Higher interest rates already have translated into higher discount rates for solvency and accounting valuations, which means good news (lower liabilities) for DB pension plans. The sensitivity of a pension plan’s liabilities to the discount rate used to determine their value depends on the demographics of the plan members, the type of valuation and level of discount rates being used. Generally, the “duration” for most pension plan liabilities (defined here as the percentage decrease in liabilities for a 1% increase in discount rates) will range from 10 to 25.
In the United States, the average accounting funded ratio increased from 94.6% in July 2021 to 104.5% in July 2022, according to the Milliman 100 Pension Funding Index, despite significant decreases in plan assets during that time. This is because the average accounting discount rate (typically based on long-term, high-quality bond yields) increased from 2.59% to 4.25% during that same period, driving down accounting liabilities at a faster pace than asset losses. Figure 1 demonstrates this effect in more detail.
With the 5500 filing season done it is time to tentatively get back to some blogging – starting with the plan that was likely to bring the PBGC (and the entire private pension system) down before the SFA bailout and now will be another cog in the hyperinflation wheelbarrow.
Today, the Court of Appeals for the First District of Texas reversed and rendered a decision in favor of the City of Houston against the Houston Firefighters’ Relief and Retirement Fund (HFRRF).
HFRRF had challenged the constitutionality of a Texas statute designed to reform the City’s firefighter pension system that ensures that the actuarial assumptions for determining the City’s contribution rates are based on sound actuarial principles and establishes a process for setting the contribution rate when the City’s and HFRRF’s proposed contribution rates differ by more than two percentage points.
“The City of Houston has consistently maintained the constitutionality of the historic pension reform and welcomes the appeals court ruling,” said Mayor Sylvester Turner. “The firefighters’ pension is now 93 percent funded – compared to just 80 percent funded pre-pension reform – and is actuarially sound. It is important to note that the three pension systems – municipal, police, and fire – are healthier today because of the pension reform we have put in place.”
The latest ruling is the second time the Court of Appeals has upheld the constitutionality of the statute reforming the firefighter pension system, making the pension system more secure for Houston’s firefighters, both now and in the future.
The estimated unfunded pension liability reached as high as $8.2 billion before the 2017 reforms. Today, the unfunded liability of the City’s three pension plans is less than $1.5 billion.
Author(s): MAYOR’S OFFICE FILED UNDER: MYR – OFFICE OF THE MAYOR
Publication Date: 30 Aug 2022 (updated 14 Sept 2022?)
Since the fiscal 2019 reporting period ended, an unprecedented $5 trillion in federal stimulus and other government interventions have buoyed financial markets and strengthened plan balance sheets.2 As a result, state plans earned returns of over 25% in fiscal 2021—a highwater mark not seen since the 1980s. Pew estimates that total unfunded liabilities dropped below $1 trillion by the end of fiscal 2021, which would push state plans to be more than 80% funded for the first time since 2008. (See Figure 1; for more detail, see also Appendix G.) The significant improvement in plans’ fiscal position is due in large part to dramatic increases in employer contributions to state pension funds in the past decade, which boosted assets by more than $200 billion. Since 2010, annual contributions to state pensions have increased by 8% annually, twice the rate of revenue growth. And for the 10 lowest-funded states, the yearly growth in employer contributions averaged 15% over this period. As a result, after decades of underfunding and market losses from risky investment strategies, for the first time this century states are expected to have collectively achieved positive amortization in 2020—meaning that payments into state pension funds were sufficient to pay for current benefits as well as reduce pension debt.
An increase in pension contributions of the size seen over the past decade signals a shift in budget priorities by state policymakers and a recognition that the costs of postponing obligations are untenable if left unaddressed. Although this has improved the outlook for state pension plans, it has also crowded out spending on other important programs and services and left states with less budgetary space to sustain future rises in pension payments.
This report describes a “scorecard”, a standardized summary of pension valuation results (shown on next page), as well as three new metrics, of varying degrees of novelty, to appear on it:
The Scaled Liability is a measurement of pension liabilities against the size of the economy that supports these liabilities. The UAL Stabilization Payment (USP) is an objectively defined cash flow policy standard comparable to the funding ratio, an objectively defined balance sheet policy standard. Risk-Weighting Assets is a proposed method to assess the value of a plan’s assets, taking into account its capacity to endure the downside risk it has taken on through its allocation of investments.
The National Conference on Public Employee Retirement Systems recently released a report entitled “Measuring Public Pension Health: New Metrics, New Approaches” that introduces new mechanisms to account and judge the sustainability of pension plans.
To create these, the report’s author, Tom Sgouros, fellow and co-chair at The Policy Lab at Brown University, formed and hosted the Pension Accounting Working Group, a group made up of actuaries and public pension experts. The group assembled to measure the health of plans, and create new metrics to generate greater insights into a pension’s sustainability, so that trustees and policymakers could make better and more informed decisions.
The working group came up with three new metrics. The first is “scaled liability,” a measurement of pension liabilities against the size of the underlying supporting economy. The second is “unfunded actuarial liability (UAL) stabilization payment,” an objectively defined cash-flow policy standard comparable to the funding ratio. And last is “risk-weighting asset values,” a method to assess the value of a plan’s assets that accounts for a plan’s capacity to endure the downside risk it has taken through the allocation of its assets.
The scaled liability measurement uses economic strength as a proxy for tax capacity. This measurement helps decisionmakers get a read on a plan’s sustainability by providing a comparison between a pension plan and the economic strength of its sponsor. The Federal Reserve includes a comparison of net pension liability with measures of GDP and state revenues in the “Enhanced Financial Accounts” component of its “Financial Accounts of the United States” report.
Retired public service workers gathered Monday to urge lawmakers to put more money into state pension funds.
The pension situation in Illinois is often referred to as a crisis because as of June 2021, the unfunded pension liabilities were almost $140 billion, according to a Commission on Government Forecasting and Accountability report.
That is money the state has promised to retirees who say they need it to live.
There’s a proposal in this year’s budget to put half a billion dollars toward pension debt on top of the required payments from the state.
Decisions made more than 30 years ago drive challenges. The seeds of the City’s pension problems were sown more than three decades ago when the City promised unsustainable benefit increases to members of the retirement system without funding the associated annual Actuarily Determined Contribution (ADC).2
The severity of the situation makes Providence an outlier. The City of Providence’s Employee Retirement System (ERS) is among the lowest funded pension plans in the nation. Since 1991, the City’s unfunded pension liability increased by more than $1 billion. In addition to the pension liabilities, and over and above the pension shortfall, the City’s retiree health benefits are underfunded by approximately $1.1 billion.3 The unfunded liability of the ERS drives costs to City that outpace revenue growth, limiting investments in other priorities. As of June 30, 2020, the ERS was only 22.2 percent funded.4 Total pension liabilities equated to $8,518 per resident – of which $6,629 is not funded.5 In the last twenty years, the City’s unfunded liability per capita increased by $4,000 per resident.
A coalition of civic leaders is recommending that Providence issue a $500 million bond to address the city’s massive unfunded pension obligation.
“Doing nothing is simply not an option,” the Pension Working Group wrote in a 27-page report issued Monday. The group of public officials, working with business and nonprofit leaders, released its recommendations after six months spent studying the city’s staggering pension liability problem.
Providence’s pension plan is funded at 22%, making it one of the weakest employee retirement systems in the nation. Since 1991, the city’s unfunded liability has grown by more than $1 billion, and that doesn’t include a $1.1 billion shortfall in retiree health benefits.
“Current and future retiree liabilities are unsustainable,” the report states.
The City of Pittsburgh has revised its employee pension program. But whether the moves were prudent remains an open question, concludes an analysis by the Allegheny Institute for Public Policy.
It was in December that outgoing Mayor Bill Peduto signed ordinances that eliminated a pension reduction for some city employees, modified the employee contribution rate and extended the number of years that the city will dedicate parking taxes to those pensions.
All this said, new ordinances return and/or add more city employees to the pension plans’ liabilities, increasing them from $87.9 million to $96.9 million, based on an actuarial analysis. And they assume a robust recovery in post-pandemic parking tax revenue to meet the pledged contribution to the pension plans.
But do remember that the 2010 ordinance states that the city’s full faith and credit are pledged to meet the parking tax obligation. “That means other sources of tax or non-tax revenue may be called upon if needed,” Montarti says.
“If the city can reach an 80% funding ratio without the inclusion of the parking tax pledge, then it is possible that the dedication of the revenue to the pensions may end earlier than 2051, based on language in the new ordinances,” he says.
“Why not wait until the pension funding ratio was further into that range or, even better, actually met the level of ‘no distress’ (of 90 percent or above)?” Montarti asks. “What if the stock market underperforms and the city’s pensions lose ground?”
It is Super Bowl time which, for some of us, means that the new 5500 for the Bert Bell/Pete Rozelle NFL Player Retirement Plan (EIN 13-6043636) is out and we get a better idea of how much Joe Burrow really has in common with a Cleveland Iron Worker.
At 25.53% funding (a massive decrease from last year) are the actuaries setting up the next play for this plan to be a Hail Mary?