Milliman last week released its first Public Pension Funding Study. The purpose of the study was to independently measure the aggregate funding status of the 100 largest public pension plans in the United States, responding to statements made by some sources that public pension liabilities are being significantly underreported.
The study found that, in aggregate, the independently calculated actuarial accrued liabilities of these plans were only 3% higher than the liabilities reported by the plans. While the weighted average investment return assumption being used by the plans was 7.80%, the independent calculations performed in the study suggested a weighted average rate of 7.55%, or a decrease of just 25 basis points from the assumption the plans are actually using. This is in line with the recent trend of plans lowering their investment return assumptions to reflect reduced capital market assumptions since the economic downturn. Interestingly, many plans in the study were actually using a more conservative approach than the independent calculation showed, with 33 of the 100 plans having an investment return assumption lower than the independently calculated rate (and therefore reporting greater actuarial accrued liabilities than the study independently measured for them).
The aggregate funding ratio of the 100 plans, using a market value of assets (MVA) (i.e., the value of the assets with no deferral of gains or losses) and the actuarial accrued liability calculated using an independent measure of investment return rates, was 67.8%. This compared to an MVA-funded ratio of 69.8% as reported by the plans. This indicates that the plans in aggregate are reporting a reasonable estimate of their liabilities. On an actuarial value of assets (AVA) basis, the independent funded ratio measured in the study was 73.0%, compared to 75.1% as reported by the plans.
Although much negative attention has been given to the state of pension plans in the United States, the findings of the Milliman study indicate that on the whole the plans are aware of their funding shortfalls, and are using reasonable investment return assumptions to perform measurements of their liabilities. It should also be noted that many public retirement systems and their plan sponsors are additionally addressing funding needs by adjusting benefit levels; a recent study by the National Conference of State Legislatures found that 43 states have enacted significant pension reform legislation for at least one statewide retirement plan from the beginning of 2009 through the end of 2011.
Clearly, significant additional funding is needed to improve the long-term financial solvency of public pensions; however, based on Milliman’s report, most plans appear to be adhering to a high level of transparency and appropriate calculation in the reporting of pension funding.
More information, including the complete study, can be found here.