Saginaw County Faces Unanticipated Rise in Pension Funding Contribution

Lower investment returns and bigger lifespans mean that Saginaw County, Mich., faces a pension funding shortfall in the coming years, even after issuing $52 million in pension bonds three years ago. At a February 16 meeting, Saginaw News reports, the county Board of Commissioners discussed the situation with the Municipal Employees’ Retirement System (MERS) of Michigan, manager of the county’s pension fund.

The board learned that it owes more than what MERS had estimated last year for the 2017-2018 fiscal year to continue funding the pensions of Saginaw County’s retirees. The county also faces a deficit in the coming years.

Robert Belleman, Saginaw County’s controller, said that the county is “disappointed” with MERS’ estimates that require the county to step in with another $4.5 million in funding for the 2017-2018 fiscal year, representing a 71% rise over the previous year’s annual required contribution.

This situation comes about as MERS adjusts its required employer contributions every year based on the actual experience of the previous year, going by investment experience and demographic experience, as well as changes in actuarial assumptions on mortality rates and changes in the plan’s benefit provisions. As a result of this exercise, in which MERS cut down its estimate of Saginaw County’s investment returns and hiked up the county’s lifespans, the county’s funded level dropped to 90 percent, from 98 percent at the end of 2014.

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According to MERS, it provides customers with six-year projections based on various market volatility scenarios to help them plan for the future.

Jennifer Mausolf, MERS communications director, noted that historically MERS has met an 8% investment assumption over the long term. However, since the financial crisis of 2008, the public plan investment community’s position is that an 8% return assumption may be too high. “We feel it is still too soon to conclude that recent economic conditions have permanently changed future long-term financial markets; however, the MERS Retirement Board determined that it would be prudent to reduce the long-term investment assumption to 7.75 percent per year. This increases the likelihood of meeting or exceeding the assumption,” Mausolf said.

To make up the shortfall, Saginaw County’s Board of Commissioners is contemplating another option that would require it to make an annual contribution of only $2.5 million for the fiscal year and effectively “recalculate our amortization from an average of 4-5 years to 9-10 years.”

The County will also continue to look for ways to enable it to make more than the required contribution to address this shortfall, according to Belleman. And although MERS has reduced its expected rate of return on investments from 8% to 7.75%, Belleman believes this is still on the high side, considering MERS’ average annual return of 6.75 percent over the past 15 to 20 years.

Another factor that could impact investment returns would be the possibility of a recession. According to MERS, “Recessions are a natural part of the business cycle. Prudent institutional investors, like MERS, anticipate market downturns and factor those events into our financial models. Given that we are over eight years into a recovery, it seems likely that some kind of slowdown in growth is likely in the next couple of years.”

By Poonkulali Thangavelu

In a move to boost returns, Chinese pension funds have begun investing in securities, a radical change from their traditionally low-risk, low-return strategy of leaving the funds in banks, or investing in treasury bills.

Seven provincial-level regions, including China’s two largest cities of Shanghai and Beijing, have entrusted their pension funds to the National Council for Social Security Fund (NCSSF) for investment.

The National Social Security Fund (NSSF) is China’s social security reserve fund to supplement and adjust the social security spending, such as social insurance during the peak time period of the aging of population. The funding sources of NSSF include fiscal allocation from the central government, the transfer of state-owned capital and the fund investment proceeds, and capital raised by other methods approved by the State Council.

Although the provincial governments are not allowed to invest in financial products such as equities and bonds, the NCSSF is allowed. The fund holds close to $300 billion in assets, and has returned an average 8.8% per year since 2000, included a 15% investment return in 2015, according to Bloomberg News, citing Shanghai’s Securities Daily state media reports. However, the locally managed pension funds only returned approximately 2.3%

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Chinese state news agencies reported that 360 billion yuan ($52.41 billion) is being transferred from bank accounts operated by local authorities to the NCSSF for centralized asset management.

The decision, which is a fundamental change in the way China’s pension funds are managed, was first announced in 2015. The State Council had issued guidelines to ease investment rules on pension funds, and allowed their entry into the stock market, which had been suffering from extreme volatility.

The hope was that the markets would become more stable from the massive injection of long-term investments that could come from pension funds, while at the same time the funds would benefit from higher returns.

In December, the Chinese government approved 21 pension-fund management institutions, which included 14 fund management companies, six insurance companies, and one securities firm. China Asset Management, China Life Pension, and CITIC Securities were among the approved firms.

On Wednesday, China’s State Council announced it will further loosen access restrictions on private investment, and encourage participation in sectors such as medical services, elder care, education, culture and sports. The government will encourage investment funds dominated by private capital and operating under market mechanisms, according to a statement released after a State Council executive meeting.

There will be more financing channels in the equity and bond markets, and collateral financing, enabling companies to use their intellectual property rights and rights to earnings as collateral to secure financing. Favorable policies in land use and taxation for private investment will also be established.

By Michael Katz