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.