Public Pension Gap Widening Between Top and Bottom Funds

The best third is 90% funded, and the worst third is at 55% and falling, a new study says.

At 72%, the average 2017 funded status of public pension plans has barely changed in the past few years. And while it remains steady, trends are suggesting a larger gap brewing between the top and bottom thirds.

Splitting 180 plans from best-, worst-, and middle-funded levels from 2001 to 2017, the Center for State and Local Government Excellence (SLGE) and the Boston College Center for Retirement Research noticed the top plans average about 90% funded, while the bottom sit at about 55%—and continue to slip in the wake of the 2008-09 financial crisis.

Mid-level pensions averaged at 73% funded.

To change these measures, the collaborative paper, titled “Stability in Overall Pension Plan Funding Masks a Growing Divide,” said the declining tier will likely “require intervention beyond traditional reforms to change the trajectory of their funded status.”

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

Due to smoothing rates, which averages three strong years and two weak ones, assets grew by 5.2%, to $3.64 trillion from $3.46 trillion, between 2016 and 2017.  Actuarial liabilities grew by 4.9%,  to $5.07 trillion from $4.83 trillion. The liability values are based on a plan’s annual discount rate.

While the costs of plans were about the same across the board, one of the top factors in the increased liabilities of these lower-tier plans was the lack of contributions paid. While the higher and middle bracket saw 95% and 80% of their required contributions, the bottom rung only obtained 74% of what they were promised.

Market corrections and underperformance also contributed to the pensions’ problems, with greater losses coming from the 55%-funded and below plans.

The top plans are fine for now as long as they don’t make any radical changes to their strategies, but the lower and middle are in varying degrees of trouble. The big concern is, of course, a market downturn within the next year.

In this scenario, the report says plans will either return exactly their assumed rates annually, or lose 15% of their assets. Should the best of those two scenarios occur, the average status could hit 76% by 2022. In the worst-case scenario, it’ll fall to 71%, even if plans generate strong returns from 2020 to 2022.

“Public pensions plans often are ‘clumped together’ when the funding status is described in policy discussions and covered by the news media,” Joshua M. Franzel, president and CEO of SLGE. “Generalizations often are made about all public plans as if they were monolithic, but they are not. The data indicate that state and local plans are not in the same fiscal position, do not face the same challenges, and do not have the same funding histories.”

Tags: , , ,

Prudential Closes $3.2 Billion in New UK Longevity Reinsurance Deals

Firm says market for pension de-risking is expanding at its fastest pace in years.

US-based Prudential Retirement, a unit of insurance giant Prudential Financial, has concluded $3.2 billion in previously undisclosed longevity reinsurance contracts, which the company says is another sign that pension de-risking activity in the UK is continuing at a brisk pace.

As part of the transactions, Prudential assumes the longevity risk for approximately 13,200 British retirees.

“The market for pension de-risking solutions is expanding at its fastest pace in years,” said Prudential in a release, “in part because such activity has become more affordable than at any point in the last decade.”

Prudential said the affordability of pension buy-ins and buy-outs is due in part to the improved funded status of UK pension plans.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

“The average UK pension scheme is at or near full funding, a material improvement over the last two years,” Amy Kessler, Prudential’s head of longevity risk transfer, said in a release. “Pensions are actively taking advantage of this environment by locking in these gains and transferring risk, knowing that such periods don’t last forever.”

According to JLT Employee Benefits, the funding level of the pension plans of the FTSE 100 and FTSE 350 companies reached 100% and 99%, respectively, in October, while the funded level for all private sector pension plans in the UK is 98%.

Prudential said the longevity reinsurance contracts follow at least 10 others during the last 12 months that are $1 billion or more in size. It also said 2018 is shaping up to be one of the best years on record in the market.

“The unprecedented level of market activity in 2018 favors insurers and reinsurers who have invested in their pricing teams and analytics,” said David Lang, vice president at Prudential Financial. “It also favors pension schemes that come prepared with credible and complete data.”

Earlier this month, International Paper purchased a $1.6 billion group annuity contract from the Prudential Insurance Company of America, which moved the benefit obligations of 23,000 retirees to the insurer. The deal was the second-largest agreement in 2018, behind FedEx’s $6 billion arrangement with MetLife in May.

Tags: , , ,

«