Tag Archives: public pensions

Public pensions regain ground lost in Q4, experience $78 billion improvement in funded status

Milliman has released the 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 2017, the funded ratio of these plans regained ground lost at the end of last year, climbing from 70.1% at the end of December to 72.0% as of March 31, 2017. These plans saw their funded status improve by $78 billion for the quarter, the result of strong investment returns (measuring 4.29% in aggregate) that led public plan asset growth to outpace the rise in pension liabilities.

Thanks to robust market performance in Q1, the funded ratios for our Milliman 100 plans improved across the board, with five additional pensions crossing the 90% funded mark. And while quarterly investment returns dwarfed those of Q4, the wide range in performance–from a low of 2.12% to a high of 5.06%–highlights the challenge that lies ahead for many poorly funded plans.

Of the Milliman 100 plans, 15 have funded ratios above 90%, 64 have funded ratios between 60% and 90%, and 21 have funded ratios lower than 60%. The Milliman 100 PPFI total pension liability (TPL) increased from $4.659 trillion at the end of Q4 to an estimated $4.698 trillion at the end of Q1. The TPL is expected to grow modestly over time as interest on the TPL and the accrual of new benefits outpaces the benefits paid to retirees.

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 status inches back down in Q4 as asset returns fall short of benchmark

Milliman today released the fourth quarter results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit (DB) pension plans. By December 31, 2016, the funded ratio of these plans had fallen to 70.1%, down from 71.0% at the end of September. The funded status declined by $54 billion, the result of modest investment returns for the fourth quarter that fell short of the quarterly benchmark.

The robust market performance seen post-election helped moderate the losses suffered in October, with Q4 investment returns of about 0.45% in aggregate for the quarter. If the recent surge in the equity market holds up and interest rates remain stable, the returns in 2017 Q1 should be much more promising.

The Milliman 100 PPFI total pension liability (TPL) increased from $4.620 trillion at the end of Q3 to an estimated $4.659 trillion at the end of Q4. The TPL is expected to grow modestly over time as interest on the TPL and the accrual of new benefits outpaces the benefits paid to retirees.

To view the Milliman 100 Public Pension Funding Index, click here. To receive regular updates of Milliman’s pension funding analysis, email us.

Public pension plans’ funded status improves in Q3

Sielman-BeckyMilliman today released the third-quarter results of its Public Pension Funding Index, which consists of the nation’s 100 largest public defined benefit pension plans. As of September 30, the funded ratio of these plans rose to 71.0%, up from 69.8% at the end of June. The funded status improved by $48 billion, the result of an estimated $86 billion increase in plan assets thanks to relatively healthy investment returns of 3.5% for the quarter.

While investment returns were healthier than expected, our Milliman 100 plans experienced a wide range of returns, from an estimated low of 1.33% to a high of 4.37%. Bond funds and commodities generally fared poorly, after having done well in the second quarter. It’s yet to be seen whether they will rebound as we close out the year.

The Milliman 100 PPFI total pension liability (TPL) increased from $4.583 trillion at the end of Q2 to an estimated $4.620 trillion at the end of Q3. The TPL is expected to grow modestly over time as interest on the TPL and the accrual of new benefits outpaces the benefits paid to retirees.

To view the Milliman 100 Public Pension Funding Index, click here. To receive regular updates of Milliman’s pension funding analysis, email us.

Milliman issues fourth annual Public Pension Funding Study, provides objective analysis of funded status for 100 largest plans

Sielman-BeckyMilliman today released its fourth annual Public Pension Funding Study, which consists of the nation’s 100 largest public defined benefit pension plans and analyzes these plans from both a market value and an actuarial value perspective. Another year of strong market conditions in 2014 helped drive a funded status improvement of more than 4%, but challenging times lie ahead. After years of strong asset performance, 2015 has been flat from an equity standpoint. Furthermore, many public plan sponsors have reduced return assumptions going forward, a trend that reflects today’s market realities but also creates a steeper hill to climb if these pensions are to reach full funding.

These pensions had a decent year in 2014, but given the early returns in 2015, the road ahead could be challenging for the 66% of these plans that are less than 80% funded. Many public plans have become more realistic about return assumptions in recent years—the median return assumption has decreased from 8.00% in 2012 to 7.65% this year—which will further steepen the climb to full funding, especially for the 10% of our study that are currently less than 50% funded.

This year’s study revealed that a significant milestone has been reached with the country’s largest public pension plans: for the first time, the number of retired and inactive members covered by these plans outstripped the number of employees who are earning benefits. And the accrued liability for those retirees overshadows the accrued liability for employees by more than 40% in aggregate.

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Changing public pension investment landscape

The global financial crisis shrunk the funding status of many public pensions. Some sponsors are beginning to cut their expected rate of return, and change the way they invest and handle portfolio risk. In this Reuters article, Milliman consultant Tamara Burden provides perspective on how sponsors can better manage their pension investment risk.

The growing recognition that short-term volatility can have a devastating impact on mature pension plans in the $4 trillion sector could herald a sea change in the way public funds invest in the future.

“There is this shift to recognizing risk is a relevant piece of the discussion, it’s not just about how you get the highest returns over a long period of time but that short-term fluctuations in asset levels can be incredibly detrimental,” said Tamara Burden, an actuary at consulting firm Milliman….

Burden is seeking to persuade public pension managers to use Milliman’s risk management strategy to reduce equity exposure in portfolios by shorting stock index futures. This means they don’t have to sell their fund’s equity holdings.

The strategy is being applied to about $70 billion in portfolios with variable annuities, retail mutual funds and collective investment trusts used by 401(k) plans, but so far not in the public pension sector.

Interest, Burden says, has increased this year with about 15 public pension administrators considering a shift versus five during the same period last year.

Sticky contribution rate can enhance public pension funding status

Alternative funding approaches can help public defined benefit (DB) plan sponsors stabilize contribution rates and maintain a healthy funded status. In this article, Milliman actuary Daniel Wade discusses how a fixed, or “sticky,” contribution rate approach helped one large DB retirement system maintain a strong funded ratio.

Here is an excerpt:

While policymakers have the discretion to recommend a change to contribution levels when deemed necessary, the funding and benefits policy has guidelines and metrics to assist those policymakers with the difficult decisions required. The policy has a relatively wide (but not too wide) zone for maintaining the status quo. When the funded ratio is between 95% and 120% and certain other parameters are met, the policy advises that no action should be taken.

Note that the “no action” zone is not symmetric around 100%. This is by design, which is due to the belief that actions required to increase the funded ratio when it dips below 100% are more urgent than taking actions that could decrease the funded ratio as it exceeds 100%. Reserves over 100% may be needed for future rate stabilization. The funded ratio is a useful measure, but it is based on the assumption that best estimates are met. A cushion above 100% is welcomed when assumptions are not met.

Often in the public sector, there are significant governance issues once there is a “surplus” as measured by a funded ratio above 100%. Permanent benefit improvements can be made based on temporary highs in asset values.

… Note that in the System’s policy, the term “funding reserve” is used instead of surplus when the funded ratio is above 100%. While this is only terminology and does not directly influence anything, it reflects a mindset that having a funded ratio above 100% does not mean that you have extra money that must be spent; instead there is a reserve for rate stabilization.

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