Administration November 12, 2014

Public Pensions May Need to Lower Return Assumptions

Funded ratios of public pension plans rose modestly from last year, but remain near 70% despite several strong years of post-2009 investment returns, according to Milliman.
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The Milliman 2014 Public Pension Funding Study, which annually explores the funded status of the 100 largest U.S. public pension plans, found larger plans in the study tend to be better funded than the smaller plans in the study. The best funded plans, those in the top quartile of plans as measured by the sponsor-reported funded ratio, account for 34% of the aggregate sponsor-reported accrued liabilities, whereas the worst funded plans, those in the bottom quartile, account for only 18% of the aggregate sponsor-reported accrued liabilities.

This year’s study found that the gap between the accrued liability of plans as recalibrated by Milliman and the sponsor-reported accrued liability widened, from 2.6% in the Milliman 2013 Public Pension Funding Study to 3.8% in 2014. This widening gap in liability mirrors a corresponding widening between the investment return assumptions reported by the plans in the study relative to Milliman’s independently determined investment return assumptions.

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While 13 of the 100 plans in the study have lowered their reported investment return assumptions since the Milliman 2013 Public Pension Funding Study, most plans in the study have left their investment return assumptions unchanged. The median investment return assumption reported by the plans decreased from 8% in the 2012 study to 7.75% in the 2013 study, and it remains at 7.75% in the 2014 study. Meanwhile, Milliman sees market consensus views on long-term future investment returns continuing to decline, so its median independently determined investment return assumption decreased from 7.65% in the 2012 study to 7.47% in the 2013 study and to 7.34% in the 2014 study. In aggregate, this suggests that for many plans that have not recently lowered their reported assumptions, some decrease in the investment return assumption may be appropriate, Milliman says.

The plans in the study reported aggregate accrued liabilities of $3.88 trillion for the nearly 25 million members covered by the plans. This total breaks down into $1.61 trillion for the 12.5 million plan members who are still working plus $2.27 trillion for the 12.1 million plan members who are retired and receiving benefits or who have stopped working but have not yet started collecting their pensions. Milliman notes that over the past three years, the number of active members has been fairly stable while the number of retired and inactive members has climbed steadily.

While the aggregate 2014 investment allocation is 73% in non-fixed-income classes and 27% in fixed income, there is considerable investment allocation variation from plan to plan. Milliman found a low correlation between reported funded ratios and the percentage of non-fixed-income assets.

The Milliman 2014 Public Pension Funding Study report is here.

Administration November 12, 2014

Nonqualified Plans Have Issues with Education and Recordkeeping

More than three-quarters (78%) of nonqualified retirement plan sponsors surveyed indicated they have some concerns and challenges with their plans.
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Topping the list of issues among nonqualified retirement plan sponsors is educating participants, increasing participation, maintaining compliance, and ensuring accuracy in the administration of the plan, according to the 2014 Wells Fargo Nonqualified Plan Benchmarking Survey.

One in five respondents cited employee education as a top challenge, while 18% said participation and appreciation for the plan is a top challenge.  Nearly half of plan sponsors indicated they have difficulties with their recordkeeper involving errors, administration, compliance, or poor service, among other factors.

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Flexibility of the recordkeeping system (66%) is the number one factor used to evaluate service providers for nonqualified plans. Also in the top five: cost for services (64%), nonqualified expertise (61%), ability to bundle services (56%), and providing plan design guidance (51%). Two-thirds of plan sponsors said they use their nonqualified plan recordkeeper for plan design services, while one-third said they use the recordkeeper for both plan design and financing.

Thirty percent of plan sponsors said they do not follow a formal due diligence review schedule for their nonqualified plans.

In the nonqualified marketplace, stability is the norm. While about one-third (32%) of plan sponsors intend to make a change to their plan in the next 12 months, there is not one particular type of change that is sweeping through the market.

 

Trends show some plan sponsors are exploring changes to make the plans more generous and others are limiting benefits. For example, 7% of plan sponsors are looking to expand eligibility; 5% are considering limiting eligibility. And 2% might increase their match, while 2% might decrease or eliminate it. The most often mentioned change is to the funding strategy; but even here, only 9% of sponsors mention this as an important consideration for the coming year. 

Account-balance plans outnumber non-account-balance plans by a margin of four to one. Most companies with account balance plans set aside investments to cover participant balances, with mutual funds cited as the most frequently used investment vehicle. 

The majority of nonqualified plan sponsors surveyed (62%) have set up a Rabbi trust for their plans. On average, 83% of plan liabilities are funded. 

More findings from the Wells Fargo survey may be found here.

The survey was conducted in March 2014 in conjunction with Boston Research Technologies. It involved 150 telephone interviews of Fortune 1500 human resources and treasury managers.

 

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