Tag Archives: gasb

05.09.25
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The Benefits of Using Multiple Discount Rates in a Public Pension Plan

By: Russ Kamp, CEO, Ryan ALM, Inc.

Public pension plan sponsors frequently ask us about the impact of investing in a cash flow matching (CFM) strategy on the fund’s ability to achieve the ROA, which is also the discount rate used to value the plan’s liabilities under GASB accounting. As we’ve discussed many times, the plan’s ROA is actually a blend of ROAs with an “expected” return target assigned to each asset class, except for bonds, which uses the YTM of the index benchmark, and then those forecasts are averaged based on the weight of the exposure within the total asset base. So, despite the fact that GASB requires a single rate to discount the plan’s liabilities, multiple ROA targets have been used for years.

We believe that this process can, and should, be refined even more. We believe that the ROA target should be focused on the plan’s liabilities and not just the assets. With a liability focus one gets the following benefits when using multiple discount rates, including:

  • Risk Matching: Applying different discount rates to different asset or liability segments can better reflect the varying risk profiles of those segments. For example, using a lower, market-based rate for secured benefits (through a CFM process) and a higher rate for more uncertain, investment-backed benefits can align present value (PV) calculations more closely with the actual risks being taken within the fund.
  • Improved Accuracy: Multiple rates may provide a more accurate estimate of liabilities, especially when plan assets are invested in a mix of instruments with different risk and return characteristics.
  • Transparency in Funding Status: By separating liabilities based on funding source or risk, stakeholders get a clearer picture of which obligations are well-secured (those that are defeased through CFM) and which may be more vulnerable to market fluctuations (the growth assets).
  • Policy Flexibility: Using a blended discount rate can help manage the transition when lowering the overall discount rate, avoiding sudden shocks to contribution requirements.

We often discuss the need to bring an element of certainty to the management of DB pension plans, which have embraced uncertainty for years. Bifurcating your plans liabilities (retired lives and actives) and assets (liquidity and growth) into two buckets and applying different discount rates to each brings greater certainty to the management of a pension plan. There is no longer any guessing as to how your liquidity bucket will perform, as the asset cash flows are matched to liability cash flows with certainty and the fund’s cost savings and return are both know on the day that the portfolio is constructed. How wonderful!

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!

10.16.24
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Milliman: Public Pension Funded Ratio at 82.8%

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

Milliman recently released results for its Public Pension Funding Index (PPFI), which covers the nation’s 100 largest public defined benefit plans.

Positive equity market performance in September increased the Milliman 100 PPFI funded ratio from 82.0% at the end of August to 82.8% as of September 30, representing the highest level since March 31, 2022, prior to the Fed’s aggressive rate increases. The previous high-water mark stood at 82.7%. The improved funding for Milliman’s PPFI plans was driven by an estimated 1.4% aggregate return for September 2024 (9.4% for the YTD period). Total fund performance for these 100 public plans ranged from an estimated 0.7% to 2.1% for the month. As a result of the relatively strong performance, PPFI plans gained approximately $72 billion in MV during the latest month. The asset growth was offset by negative cash flow amounting to about $10 billion. It is estimated that the current asset shortfall relative to accrued liabilities is about $1.138 trillion as of September 30. 

In addition, it was reported that an additional 5 of the PPFI members had achieved a 90% or better funded status (34 plans have now eclipsed this level), while regrettably, 14 of the constituents remain at <60%. Given that changing US interest rates do not impact the calculation for pension liabilities under GASB accounting, which uses the ROA as the liability discount rate, the improvement in the collective funded status may be overstated, as US rates continued to decline throughout the third quarter following an upward trajectory to start the calendar year.

10.07.24
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Ryan ALM, Inc. 3Q’24 Pension Monitor

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

We are pleased to share with you the Ryan ALM, Inc. Q3’24 pension monitor. This quarterly report compares different liability growth rates (based on a 12-year average duration) versus the asset growth rate for public, multiemployer, and corporate funds based on the P&I asset allocation survey of the top 1,000 plans which is updated annually each November.

With regard to Q3’24, Public Pension funds (4.9%) outperformed Corporate Pension plans (3.6%) by 1.3% net of liability growth, as public pension plans had a much greater exposure to US equities (21.9%) versus Corporates (12.6%). The S&P 500 continues to produce exceptionally strong returns in this uncertain environment. From a liability standpoint, the ASC 715 discount rates (+4.6%) marginally trailed liability growth for both public and multiemployer plans that operate under GASB accounting rules using the ROA.

Please don’t hesitate to reach out to us with any questions that you might have regarding this monitor.

04.24.24
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Milliman Reports Improved Funding For Public Fund Pension Plans as of March 31, 2024

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

Milliman recently released results for its Public Pension Funding Index (PPFI), which covers the nation’s 100 largest public defined benefit plans.

Positive equity market performance in March increased the Milliman 100 PPFI funded ratio from 78.6% at the end of February to 79.7% as of March 31, representing the highest level since March 31, 2022, prior to the Fed’s aggressive rate increases. The previous high-water mark stood at 82.7%. The improved funding for Milliman’s PPFI plans was driven by an estimated 1.7% aggregate return for March 2024. Total fund performance for these 100 public plans ranged from an estimated 0.9% to 2.6% for the month. As a result of the relatively strong performance, PPFI plans gained approximately $85 billion in MV in March. The asset growth was offset by negative cash flow amounting to about $9 billion. It is estimated that the current asset shortfall relative to accrued liabilities is about $1.271 trillion as of March 31. 

In addition, it was reported that an additional 4 of the PPFI members had achieved a 90% or better funded status, while regrettably, 15 of the constituents remain at <60%. Given that changing US interest rates do not impact the calculation for pension liabilities under GASB accounting, the improvement in March’s collective funded status may be underreported, as US rates continued the upward trajectory begun as the calendar turned to 2024.

04.04.24
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Ryan ALM, Inc. Pension Monitor Q1’24

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

We are pleased to share with you the Ryan ALM, Inc. Q1’24 pension monitor. This quarterly report compares different liability growth rates (based on a 12-year average duration) versus the asset growth rate for public, multiemployer, and corporate funds based on the P&I asset allocation survey of the top 1,000 plans which is updated annually.

With regard to Q1’24, Public pension funds (2.2%) underperformed Corporate Pension plans (3.7%) by 1.5% as ASC 715 discount rates showed a negative growth rate of -1.5% for Q1’24 while the discount rate using the average ROA (GASB accounting) would have appreciated by 1.8%. This outperformance by corporate pension plans was accomplished despite the much greater exposure to US fixed income within corporate pension plans (45.4%) versus both public (18.7%) and multiemployer (18.2%) and the far less exposure to US equities (12.6%) versus publics (21.9%) and multiemployer (22.2%).

Please don’t hesitate to reach out to us with any questions that you might have regarding this monitor.