 the previous quarter. Meanwhile, at the lower end of the spectrum, nine plans fell below the 60% funded mark, bringing the total number of plans under 60% to 35, up from just 26 at Q4 2019. The total pension liability (TPL) continues to grow and stood at an estimated $5.355 trillion at the end of Q1 2020, up from $5.313 trillion at the end of Q4 2019.

To view the Milliman 100 Public Pension Funding Index, click here.

Also, to receive regular updates of Milliman’s pension funding analysis, contact us here.

Milliman study finds no correlation between level of public pension benefits and health of plans’ funded status

Milliman has released the results of its 2018 Public Pension Funding Study (PPFS), which analyzes funding levels of the nation’s 100 largest public pension plans, including an independent assessment on the expected real return of each plan’s investments.

This year, the 2018 Milliman PPFS also examined the value of pension benefits that are being paid for by plan sponsors, termed net employer-paid service cost. The study found that, of the 100 plans in the study, a majority (69) provide a pension benefit that costs between 0% and 10% of payroll. For three plans in the study, however, contributions from active members more than cover the annual cost of their own annual pension accruals. On the flip side, 13 plans have a net cost of more than 15% of payroll, indicating relatively costly benefits.

The results of the service cost analysis were eye-opening. And in fact, our study found there is very little correlation between the level of the benefits provided by plan sponsors and the funded status of a plan. Plans with a greater level of benefits are neither better funded–nor more poorly funded–than plans with modest benefits.

For Milliman’s 2018 PPFS, the estimated aggregate funded ratio of the nation’s largest public pension plans is 72.1% as of June 30, 2018, with assets earning slightly more than anticipated by the plans’ interest rate assumptions. We estimate that aggregate plan assets rose to $3.67 trillion as of June 30, 2018, and that the plans experienced a median annualized return on assets of 8.29% in the period between their fiscal year-ends and June 30, 2018. Our estimated, recalibrated total pension liability for these plans has since passed the $5 trillion mark as of June 30, 2018. Based on the market’s consensus views that long-term investment returns have been declining, the study recalibrated total pension liability for each plan using independently determined interest rate assumptions (the PPFS uses the term “interest rate” to indicate the assumption the plan sponsor has chosen to determine contribution amounts, and the term “discount rate” to indicate the rate used to measure liabilities for financial reporting purposes).

To view the full Milliman 100 Public Pension Funding Study, click here.

To receive regular updates of Milliman’s pension funding analysis, contact us here.

Lackluster asset performance in Q2 drops public pension funding by $23 billion

Milliman has released the 2018 second quarter results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans. In Q2, these plans experienced a $23 billion loss in funding, largely due to a lackluster asset performance of 0.70% in aggregate. The plans earned approximately $45 billion for the quarter, below assumed investment returns reflected in liability calculations. This shortfall is exacerbated by $28 billion flowing out of the plans, as benefits paid out exceeded contributions coming in from employers and plan members. The PPFI funding ratio dipped slightly from 71.4% in Q1 2018 to 71.2% in Q2.

Without the strong investment performance we saw in 2017, it’s difficult for these public pensions to gain ground. If a plan’s benefits paid out exceed contributions coming in, reliance on the market is even more crucial to buttress funding.

As of June 30, 2018, the PPFI deficit stands at $1.448 trillion, the largest since the index began in September 2016. The total pension liability (TPL) topped the $5 trillion mark for the first time in Q2, at an estimated $5.025 trillion at the end of the quarter, up from $4.985 trillion at the end of Q1. Funded ratios did not move much this quarter, with one more plan dropping below the 90% funded mark; there are now just 14 plans above this mark, 26 plans whose funded ratios fall below 60%, and 11 plans remain below 40% funded.

To view the Milliman 100 Public Pension Funding Index, click here.

To receive regular updates of Milliman’s pension funding analysis, contact us here.

Pension and OPEB underfunded status after Michigan PA 202

The Protecting Local Government Retirement and Benefits Act (the Act) addressed underfunding issues associated with pension plans and retiree medical plans in Michigan that are sponsored by local governments. Prescribed actuarial assumptions used to make calculations have not yet been set. This paper by Milliman consultants Tim Herman and Jack Chmielewski aims to help stakeholders of Michigan’s many local government pension and other post-employment benefit programs develop informed expectations around the range of outcomes that could result from the state treasurer’s decisions about actuarial assumptions as they relate to the Act.

GASB 74/75: Impact on small government employers

GASB Statements No. 74 and 75 have substantially revised the valuation and accounting requirements previously mandated under GASB Statements No. 43 and 45. With implementation required for plan fiscal years beginning after June 15, 2016, for GASB 74 and June 15, 2017, for GASB 75, the time is now for government entities to understand and comply with the new requirements. This article by Milliman’s Joanne Fontana reviews the Alternative Measurement Method, which is used by small government employers in lieu of an actuarial valuation, and discusses the important changes relevant to small government employers as GASB 74/75 takes effect.