29 plans lowered their interest rate assumptions, which increased their accrued liabilities and lowered their funded ratios. Most plans are setting their interest rate assumptions in a realistic manner consistent with long-term market return expectations. Funded ratios are down slightly.
The Milliman Public Pension Funding Study uses an approach to measure the aggregate funded status of the 100 largest U.S. public pension plans that is unique among studies assessing the health of the country’s public pension plans. Our study independently determines an actuarial interest rate assumption for each plan based on its unique asset allocation and Milliman’s current outlook on future long-term investment returns, then uses the actuarially determined interest rates to recalibrate each plan’s accrued liability. We found that the total recalibrated accrued liability for the plans in the study was just 2.6% larger than the total accrued liability reported by the plans. While the challenge of funding future pension promises remains considerable, our study results indicate that most plans have set their interest rate assumptions and measured their pension liabilities in a realistic, actuarial manner that is consistent with long-term market return expectations. There is more than one way to put a dollar figure on the value of future pension benefits; the focus of this study is the traditional budgeting approach of assessing liability based on the long-term returns expected to be earned by plan assets.
A notable finding of this year’s study is that 29 of the 100 plans in the study have lowered their interest rate assumptions since the Milliman 2012 Public Pension Funding Study. The median interest rate used by the plans decreased from 8.00% in the 2012 study to 7.75% in the 2013 study. This drop is in line with a generally declining market consensus on expected long-term investment returns; our study’s median actuarially determined interest rate similarly decreased from 7.65% in the 2012 study to 7.47% in the 2013 study. Note that lower interest rate assumptions cause accrued liabilities to increase and funded ratios to fall.
Plans report on the size of their assets in two ways: market value, which is well understood; and actuarial value, which reflects asset smoothing techniques designed to moderate year-to-year fluctuations in contribution amounts but which may deviate significantly from market value in periods of sizeable market gains or losses. The 100 plans in this study reported assets totaling $2.58 trillion on a market value basis and $2.73 trillion on an actuarial value basis. By comparison, reported assets in the Milliman 2012 Public Pension Funding Study stood at $2.51 trillion on a market value basis and $2.71 trillion on an actuarial value basis.
Funded ratios have fallen slightly in the Milliman 2013 Public Pension Funding Study relative to the 2012 study, reflecting changes in both assets and liabilities. On the asset side, for more than half of the plans in this study the most recent valuation information available is as of July 1, 2012. The 12-month period from July 2011 to July 2012 generally saw disappointing investment results, with market returns hovering around 1% to 2%. On the liability side, 29 of the plans in this study lowered their interest rate assumptions and therefore increased their reported accrued liabilities.
The larger plans in the study tend to be somewhat better funded than the smaller plans in the study. The top quartile of plans by reported funded ratio accounts for 35% of the aggregate reported accrued liabilities, whereas the bottom quartile of plans accounts for just 18% of the aggregate reported accrued liabilities.
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This study is based on the most recently available Comprehensive Annual Financial Reports and valuation reports, which reflect valuation dates ranging from June 30, 2010, to December 31, 2012; about two-thirds are from June 30, 2012, or later. For the purposes of this study, the reported asset allocation of each of the included plans has been analyzed to determine an independent measure of the expected long-term annual geometric average rate of return on plan assets. The reported accrued liability for each plan has then been recalibrated to reflect this actuarially determined interest rate. This study therefore adjusts for differences between each plan’s assumed rate of investment return and a current market assessment of the expected return based on actual asset allocations. This study is not intended to estimate the plans’ liabilities for settlement accounting purposes or to analyze the funding of individual plans.