Tag Archives: public employers

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.

Public pension funding falls back to 71.4% in the first quarter of 2018

Milliman has released the 2018 first quarter results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans. In Q1, these plans experienced a $93 billion loss in funding, largely resulting from volatile equity markets that produced an aggregate -0.75% investment return for these plans. In comparison, the PPFI investment return for 2017 Q4 was 3.24%. From January 1, 2018, to March 31, 2018, the PPFI pensions saw their funded status drop from 73.1% to 71.4%.

After more than a year of running smoothly, the market stubbed its toe in Q1. As a result, much of last year’s robust pension funding gains were washed away in early 2018.

No plans in our index seem to have made it through the first quarter of 2018 unscathed, with estimated returns ranging from a low of -1.91% to a high of -0.03%; the Milliman 100 PPFI deficit grew from $1.332 trillion to $1.425 trillion during Q1. The losses resulted in six plans dropping below the 90% funded mark, with 15 plans now over 90% funded, down from 21 as of 2017 Q4. At the other end of the spectrum, 26 of the 100 plans now have funded ratios below 60%, with 10 plans that 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.

GASB 67/68: Special Funding Situations

In 2014, new accounting rules for U.S. public pension plans took effect. To implement those rules successfully, a variety of technical concepts regarding newly required calculations need to be understood. The Government Accounting Standards Board (GASB) Statements No. 67 and 68 miniseries discusses special funding situations. With special funding situations, major accounting metrics under GASB must be adjusted to reflect the relationship. Milliman’s Jennifer Sorensen Senta provides perspective in this PERiScope article.

Public DB plans get some love

Here’s some good news about defined benefit (DB) plans: Public employees, in overwhelming numbers, are showing that they understand and appreciate the value of their defined benefit pension plans.

We know this is true because we studied the data from seven statewide retirement systems that offer employees the choice between a DB and a defined contribution (DC) plan such as a 401(k). The systems included in the study were Colorado Public Employees’ Retirement Association, Florida Retirement System, Montana Public Employees Retirement Association, North Dakota Public Employees Retirement System, Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio, and South Carolina Retirement Systems.

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The choice of public employees

Pensions & Investments picks up on the release of the new report on public retirement plan preferences, “Decisions, Decisions.” Here is an excerpt from P&I:

Public-sector employees overwhelmingly choose defined benefit plans over defined contribution plans when given a choice, according to a report by the National Institute on Retirement Security and Milliman.

In six states that offer new employees a choice between DB and DC plans, the report found that DB was chosen by most employees, ranging from 75% to 98% among the state plans.

“If you had an election with 75% of the vote (for a candidate), it would be well past a landslide,” Mark Olleman, a consulting actuary and principal at Milliman, said in a telephone interview. Mr. Olleman is co-author of the report, which was issued Thursday, with Ilana Boivie, an NIRS economist.

Statewide DC plans have lower investment returns than DB plans because DB assets are pooled and professionally managed, according to the report.

“Some states have considered moving from a DB-only to a DC-only structure in an attempt to address an unfunded liability,” the report said. “Making this shift, however, does nothing to close any funding shortfalls and can actually increase retirement costs.”

Reuters casts the findings in an even broader context, comparing public and private employer approaches to retirement:

To fix their persistent pension problems, some U.S. states are looking to reshape their retirement plans to resemble those in the private sector, but they may find may employees resistant and the savings elusive.

For more perspective, check out coverage from Plan SponsorAdvisorOne, Institutional Investor, and BenefitsPro. And you might also might appreciate the article from Investment News with our favorite headline so far: “This just in–DB plans rock.”

New study finds pensions are preferred retirement plan

A new study of the retirement plan choice in the public sector finds that defined benefit (DB) pensions are strongly preferred over 401(k)-type defined contribution (DC) individual accounts.  The study analyzes seven state retirement systems that offer a choice between DB and DC plans to find that the DB uptake rate ranges from 98% to 75%.  The rate for new employees choosing DC plans ranges from 2% to 25% for the plans studied.

In recent years, a few states have offered public employees a choice between primary DB and DC plans.  The new study, Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers, analyzes the choices made by employees and finds that:

  • When given the choice between a primary DB or DC plan, public employees overwhelmingly choose the DB pension plan.
  • DB pensions are more cost-efficient than DC accounts because of higher investment returns and longevity risk pooling.   
  • DC accounts lack supplemental benefits such as death and disability protection. These can still be provided, but require extra contributions outside the DC plan, which are therefore not deposited to the members’ accounts.
  • When states look at shifting from a DB pension to DC accounts, such a shift does not close funding shortfalls and can increase retirement costs.
  • A “hybrid” plan for new employees in Utah provides a unique case study in that it has capped the pension funding risk to the employer and shifted risk to employees.

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