Consultants, Defined Benefit, Pension Funds, Public Funds

Zero Correlation Between Level of Public Pension Benefits, Plans’ Funded Status: Milliman

The results of Milliman’s 2018 Public Pension Funding Study (2018 PPFS), which analyzes funding levels of the nation’s 100 largest public pension plans–including an independent assessment on the expected real return of each plan’s investments–revealed no correlation between the level of benefits provided by plan sponsors and the funded status of a plan. It also showed a relatively modest level of benefits being delivered, contradicting a widespread notion that retirement benefits accorded public pension-plan participants are comparatively high.

Milliman’s 2018 annual study is based on the most recently available comprehensive annual financial reports for the 100 largest public pension systems, which reflect measurement dates ranging from June 30, 2015, to December 31, 2017; 91 are from June 30, 2017, or later.

According to the study, the majority (69) of public plans evaluated provide a pension benefit that costs between 0% and 10% of payroll. Three plans in the study actually saw contributions from active members more than cover the annual cost of their own annual pension accruals. On the flip side, 13 plans have a net cost of more than 15% of payroll, indicating relatively costly benefits.


Becky Sielman, principal and consulting actuary, Milliman

“The results of the service-cost analysis were eye-opening because the data indicates quite a modest level of benefits for many current employees, which runs counter to many claims that pension benefits for public employees are high,” said Becky Sielman, a principal and consulting actuary with Milliman and author of the study. “In fact, our study found there is very little correlation between the level of the benefits provided by plan sponsors and the funded status of a plan. Plans with a greater level of benefits are neither better funded–nor more poorly funded–than plans with modest benefits,” she asserted.

A study published last year by The Center for Retirement Research (CRR) at Boston College, titled Stability in Overall Pension Plan Funding Masks a Growing Divide,  also found that there is no real relationship between the benefit-generosity and the funding ratio of a plan. (See related article: Underfunded Plans and Poor Returns Go Hand in Hand: CRR Study) The CRR researchers found that the better-funded plans typically offered better benefits to their employees than the worse-funded ones. In short, “the data shows that the worst-funded plans have not provided higher levels of benefits over the past 17 years,” the report stated.

Avg. Funded Ratio: 72%

Milliman’s 2018 PPFS also found that the estimated aggregate funded ratio of the nation’s largest public pension plans is 72.1% as of June 30, 2018, with assets earning slightly more than anticipated by the plans’ interest rate assumptions. The consultant estimate that aggregate plan assets rose to $3.67 trillion, as of June 30, 2018, and that the plans experienced a median annualized return on assets of 8.29% in the period between their fiscal year-ends and June 30, 2018. Milliman’s estimated, recalibrated total pension liability for these plans has since passed the $5 trillion mark as of June 30, 2018.

Based on the market’s consensus views that long-term investment returns have been declining, the study recalibrated total pension liability for each plan using independently determined interest rate assumptions (the PPFS uses the term “interest rate” to indicate the assumption the plan sponsor has chosen to determine contribution amounts, and the term “discount rate” to indicate the rate used to measure liabilities for financial reporting purposes), according to the press release. (See full report here.)

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