Milliman’s Q1’22 Public Fund Update

By: Russ Kamp, managing Director, Ryan ALM, Inc.

The Milliman organization produces an outstanding report each quarter that covers changes in the funding levels for both corporate as well as public pension systems. The Public Pension Funding Index (PPFI) report was released recently and it covers the top 100 public pension defined benefit plans through March 31, 2022. According to Milliman, the top public pension systems recorded investment losses of roughly 3.4% during those three months resulting in a funded status deterioration of $167 billion. The collective funded ratio declined from 85.5% at the end of 2021 to 82.7% on March 31, 2022.

Public pension systems operate under GASB accounting standards which allow pension liabilities to be valued using the return on asset assumption (ROA) as the discount rate to price liabilities. This discount rate is static and doesn’t reflect changes in the US interest rate environment. The good news for public pension systems is that pension liabilities are like bonds. The present value of those liabilities would fall in a rising rate environment if priced on a market value (economic) basis. Yes, pension assets have struggled so far in 2022, but we believe that the average public pension system’s longer duration liabilities would have struggled more. As a result, the $167 billion estimated loss in funded status may not be correct and may actually have improved on an economic basis despite the struggles in the capital markets. Ryan ALM provides a quarterly Newsletter on pension funding. You can check out our Q1’22 report at ryanalm.com/newsletter. 

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