Commentary

Milliman Annual Study on Public Pension Funding

The actuarial and consulting firm Milliman has recently released its annual study exploring the funded status of the 100 largest US public pension plans. Besides using the plan sponsor’s own assessment of the funded status, the study also recalibrates each plan’s assets and liability based on Milliman’s own independent evaluation of the plan’s expected investment return.

The study finds that the aggregate funded ratio increased from 70.7% to 75% through 2014, due to strong investment returns. However, the weak market performance in 2015 will bring down funded ratios, but the effect has not been yet fully recognized because of the time lag in reporting. Overall, the assessed plans have sufficient assets to cover 100% of the reported accrued liability for retirees and inactive members, but have only 39% of the required assets to cover the reported accrued liability for active members.

During the 2012-2015 period, the median reported investment return assumption decreased from 8.00 percent to 7.65 percent, reflecting the continued decline in long-term expected investment returns. However, the reported return assumption may still overestimate the expected returns. Milliman’s independently determined investment return assumption is 7.25 percent, which is 40 basis points lower than the reported 7.65 percent in 2015. As a result, the recalibrated unfunded liability is $1.20 billion (compared with the reported $1.02 billion) and the recalibrated funded ratio is 71.7 percent (compared with the reported 75 percent).

The study also finds that for the first time, retired and inactive members outnumber active members.

To read the full study, go here.

Truong Bui is a policy analyst at Reason Foundation, where he works on the Pension Integrity Project.