The aggregate funded status of the 100 largest public pension funds declined slightly last year as the result of increasing liabilities, according to the Milliman 2013 Public Pension Funding Study.
The funded status fell to 72.4% from 75.1%, based on data reported by the plans in their most recent annual reports, which span from June 30, 2010, to Dec. 31, 2012. However, Milliman also independently determined an actuarial interest rate assumption for each plan based on the asset allocation to calculate plan liabilities and funded status. Under Milliman's calculation, the funded status declined to 70.6% from 73%. The report does give credit to public plans on how liabilities are calculated, as Milliman's method results in just 2.6% more in liabilities.
The gap between plans' reported liabilities and Milliman's calculation decreased to about $90 billion from $110 billion last year. A large factor in that decrease is 29 plans lowered their assumed rate of return since the 2012 report, causing the median rate to decrease to 7.75% from 8%. Milliman's own median determined rate decreased to 7.47% from 7.65%. There were 28 plans that had rates below Milliman's calculation.
“The most interesting thing is to have so many plans lower their interest rate assumption,” said Rebecca A. Sielman, principal and consulting actuary for Milliman and author of the report. “It wasn't unexpected, but it's good to see it actually happening.” She added an important reason for doing the report is to “independently kick the tires to see if plans are using the right interest rate assumptions or not.”
Total assets of the 100 plans increased to $2.73 trillion from $2.71 trillion, while liabilities increased to $3.77 trillion from $3.6 trillion, according to plan reports. Milliman's recalibration showed liabilities increasing to $3.86 trillion from $3.71 trillion.
The aggregate liabilities are trending more toward the retired population than active participants. Of the $3.77 trillion in liabilities, $1.62 trillion was attributed to 12.6 million working members, compared to $2.15 trillion for the 11.8 million retirees and those who are not now employed by the state or municipality but have not started receiving their pension yet. Since the 2012 report, the active population declined by 200,000, while the inactive increased 900,000. Plans have 100% of assets necessary to cover retiree liabilities, but only 27% for active participants.
For the first time, Milliman reported a median asset volatility ratio, which is the ratio of plan assets to payroll of active participants, of 3.9. Eighteen plans had a ratio of 5.5 or more.
“The bigger (the number) is, you have to be more careful with the volatility of (pension) contributions,” Ms. Sielman said in a telephone interview.