Milliman is reporting that the aggregate funded ratio for the U.S. Multiemployer pension system improved to 82% from 74% during the first six months, as they estimated that the average plan’s investment gain was 13.4%. It has been a great start to the year for investments, but this metric masks what has truly happened to Pension America in general and multiemployer plans specifically.
As we reported in our October 8, 2019 blog post “How Have DB Plans Faired in 2019”, our fairly conservative asset mix is up 15.7% through September 30th. Regrettably, multiemployer plans (as well as public funds) continue to discount plan liabilities at the ROA (roughly 7.25%). Of course, a dramatic outperformance by the asset side of the equation looks great versus a static discount rate, but the reality is much different. We know that U.S. interest rates have plummeted this year. According to Ryan ALM, valuing liabilities using the U.S. Treasury STRIPS curve has liability growth at 17.6% YTD (9/19). With this view, we see that pension system asset allocations have actually failed to keep pace with the liability side of the equation. In this case, there is no way that the funded ratios have improved, let alone dramatically.
Why is this important? First, asset allocation decisions should reflect the funded status of a plan, and as plans get better funded they should take risk off the table. Doing this based on incorrect information compounds the problem. Second, plans often review benefit decisions (enhancements) when a plan’s funded status sits at certain levels. Thinking that your plan is better funded than it actually is would likely lead to inappropriate decisions. I first witnessed this when I was a consultant to a large state plan in the late 1980s – this issue continues today.
Milliman is also reporting that those plans currently identified as critical and declining did not show the same relative improvement. This is not surprising given their significant call on capital each and every year. As we’ve argued for many years, these plans need a significant infusion of capital in order to survive. They can’t grow their way to success with a significantly declining asset base let alone discounting liabilities at a true rate.
The fact that we still operate under multiple accounting rules for discounting liabilities is just wrong. There may be pain initially with a true accounting for the value of the promises, but once that data is known we can begin to solve the true problem. Pretending that liabilities are X when they are in fact some factor greater than X needs to stop. It is time to wake up and face the truth.