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

Milliman has once again provided perspective on the “average” public pension system with the release of the Public Pension Funding Index (PPFI), which analyzes data from the nation’s 100 largest public defined benefit plans. January’s result has the Milliman 100 PPFI funded ratio declining slightly from 78.2% at the end of 2023 to 77.7% as of January 31, 2024.

They attribute the decline to flat investment gains (-$11 million in market value), -$9 in net negative cash flow, and a slight increase (?) in the value of plan liabilities resulting in a change in funding by $33 million. The current funding gap of the index constituents is now -$1.4 trillion. But is that really what took place in January? We know that pension liabilities are bond-like in nature and move up and down with changes in US interest rates. The US rate environment changed quite a bit in January as yields moved higher across the US Treasury yield curve. Unfortunately, because most public plans are using their return on asset assumption (roughly 7%) to discount the plan’s liabilities, changes in interest rates are not reflected in the calculation of a plan’s liabilities.

How meaningful can the difference in accounting rules be among corporate and public plans? Just take a look at the Ryan ALM Pension Monitor for calendar year 2022, and you’ll note that the difference was substantial. In fact, both types of pension plans investing in the same markets, with reasonably similar asset allocations, had starkly different outcomes (a 32.1% difference!) as a result of the accounting rules used. Furthermore, Milliman reported that corporate plans actually showed improved fund ratios in January as a result of the discount rate change on plan liabilities. “The PFI projected benefit obligation, or pension liabilities, decreased to $1.316 trillion at the end of January 2024 from $1.337 trillion at the end of December 2023. The change resulted from an increase of 14 basis points in the monthly discount rate, to 5.14% for January from 5.00% for December 2023.” (Milliman)

Ron Ryan wrote an incredibly insightful book titled, “The US Pension Crisis” in which he placed appropriate blame on the accounting rules and the differences in how pension liabilities are calculated between FASB (corporate) and GASB (public) methodologies. Why these differences exist is beyond me, especially when one also understands that there exists a third methodology (IASB) that uses an even more conservative standard to measure a plan’s liabilities. Managing a pension plan is not easy, especially when the true value of a pension plan’s liabilities is unknown.

So, January was good for Corporate America’s pension funding, but bad for Public pension plans. With US interest rates having risen sharply since March 2022, the value of plan liabilities is closer to reality, but there still exists a gap today. It would be wonderful if the actuarial profession could agree on one methodology so that we didn’t get conflicting outcomes on an ongoing basis.