The Milliman Public Pension Funding Study annually explores
the funded status of the 100 largest U.S. public pension plans. We
report the plan sponsor’s own assessment of how well funded a
plan is. We also recalibrate the liability for each plan based on
our independent assessment of the expected real return on each
plan’s investments. This process enables us to independently
determine funded status without reflecting any bias or lag that
may exist in the plan sponsor’s own return expectations.
- As of June 30, 2016, the aggregate funded
ratio is estimated to be 69.8%, as markets took
back some of the gains from 2012 to 2014 and
discount rates declined
- Plan sponsors continue to reduce interest rate
assumptions in the expectation that returns over
the coming decades will be lower
- The difference between the average
sponsor-reported assumption of 7.50% and
our independently determined assumption of
6.99% is the highest we have seen, indicating
that pressure to reduce interest rate
assumptions is unlikely to abate
Starting with our 2016 edition of the Milliman Public Pension
Funding Study, we have shifted our focus away from the accrued
liability figures that are used to determine a plan’s funding
requirements; rather, our study is now based on the Total Pension
Liability figures used for financial reporting under Governmental
Accounting Standards Board Statements No. 67 and 68 (GASB
67/68), which apply to governmental entities. For many plans,
the funding accrued liability and the Total Pension Liability are
determined in essentially the same way, but the Total Pension
Liability numbers are more directly comparable from plan to plan.
Also, importantly, the financial reporting requirements include
some key details that enable us to project the Total Pension
Liability forward beyond the plan sponsor’s fiscal year-end.
This permits us to analyze how the funded status of these plans
changes over time in response to shifts in the economic climate.
Based on the information the plan sponsors reported at their
last fiscal year-ends, we project that the plans experienced a
median annualized return on assets of just 1.31% in the period
between their fiscal year-ends and June 30, 2016. Total plan
assets are estimated to have declined from $3.24 trillion to
$3.20 trillion, while the aggregate Total Pension Liability
measured using the plan sponsor’s discount rates is estimated
to have increased from $4.43 trillion to $4.58 trillion. The
funded ratio is estimated to stand at 69.8% as of June 30, 2016,
with an aggregate underfunding of $1.38 trillion. Look for our
funded status updates on a quarterly basis.
Turning to the information reported by the plans as of their most
recent fiscal year-ends (see Figure 1), funded ratios dropped by a few points in the Milliman 2016 Public Pension Funding Study
relative to the 2015 study, largely reflecting the downturn in the
equity market in 2014 and 2015. Most pension plans saw high
market rates of return in both the 2012-2013 and 2013-2014 periods
but disappointing returns since then.
Figure 1: Aggregate funded status as of most recent measurement date ($ trillions)
The decline in the median discount rate from 2013 to 2016 provides
a clear illustration of what many investment experts are referring
to as the current “low return environment.” Market expectations
about future investment returns have fallen substantially since
2000, which has created a significant challenge for public pension
plan sponsors. This study’s independently recalibrated discount
rates are updated annually based on current market expectations,
but few plans reevaluate their assumptions as frequently as
annually. The downward trend in our recalibrated rates indicates
that as plans do periodically reassess their assumptions, further
reductions in interest rate assumptions are likely to be seen.
Study technical appendix
Methodology: Expected investment return
For the purposes of this study, we recalibrated liabilities to reflect discounting at the expected rate of return on current plan assets.
To develop the expected rate of return used in these calculations, we relied on the most recently available asset statements for each
plan, particularly on Statements of Plan Net Assets as disclosed in published Comprehensive Annual Financial Reports. We did not
make adjustments for potential differences between actual asset allocations and target policy asset allocations.
We calculated the expected rate of return with a “building-block method,” using a geometric averaging methodology. We used
Milliman’s December 31, 2015, capital market assumptions to calculate the 50th-percentile 30-year real rate of return, and then added
the plan’s inflation assumption to arrive at the total expected investment return on plan assets. Where the plan inflation assumption
was not available, we used an inflation assumption of 2.50%. We did not make any adjustment to the expected rate of return for plan
expenses, nor did we include any assumption for investment alpha (i.e., we did not assume any excess return over market averages
resulting from active versus passive management).
Methodology: Liability recalibration
We performed the recalibration of liabilities using the sensitivity information disclosed in published Comprehensive Annual
Financial Reports. Where this information was not available, we made adjustments based on available information.