The aggregate funded status of the 100 largest public pension funds increased slightly last year from a market value perspective, said Milliman’s 2014 Public Pension Funding Study.
The funded status rose to 70.7% from 68.5%, based on data reported by the plans in their most recent annual reports. The majority of the valuation dates are June 30, 2013.
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 calculations, the funded status rose to 68.2% from 66.8% from a market value perspective.
Strong market performance drove the funding gains year-over-year, the study concludes.
However, from an actuarial value perspective, the funded status of the 100 largest public pension funds actually decreased, said Rebecca A. Sielman, principal and consulting actuary and author of the report. The funded status declined to 72.1% from 72.4%, based on data reported by the plans. Under Milliman’s calculations, the funded status decreased to 69.4% from 70.6%.
Ms. Sielman said the actuarial values of assets were “much higher” than the market values in the immediate aftermath of the financial crisis. However, “strong market gains over the past several years,” have led to higher market values.
The study also looked at plan sponsors’ investment return assumptions.
Plan sponsors’ investment return assumptions remained relatively the same at a median 7.75% year-over-year but were higher than current long-term market return expectations, Ms. Sielman said. Milliman reduced its own long-term investment return assumption to 7.34% in the 2014 study, down from 7.47% in the 2013 study.
“Plan sponsors need to continue to look at investment return assumptions and lower as necessary so they continue to reflect market thinking about long-term returns,” Ms. Sielman said. Since the 2013 study, 13 out of the 100 plans have reduced their assumptions.
New this year, the study explored whether poorly funded plans are more likely to use “unrealistically high” investment return assumptions or take on more risky investments, Ms. Sielman said. “We found no correlation or hardly any between how well funded a plan is and whether investment return assumptions are too high or (whether the plan) has more risky investments,” Ms. Sielman said.
Total assets of the 100 plans rose to $2.75 trillion, up from $2.58 trillion from a market value perspective, according to plan reports. On an actuarial value basis, assets rose to $2.8 trillion in 2013, up from $2.73 trillion the year prior. Meanwhile, actuarial accrued liabilities totaled $3.88 trillion, up from $3.77 trillion.
