Pension Plan Funding Sputters in 2016

With the growth of liabilities outpacing that of investments last year, the aggregate funded status of state and local pension plans declined in fiscal year 2016, according to a new report from Boston College’s Center for Retirement Research.

According to the report, the ratio of assets to liabilities fell based on both the old and new standards used by the Governmental Accounting Standards Board. The report measured plan funding using both the new and old standards because, although the new standard has been in effect since 2014, most plans also still report under the traditional rules.

In 2016, the ratio of assets to liabilities for the 170 plans in the Public Plans Database decreased from 73% in 2015 to 72% in 2016, as measured by the traditional GASB standard; and from 73% to 68%, as measured by the new standard. The Public Plans Database was established in 2007 by the Center for Retirement Research, and the Center for State and Local Government Excellence (SLGE). The database covers both defined benefit and defined contribution plans.

“Even though 2017 has been a very good year in terms of market returns,” said the report, “plan funded ratios are projected to grow only modestly by 2021 even if plans achieve their assumed returns, (currently 7.6% on average).”

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The report said that in 2016, liabilities valued under the old and new standards grew by 5.6% and 6.3% respectively, which exceeded asset growth, causing the funded ratios to drop. It also said the value of liabilities depends on the rate used to discount promised benefits.

The traditional discount rate averaged 7.6% across public plans in 2016, while the blended discount rate used for the new GASB standard averaged 7.3%. As a result, the liabilities measured under the new GASB standard were about $160 billion (or 3.3%) greater than those measured under the traditional method.

“The stock market in 2016 continued the poor performance of 2015, decreasing the funded status of state and local pension plans,” said the report. “The revival of markets in 2017 has helped pension plan assets recover. But looking forward, the funded status of plans will depend heavily on both future investment performance and adequate contributions.”

The report said that, assuming plans achieve their expected returns, they are projected to be 72.9% funded under the old GASB standard in 2021, compared to 71.8% today, and 70.6% funded under the new GASB standard, compared to 67.9% today.

“To achieve more meaningful progress in funded levels going forward, plans need to re-evaluate the way their required contributions are calculated,” said the report. “Plans need to set and pay a more sufficient actuarially determined employer contribution, in addition to achieving their assumed returns.”

Tags: Boston College, Pension, Public Pension Plans, Research

Approximately 1.1 million fewer women are receiving a state pension because of the increase in pension age from 60 to 63, according to a report from the UK’s Institute for Fiscal Studies (IFS).

According to the report, affected households are receiving an estimated £74 ($98) a week less in state pensions and other state benefits as a result of the pension age increase, which occurred between 2010 and 2016.

“The net effect is that household incomes for women in this age group have fallen by around £32 per week on average,” said the report. “The reduction is similar in cash terms for richer and poorer households, meaning that while the average drop in proportional terms is 12%, the decline is significantly larger, on average, for low-income households (21%) than for high-income households (4%).”

The drop in household incomes caused by the pension age increase have pushed income poverty among 60- to 62-year-old women up sharply, said the report. However, “we found no evidence of any change in measures of material deprivation (that is, people saying that they cannot afford a range of important items),” said the report. “This might suggest that, despite lower incomes, so far families have generally managed to avoid higher levels of deprivation by smoothing their spending over time.”

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For women aged 60 to 62, who now fall below the state pension age, the age increase raised employment rates significantly, increasing the gross earnings of these women by £2.5 billion in total. The report said that for all 60-to 62-year-old women (including those not in paid work), this is equivalent to an average of £44 per week. Despite this increase in employment, it’s not sufficient enough to counter lower incomes, said the report.

“The increased state pension age is boosting employment—and therefore earnings—of affected women,” said Jonathan Cribb, a senior research economist at the IFS, “but this is only partially offsetting reduced incomes from state pensions and other benefits.”

Additional findings from the report include:

The increased state pension age from 60 to 63 boosts the public finances by £5.1 billion per year by 2015–16. The female state pension age is currently continuing to rise, reaching 65 in 2018 and (along with men), and 66 in 2020.
Rates of income poverty among women are greater for those just below the state pension age than for those just above it. The increase in income poverty from increasing the state pension age is due to fact that the working age tax and benefit system is considerably less generous than for those over the state pension age.

The same reform increases the age that single men can claim Pension Credit from 60 to 63 over the same period. The reform reduces benefit incomes of single men aged 60 to 62 by an average of £21 per week (from a pre-reform average of £89), and increases their income poverty rates by 6.1%.

Tags: Institute for Fiscal Studies, Pension, UK

Rising Pension Age Hits Women’s Savings in UK