Tag Archives: Accounting

11.22.24
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And So It Is!

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

Milliman has released the results for its Public Pension Funding Index (PPFI), which analyzes data from the nation’s 100 largest public defined benefit plans. They are reporting that the collective funded ratio deteriorated during the last month from 82.8% as of September 30th, to 81.2% as of October 31st, as the combined investments of these plans fell for the first time since April. The estimated return for the PFFI was -1.6%, as losses ranged from -2.9% to -0.6%. The $s lost were roughly $80 billion during the month. The funding deficit now stands at about $1.1 trillion.

You may recall that on November 8th, I produced a blog post titled, “Another Inconsistency”, in which I wrote about Milliman’s reporting of its corporate index that highlighted the fact that the collective funded ratio improved during the month despite asset losses due to the fact that liabilities fell to a great extent as interest rates rose.

I also wrote the following, “what do you think will happen in public fund land? Well, given weak markets, asset levels for Milliman’s public fund index will likely fall” (they did, as reported above). “Given that the discount rate for public pension systems is the ROA, there will be no change in the present value of public pension plans’ future benefit obligations (silly). As a result, instead of witnessing an improvement in the collective funded status of public pensions, we will witness a deterioration.” (and we did!) The inconsistency is startling!

Decisions with regards to benefits and contributions are made all the time based on information related to the funded ratio/status of these pension plans. Using different accounting standards clearly produces different outcomes that might just lead to inappropriate conclusions and the subsequent decisions. Oh, boy!

11.08.24
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Another Inconsistency

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

The US pension industry is so critically important for the financial future of so many American workers. The defined benefit coverage is clearly not what it once was when more than 40% of workers were covered by traditional pension. There were a number of factors that led to the significantly reduced role of DB plans as the primary retirement vehicle. At Ryan ALM we often point out inconsistencies and head-scratching activities that have contributed to this troubling trend. One of the principal issues has been the conflict in accounting rules between GASB (public plans) and FASB (private plans). We frequently highlight these inconsistencies in our quarterly Pension Monitor updates.

The most striking difference between these two organizations is in the accounting for pension liabilities. Private plans use a AA corporate yield curve to value future liabilities, while public plans use the return on asset assumption (ROA) as if assets and liabilities move in lockstep (same growth rate) with one another. As a reminder, liabilities are bond-like in nature and their present values move with interest rates. I mention this relationship once more given market action during October.

Milliman has once again produced the results for the Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest US corporate pension plans (thank goodness that there are still 100 to be found). During the month of October, investment returns produced a -2.53% result. Given similar asset allocations, it is likely that investment results will prove to be negative for public plans, too. We’ll get that update later in the month from Milliman, also. Despite the negative performance result for the PFI members, their collective Funded Ratio improved from 102.5% at the end of September to 103.4% by the end of October.

The improved funding had everything to do with the change in the value of the PFI’s collective liabilities, as US rates rose significantly creating a -0.35%  liability growth rate and a discount rate now at 5.31%. This was the first increase in the discount rate in six months according to Zorast Wadia, author of the PFI. The upward move in the discount rate created a -$51 billion reduction in the projected benefit obligation of the PFI members. That was more than enough to overcome the -$41 billion reduction in assets.

What do you think will happen in public fund land? Well, given weak markets, asset levels for Milliman’s public fund index will likely fall. Given that the discount rate for public pension systems is the ROA, there will be no change in the present value of public pension plans’ future benefit obligations (silly). As a result, instead of witnessing an improvement in the collective funded status of public pensions, we will witness a deterioration. The inconsistency is startling!