A Third of US Public Plans Pessimistic About Funding

A Milliman report has found a third of public final salary plans have lowered their actuarial interest rate assumptions, even though it has hit funding levels.

(November 15, 2013) — A third of large US public defined benefit (DB) plans have altered their liability funding assumptions to a more conservative rate, reflecting their pessimism and recent market returns.

The Milliman 2013 Public Pension Funding Study found that out of the 100 large plans surveyed, 29 said they lowered their actuarial interest rate assumptions, with the median rate decreasing to 7.75% from 8% last year. The actuarial firm’s own calculations revealed a similar decrease—to 7.47% from 7.65% in 2012.

“Most plans are setting their interest rate assumptions in a realistic manner consistent with long-term market return market return expectations,” the report said.

These changes reflected a “declining market consensus” and a downward slide in long-term investment returns, according to the report: Equity and fixed-income expected returns have both fallen by around 200 basis points since 2000.

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Milliman said pension plans could reduce their liability funding assumptions in two ways: a dramatic single cut to the actuarial interest rate or through a series of gradual changes.

The consequences of lowering these is an increase in liabilities and cut in funded ratio, the report found. According to Milliman’s calculations, these plans were on average 70.6% funded and had accrued liabilities of $3.77 trillion on aggregate—an amount that is unlikely to be covered by plans’ current assets.

“In aggregate, the plans currently have assets sufficient to cover 100% of the reported accrued liability for retirees and inactive members, but only 27% of the assets needed to cover the reported accrued liability for active plan members,” the report said.

For each 100 basis point decrease in actuarial interest rate, the liabilities of a pension fund could increase by up to 15%, the study found, impacting a younger plan with more active members more than a mature plan.

The report also found market volatility is still a concern for most pension plans: “While market indices have generally returned to pre-financial crisis levels, many pension plans have not fully recovered from the effects of the market meltdown.”

The median asset volatility ratio for the surveyed plans was 3.9. However, Milliman found 18 of the plans recorded a ratio of 5.5 or higher—a sign that those plans’ greater susceptibility to market instability.

(November 15, 2013) — Fiduciary manager Cardano has published its first five-year fiduciary management results, showing its clients outperformed their peers on a liability base by 30 percentage points, and thrown down the gauntlet to competitors to reveal their figures.

The Anglo-Dutch firm, the clients of which include tyre-maker Pirelli, said this result had been achieved with just a third of the risk of other pensions that had not followed their system. Cardano highlighted the difficult investment conditions its clients and the wider market had experienced over the past five years.

“Over the period, levels of risk have been about a third of the industry average and broadly equivalent to portfolio with a mix of 90% bonds and 10% equities,” said Richard Dowell, head of clients at Cardano UK.

Cardano clients had steady outperformance of the liability benchmark at 2.3% per annum (net of fees). This compares to the average pension fund, Cardano said, which showed an estimated 2.1% per annum decline over the same period. The compound result is a 17% improvement for its clients compared to a 14% decline across the wider industry, representing more than a 30 percentage point difference.

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“We publish our track-record each year and encourage others to join us to create transparency within the fiduciary management industry,” Dowell said.

There is scant data on the performance of fiduciary managers and other outsourced providers. Pick up the December European edition of aiCIO for a full investigation into inadequacies of the market.

Cardano, which collected the prize for innovation in fiduciary management at the inaugural aiCIO Innovation Awards, works with more than 40 major European pension funds and insurance companies. In the UK, Cardano works with pension funds with assets totalling £50 billion, of which £10 billion is managed on a fiduciary basis.

For more information on the aiCIO European Innovation Awards, taking place on May 15, 2014, email epfeuti@assetinternational.com . For European readers, to subscribe to receive the European edition, click here.