By: Russ Kamp, Managing Director, Ryan ALM, Inc.
CalPERS, the roughly $440 billion public pension plan, has reported the plan’s preliminary fiscal performance results through June 30, 2022, at -6.1% or -$29 billion in AUM. I’m sure that there is tremendous handwringing going on throughout Sacramento, if not the whole of California, as those returns are well below their annual return on asset (ROA) objective of 6.8%. This “poor” result follows a spectacular performance year. We’ll not only see many stories about CalPERS, but we’ll soon get a plethora of performance updates from public pensions both large and small all lamenting a similar fate. But were the last 12 months so bad? After all, I was congratulating CalPERS within the title of this post. Was I just being obnoxious?
No, I wasn’t trying to embarrass anyone, but I may have been a little snarky given that a significant majority of folks in our industry would look at the result and say “WOW”, what a terrible return. However, we at Ryan ALM, Inc. look at -6.1% for the fiscal year in a very different light. You see, plan assets are but one piece of the pension puzzle. Sure, they are the piece that gets all the focus and press, but they remain just one part of a very important equation: Assets need to beat liability growth in order to maintain or improve a plan’s funded status. Toward the end of 2021 and into 2022, US interest rates rose rapidly. Those rising rates impacted both bonds and liabilities as they are highly interest rate sensitive. Rising rates will reduce the present value of future benefit payments and liability growth.
The good news for Pension America is the fact that the duration of pension liabilities is on average longer than the duration of the plan’s assets. For the prior 12 months ending June 30, 2022, liability growth for the average plan fell by -16.2% when using ASC 715 discount rates (FASB). As a result, CalPERS actually enjoyed a wonderful performance year as asset performance (despite being negative) far outpaced liability growth. Instead of fretting about a performance result that looked lousy, they should be celebrating the fact that their system actually saw improved funding when liabilities are valued using ASC 715 rates.
Please don’t hesitate to go to Ryanalm.com for additional information pertaining to discount rates and their impact on liabilities.