The Milliman Public Pension Funding Study independently measures the aggregate funded status of the 100 largest U.S. public pension plans using basic actuarial principles and reported plan liabilities and assets. The aggregate accrued liability information provided has been determined on a uniform basis with respect to the interest rate assumption across all of the plans in the study. This uniform approach allows for an accurate picture of the overall funded status of these 100 pension plans based on an independent application of Actuarial Standards Board (ASB) standards of practice, actual investment portfolios, and current capital market assumptions. We are not aware of any other study that has taken this approach and we feel this is an important story that needs to be told.
During the past year, the 100 largest U.S. public pension plans (as measured by accrued liability) reported assets of $2.705 trillion and accrued liabilities of $3.600 trillion, for an aggregate underfunding of $0.895 trillion and an aggregate funded ratio of 75.1%. The asset values the plans use for reporting purposes reflect asset smoothing techniques, which are designed to minimize fluctuations in contribution amounts but may deviate significantly from market value. The liabilities the plans report may not reflect current views on future investment return levels. Using current market values of assets and current views on investment returns, these plans have assets of $2.513 trillion and accrued liabilities of $3.706 trillion, resulting in aggregate underfunding of $1.193 trillion and an aggregate funded ratio of 67.8%.
click to enlargeResults reported by the plans
As shown in Figure 1, the plans reported an aggregate actuarial value of assets of $2.705 trillion; by comparison, the aggregate market value of assets was $2.513 trillion. Actuarial asset values are designed to reduce contribution volatility by smoothing market gains and losses, typically over three to five years. The advantage of asset smoothing techniques is that contribution levels are more consistent from year to year. After periods of large market losses such as 2000-2002 and 2007-2009, actuarial asset values may be larger than market values. After periods of large market gains such as the late 1990s, the opposite is generally the case.
Figure 2 shows the relationship of these two asset measures for the plans in this study.
click to enlargeMost pension plans suffered significant asset losses in the 2007-2009 time frame. While these losses were generally followed by sizeable gains during 2009-2011, those gains were typically not as large as the losses that preceded them, leading to plans generally having reported actuarial asset values larger than market values.
In aggregate, the plans included in this study are invested 50.8% in equities; 25.7% in fixed income; 6.6% in real estate; 12.7% in a combination of private equity, hedge funds, and commodities; and 4.2% in cash. However, there is considerable variation in the investment allocation from plan to plan. Figure 3 illustrates this variation, showing the percentage of plan assets invested in non-fixed income asset classes (equities, real estate, private equity, hedge funds, and commodities) as opposed to fixed income and cash.
click to enlargeThe plans reported accrued liabilities totaling $3.600 trillion, consisting of $1.620 trillion for the 12.8 million plan members who are still working and another $1.980 trillion for the 10.9 million plan members who are retired and receiving benefits or who have stopped working but have not yet started collecting their pensions. In aggregate, the plans have assets sufficient to cover 100% of the accrued liability for retirees and inactive members but just 33% of the assets needed to cover the accrued liability for active plan members. But a quarter of the plans lack sufficient assets to even cover all of the accrued liability for retirees and inactive members.
Figures 4 and 5 demonstrate that there is considerable variation across the universe of plans in both the magnitude of the actuarial accrued liability (AAL) per person and in the relative magnitude of the active member liability compared to the liability for retirees.
click to enlarge
click to enlargeMethodology
This study is based on the most recently available Comprehensive Annual Financial Reports and actuarial valuation reports, which reflect valuation dates ranging from June 30, 2009, to January 1, 2012; about two-thirds are from June 30, 2011 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 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 price the plans’ liabilities for accounting purposes or to analyze the funding of individual plans.
Phone:
