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

During the last week, I’ve reported on two reports from the Milliman organization. Each pertained to the current state of pension funding with one focused on corporate plans while the other addressed public pension systems. Both studies follow the funding for the top 100 plans in each of the two categories.

With regard to corporate plans, Zorast Wadia, author of the PFI, disclosed that in aggregate the top 100 plans had seen negative asset performance for the third consecutive month. Becky Sielman, co-author of Milliman’s PPFI, also mentioned that asset performance was down in October, and that the Top 100 public plans had also suffered negative performance for the third straight month. In the case of the corporate index the aggregate performance was -2.7% knocking total assets down by $40 billion for the 100 plans, while public plan aggregate performance had declined by only -1.9%, but the asset loss was roughly $89 billion.

Despite the similar performance results, it was reported that corporate plans saw aggregate funding improve as the funded ratio went from 103.6% at the end of September to 104.2% as of October 31. Good for Corporate America! On the other hand, the PPFI highlighted that aggregate pension funding had deteriorated as the funded ratio fell from 73.2% to 71.4%. So, that raises the question: How could both monthly studies highlight negative performance yet corporate plans enjoyed an improved funded ratio, while public pensions saw deterioration by 1.8%?

Well, it comes down to the valuing of plan liabilities. Corporate plans use a more market-based rate (under FASB accounting rules) which is an AA corporate yield curve rate to value their pension obligations, while public pension systems can use the ROA (GASB accounting rules) as the discount rate for their liabilities. In the current environment, with US interest rates rising, the present value (PV) of those future value (FV) liabilities have fallen to a greater extent than the plan assets. With regard to public pension accounting, given the use of the ROA, liability values don’t reflect current market interest rates.

Ryan ALM, Inc.’s founder, Ronald J. Ryan, CEO, wrote an insightful book several years ago titled, “The U.S. Pension Crisis”. It is a deep dive into accounting rules for pension plans, which he believes have distorted the economic reality for pension plans, especially public funds. As I highlighted above, you have two types of plans that experienced similar asset declines, yet one saw improved funding while the other witnessed funding deterioration. How does that make sense? Actuaries have a very challenging job. Why do we make it more challenging given the disparate valuation methodologies? Some in our industry will argue that public pension systems are “Perpetual”. As we’ve seen on a number of occasions, that doesn’t make them sustainable.