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Milliman: Top 100 Pension Plans are in Worse Financial Condition than Reported

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The nation’s top 100 public pension plans are in worse financial condition than is being reported by the funds, according to a new study from Milliman Inc., a consulting and actuarial firm.

From the report:

During the past year, the 100 largest U.S. public pension plans (as measured by accrued liability) reported assets of $2.705 trillion and accrued liabilities of $3.600 trillion, for an aggregate underfunding of $0.895 trillion and an aggregate funded ratio of 75.1%. The asset values the plans use for reporting purposes reflect asset smoothing techniques, which are designed to minimize fluctuations in contribution amounts but may deviate significantly from market value. The liabilities the plans report may not reflect current views on future investment return levels. Using current market values of assets and current views on investment returns, these plans have assets of $2.513 trillion and accrued liabilities of $3.706 trillion, resulting in aggregate underfunding of $1.193 trillion and an aggregate funded ratio of 67.8%. [emphasis mine]

The report found that the $300 billion difference in reported vs. actual unfunded liabilities stemmed from “unrealistically high interest rate assumptions.” Milliman found that the median rate of return among the nation’s top plans was 8 percent, impractical given the current economic environment. After adjusting the median discount rate down to 7.65 percent—a still generous rate of return on investments, according to Moody’s, which recommended a 5.5 percent rate in July—unfunded liabilities were revealed to be much larger, $1.2 trillion to be exact.

By overestimating the rates of return and underestimating their liabilities, these public pension plans are, in effect, deceiving taxpayers of their true cost—a ruse that is sure to cause much consternation when the truth is revealed.