Milliman, Inc., a premier global consulting and actuarial firm, today released the latest results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans.
In February, corporate pension funding improved by $67 billion thanks to a 26-basis-point increase in the monthly discount rate, from January’s 2.62% to 2.88% as of February 28. As a result, the funded status deficit dropped to $133 billion at month’s end. Meanwhile, the market value of assets dropped by $2 billion for the month, the result of a meager 0.13% investment gain. Overall the funded ratio for the Milliman PFI plans climbed from 89.7% at the end of January to 92.9% as of February 28, the fifth straight month of improved funding for these plans.
Because the state systemically underestimates its pension debt, it also underestimates the taxpayer contributions necessary to keep the debt from growing each year. During the past decade, officially-reported growth in pension debt outpaced the state’s initial projections by $24 billion. Growth in annual taxpayer contributions exceeded state estimates by about 15% per year on average, causing taxpayers to contribute $7.6 billion more than projected during the decade. Still, that extra money has not slowed a mushrooming pension debt. The state’s regular upward revisions demonstrate Moody’s method, which is more in line with private sector standards, is more accurate.
Because employee contributions to the pension funds and benefits paid out are both fixed by state law, taxpayers must make up for any shortfall caused when investment returns miss rosy targets. For example, the largest of Illinois’ five state pension systems, the Teachers’ Retirement System, reported a 0.52% return on investment in fiscal year 2020, which included the first four months of the COVID-19 pandemic. That was far short of the TRS’s 7% return target and helped grow the debt.
The latest analysis by the Pension Integrity Project at Reason Foundation, updated this month (February 2021), shows that deviations from the plan’s investment return assumptions have been the largest contributor to the unfunded liability, adding $897 million since 2002. The analysis also shows that failing to meet investment targets will likely be a problem for TRS going forward, as projections reveal the pension plan has roughly a 50 percent chance of meeting their 7.5 percent assumed rate of investment return in both the short and long term.
In recent years TRS has also made necessary adjustments to various actuarial assumptions, exposing over $400 million in previously unrecognized unfunded liabilities. The overall growth in unfunded liabilities has driven Montana’s pension benefit costs higher while crowding out other education spending priorities in the state, like classroom programming and teacher pay raises.
The state assumes the pension funds will continue to earn an average of nearly 7 percent a year, while Moody’s lowered its assumptions for 2020 to just 2.7 percent: “the FTSE Pension Liability Index, a high-grade corporate bond index Moody’s uses to value state and local government pension liabilities, fell to 2.70% as of June 30, 2020, from 3.51% the prior year.”
Moody’s also reported that the asset-to-payout ratio for the state’s funds are now equal to about seven years’ worth of payouts.
The average funding ratio of 19 U.S. publicly listed corporations with more than $20 billion in global pension fund liabilities totaled 86.2% at the end of 2020, up from 84.9% at the start of the year, according to a report from Russell Investments.
Strong investment returns offset a decrease in the discount rate of more than 70 basis points that brought the total liabilities of the club to more than $1 trillion for the first time, said the report released Tuesday.
Assets for the “$20 billion club” totaled $901.9 billion as of Dec. 31, up 8.6% from the start of the year, and projected benefit obligations totaled $1.05 trillion, up 7.3% from the start of the year.
Illinois taxpayers pay more than $2.1 million a month to retired part-time state legislators or their surviving spouses from a fund that’s only 16% funded. The individual monthly payouts are as high as $18,000 per month. Some pensioners aren’t actually retired but still getting paid.
There are 425 people drawing off the General Assembly Retirement System, ranging from $122 a month to $18,000.
At 16% funded, state Rep. Mark Batinick, R-Plainfield, said GARS is the worst of the state’s five public sector pension funds.
Robust investment returns helped boost the aggregate funded percentage of all US multiemployer pension plans to 88% at the end of 2020, from 85% a year earlier—the highest since before the global financial crisis at the end of 2007—according to consulting and actuarial firm Milliman.
The strong performance came despite a turbulent year of market volatility due to the impact of the COVID-19 pandemic. The volatility caused those same plans’ funded ratio to plunge to 72% during the first quarter of the year, which was the largest quarterly drop in funded percentage since 2007. That was followed by a rebound to 82% in the second quarter, which was the largest quarterly increase in funded percentage since 2007.
This Report addresses the widespread underfunding of the retirement systems in the nation’s state and local governments. It begins by summarizing some past, current, and probable future trends of unfunded pension liability at the state and local levels. It describes the scope of unfunded pension debt in various state and local jurisdictions and calculates both their aggregate debt and per capita debt, based on states’ self-assessments; it then incorporates a variety of other measurements of unfunded liability. Results from many of those other measures suggest that the magnitude of unfunded pension liability may be considerably larger than previously indicated.
This Report then describes and analyzes the inherent dynamics of government retirement systems that have produced this underfunding, finding that there are a variety of pressures and processes within these retirement systems that can operate to the disadvantage of employees, beneficiaries, and the public generally. It then summarizes attempts to reform pension systems in several states. Some of those states now have relatively sound retirement systems; others less so. It then contrasts the requirements that govern most private-sector pensions to the relatively relaxed regulatory regimes of state and local government pensions, concluding that adoption of rules similar to those governing private sector requirements would likely have positive consequences if implemented for state and local government pension plans and their beneficiaries.
The nation’s experience with unfunded pension liability at the state and local government levels may provide some lessons for policymakers; this Report concludes with several recommendations in this area.
Author(s): Daniel Greenberg: Senior Policy Advisor in the Veterans’ Employment and Training Service; Jay Sirot: Special Assistant in the Office of the Assistant Secretary for Policy
The funded ratio of the 100 largest corporate defined benefit (DB) pension plans improved to 89.8% at the end of January from 88.1% at the end of December as their aggregate deficit fell below $200 billion for the first time in more than a year, according to consulting firm Milliman.
With the help of a 16 basis point (bp) increase in the monthly discount rate to 2.62% from 2.46%, the plans’ funding improved by $39 billion in January as their aggregate deficit declined to $196 billion from $235 billion due to liability gains incurred during the month.
NORTH PROVIDENCE – The town’s police pension fund last year gained more than 10 percent, or $4.7 million, says Mayor Charles Lombardi, a huge year for a fund that was once in tatters.
The Breeze reported back in September 2013 that the town’s injection of $20.6 million from the Police Department’s $60 million winnings in a settlement with Google a year earlier had pushed the fund to more than 95 percent funded.
The state’s 2019 report on locally administered pension plans showed that the fund lost about 8.1 percent on its funded status from 2012 to 2018, to 86.8 percent, and that number was about 88 percent last year, said Lombardi. He said the town’s actuary hasn’t completed its work yet, but he’s hoping that funding status could reach 90 to 92 percent with this latest positive news.
Last week, the House Ways and Means Committee approved a massive taxpayer bailout of private sector multiemployer defined benefit pension plans, or MEPs, as part of a budget reconciliation package that is purportedly meant to deal with COVID-19. Senate Budget Committee Chairman Bernie Sanders claims MEPs are underfunded because “of the greed on Wall Street.” But MEPs are troubled because of mismanagement, not because of COVID-19 or Wall Street.
MEPs are jointly sponsored by a union and companies employing members of that union. It is not clear why taxpayers, who had no role in making these pension promises, should be funding them.
The proposal would saddle taxpayers with unfunded pension promises made by eligible MEPs, which are underfunded by more than $100 billion, while providing perverse incentives for other MEPs to subsequently qualify. This would be extremely expensive as MEPs are already underfunded by $673 billion as of 2017 (a funding ratio of 42%).
The public pension system lost $1 trillion, a 21 percent loss for the fiscal year, following the COVID-19 lockdowns in March. In turn, these losses have added an overwhelming amount of stress on our public pension systems, as state and local pensions were already facing a $4.1 trillion shortfall. Public pension liabilities are on track to increase to $1.62 trillion this year, up from $1.35 trillion in 2019. These numbers are alarming as many governments now have less capacity to defer cost hikes or take mitigating actions because their non-asset cash flow has greatly declined.
Two of America’s most dire pension plan systems are in California and Illinois, two of the country’s largest states with large numbers of workers in defined contribution plans. In California, the economic effects of the virus are evident on the already strained public pension system. At the end of the first quarter, the California Public Employees’ Retirement System, reported that their asset value had dropped 10.5 percent since June 2019 — a loss of $35 billion. Matters have only gotten worse in Illinois and could soon hit a level of catastrophe if aid does not come forth. Moody’s estimates that Illinois’ pension liability will rise from $230 billion in 2019 to $261 billion in 2020.
Author(s): Kevin O’Connor
Publication Date: 28 January 2021
Publication Site: Institute for Pension Fund Integrity