Tag Archives: public-pensions

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.

06.05.24
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The Status Quo Isn’t Working

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

Anyone who has read just a handful of the >1,400 blog posts that I’ve produced knows that I am a huge fan of defined benefit (DB) plans. That I’ve come to loathe the fact that DB plans were/are viewed as dinosaurs, and as a result have been mostly replaced by ineffective defined contribution plans. As a result, the American worker is less well-off given the greater uncertainty of their funding outcome. A dignified retirement is getting further out of reach for a majority of today’s workers.

That said, just because I desire to see DB plans maintained as the primary retirement vehicle, doesn’t mean that I appreciate how many of them have been managed. The pension plan asset allocations remain focused on the wrong objective, which continues to be the ROA and NOT the plan’s liabilities. It is this mismatch in the primary objective that has exacerbated the volatility of the funded ratio/status and contribution expenses. As I’ve stated many times, it is time to get off the asset allocation rollercoaster. We need to bring an element of certainty to the investment structure despite the fact that outcomes within the capital markets are highly uncertain.

How bad have things been? According to a recently produced analysis by Piscataqua Research, Inc., which regularly reviews the performance of both assets and liabilities for 127 state and local retirement systems, since 2000 contributions as a % of pay have tripled, while funded status has declined by more than 25%. Again, I’m not here to bash public funds. On the contrary, I am here to offer a potential solution to the volatility exhibited. I wrote a piece many years (1/17) ago titled, “Perpetual Doesn’t Mean Sustainable” in which I discussed the need to bring stability to these critically important retirement plans because at some point there might just be a revolt from the taxpayers that are lacking defined benefit participation themselves. We can’t afford to have tens of millions of American public fund workers added to the federal social safety net God forbid their retirement plans are terminated and benefits frozen prematurely.

There is only one asset class – bonds – in which the future performance is known on the day that the bond is acquired. You can’t tell me what Amazon or Tesla will be worth in 10 years or the value of a building or private equity portfolio, but I can tell you how much interest and principal you will have earned on the day that the bond matures, whether that be 3-, 5-, 10- or 30-years from now. That information is incredibly valuable and can be used to match and SECURE the pension plan’s liabilities. That portion of the plan’s assets will now provide stability and certainty reducing the ups and downs exhibited through normal market behavior. Why continue to embrace an asset allocation that has NO certainty? An asset allocation that can create the explosion in contribution expenses that we’ve witnessed.

DB plans need to be protected and preserved! Ryan ALM’s focus is solely on achieving that lofty goal. It should be your goal, too. Let us help you get off the asset allocation rollercoaster before markets reach their peak and we once again ride those market down creating a funding deficit that will take years and major contributions to overcome.