The “Milliman 2013 Public Pension Funding Study” reveals that funded ratios decreased slightly from figures compiled in the 2012 version of the study. This reflects changes in both assets and liabilities, says the author of the study, Rebecca A. Sielman, who is a principal and consulting actuary for Milliman.
“On the asset side, the 12-month period from July 2011 to July 2012 generally saw disappointing investment results, with market returns hovering around 1% to 2%,” says Sielman. “On the liability side, 29 of the 100 plans in the study lowered their interest rate assumptions and therefore increased their reported accrued liabilities.”
The aim of the study, says Sielman, is to assess the health of the public pension plans in the United States. It does so by determining an actuarial interest rate assumption for each plan studied, based on its unique asset allocation and Milliman’s current outlook on future long-term investment returns. It then uses those rate assumptions 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,” says Sielman. From this finding, she concludes that most public pension 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.”
With regard to these interest rate assumptions, the study shows that the median rate used by plans decreased from 8% in the 2012 version of the study to 7.75% in the 2013 one. Sielman says that such a decrease 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% to 7.47%. The lower interest rate assumptions cause accrued liabilities to increase and funded ratios to fall.”
The study also reveals that larger plans tend to be better funded than smaller ones. Results show that the top quartile of plans by reported funded ratio accounts for 35% of the aggregate reported accrued liabilities, while the bottom quartile of plans accounts for 18% of aggregate reported accrued liabilities.
This study is based on the most recently available comprehensive annual financial 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. The reported asset allocation of each included plan has been analyzed to determine an independent measure of the expected long term annual geometric average rate of return on plan assets. According to Milliman, the study is not intended to estimate the plans’ liabilities for settlement accounting purposes or to analyze the funding of individual plans.
Milliman is a provider of expertise in the areas of employee benefits, investment consulting, health care, life insurance and financial services, and property and casualty insurance.
A copy of the study can be downloaded here.