Public Pensions Face Imminent Funding Challenges

On a market value basis, public pension funded status increased by more than 4% in 2014, according to Milliman’s fourth annual Public Pension Funding Study of the nation’s 100 largest public defined benefit (DB) plans.

Overall reported funded ratios increased from 70.7% to 75%. However, after years of strong asset performance, 2015 has been flat from an equity standpoint, and many public plan sponsors have reduced return assumptions going forward, a trend that reflects today’s market realities but also creates a steeper hill to climb if these pensions are to reach full funding, Milliman says.

“Given the early returns in 2015, the road ahead could be challenging for the 66% of these plans that are less than 80% funded,” says Becky Sielman, author of the Milliman Public Pension Funding Study. “Many public plans have become more realistic about return assumptions in recent years—the median return assumption has decreased from 8% in 2012 to 7.65% this year—which will further steepen the climb to full funding, especially for the 10% of our study that are currently less than 50% funded.”

The study also found, for the first time, retired and inactive members outnumber active members. And the accrued liability for those retirees overshadows the accrued liability for employees by more than 40% in aggregate.