Administration August 29, 2012

Unfunded Pension Liabilities Most of States' Debt

August 29, 2012 (PLANSPONSOR.com) - Debt across the 50 states amounts to $4.19 trillion, according to a report from State Budget Solutions.
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Market-valued unfunded public pension liabilities make up more than half of all state debt, accounting for $2.8 trillion of the total. These market-valued pension liabilities provide a realistic view of the money owed to public pension systems as a result of years of skipped payments, borrowed funds and inaccurate discount rate assumptions, the report contends.  

The latest traditionally calculated figures total only $760 billion in unfunded pension liabilities. “Total state debt using these figures is still over $2 trillion, but a comprehensive view of state debt without accurately assessed public pension liabilities disguises the problem,” the report said.  

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States and other sources have not yet released market value pension liability figures for fiscal year 2011, so this year’s report uses the same market-valued pension liability figures first published in 2010 and used in the previous year’s report. Even so, growth in traditionally calculated unfunded pension liability totals indicates that if updated numbers were available, aggregate state debt would have continued to increase. 

Outstanding debt and other post-employment benefit liabilities each contribute approximately $600 billion to total debt. Outstanding debt includes bonds, leases and other regularly assessed components of primary government debt. Post-employment benefits include health care and other non-pension benefit guarantees owed to public employees.  

The final two items included in the total state debt calculation are outstanding unemployment trust fund loans and fiscal year 2013 budget gaps. Unemployment trust fund loans represent payments due to the federal government, often to cover rising unemployment costs as a result of the recent economic downturn. The fiscal year 2013 budget gap is the gap between revenues and expenditures in each state's most recent budget year. Both of these figures declined from last year's report; the budget gap total decreased by more than half.   

“However, these totals failed to make a sizable impact on state debt; their totals are dramatically overshadowed by pension liabilities, OPEB liabilities and outstanding debt,” the report concluded.  

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Benefits August 29, 2012

Through-Retirement DC Investment Options Uncommon

August 29, 2012 (PLANSPONSOR.com) - Americans increasingly rely on defined contribution (DC) plans for retirement savings, but investment options that will help them through retirement have yet to become mainstream, a report found. 
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Even though annuities for DC were introduced in the mid-2000s, they gained little traction from plan sponsors since that time because of fiduciary protection issues, portability and comparability, according to a report titled “Asset Management Industry Market Sizing 2012-2017,” from Financial Research Corp. (FRC), a division of Strategic Insight.

PLANSPONSOR’s annual DC survey found that roughly 5% of plan sponsors in 2011 reported offering an “in-plan” guaranteed income option (i.e., a product that offers a certain amount of monthly income in retirement). Of the sponsors that did offer this option, nearly two-thirds (63%) represented plans with 500 participants or fewer. Less than 1% of plan sponsors (primarily smaller plans) offer an “out-of-plan” guaranteed income option.

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The development of in-plan retirement income products and target-date fund (TDF) glide paths that go through retirement will help assets stay in plans longer, decreasing the potential for lower retention rates of asset managers within these plans when participants retire and roll over their savings, the FRC report said.

“The increased longevity risk has the potential to become a national crisis, so the potential manifestation of this crisis presents both opportunities and challenges for the asset management industry,” Amy LaFrance, senior research analyst at FRC and author of the report, told PLANSPONSOR. “Providers of different channels should better target solutions for specific markets.”  

Additionally, the report indicated that TDFs will experience a 14.4% asset -growth rate over the next five years (2012-2017), despite the scrutiny TDFs received during the 2008 financial crisis due to their level of equity allocations and risk exposure. According to Callan Investments Institute, nearly 70% of DC plans with a qualified default investment alternative (QDIA) option now use TDFs.

Although FRC expects TDFs will experience asset growth—as investors report their confidence in the ability of TDFs to help them achieve retirement goals—it seems to be a limited market for providers. Launches of target-date series are becoming more rare; in fact, three providers have exited the TDF industry since June, LaFrance said.

“With DC assets, projected by Strategic Insight, to reach $5.8 trillion by 2017—representing a 4.4% five-year CAGR (compound annual growth rate)—the recent exodus of TDF providers from the market is alarming,” LaFrance said. “However, the increased regulatory scrutiny, the fiduciary concern, and the litigation propensity of employees may be just some of the factors weighing heavily upon providers.”

To learn how you can get access to this study, please call 617-399-5629 or e-mail kathy.marshall@frcnet.com. 

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