How did public pension plans become underfunded? A recent study by the Center for Retirement Research at Boston College provides some insights to this question. Based on the data on 150 state and local plans in the United States, the study analyses five major factors that lead to changes in unfunded actuarial accrued liability (UAAL):
- Investment returns
- Deviations from actuarial assumptions
- Benefit changes
- Assumption changes
The public pension plans are divided into three groups: “Good”, “Average”, and “Bad”, according to their average funded ratios over the 2001-2013 period. The study finds that, across the three types, lower investment returns’ than assumed was the largest factor behind increases in UAAL. Shortfalls in contributions were the next major factor. However, bad plans’ contributions fell much further short of the normal cost plus interest on unfunded liability than those for the good plans. Also, bad plans’ actuarial experiences significantly deviated from their assumptions, compared to the average and good plans. These facts suggest that discipline in pension funding and reliable actuarial estimates are what set well-funded plans apart from poorly-funded ones.
To read the full study, go here.