US Defined Benefit Plans Rise in Q2, Recoup Losses from Q4 2018

The 100 largest US public DB plans saw a $50 billion rise in funding during the quarter.

The 100 largest US public defined benefit pension plans saw a $50 billion jump in funding in the second quarter of the year, which caused its funded ratio to rise to 72.2% from 71.0% the previous quarter, according to consulting firm Milliman.

Milliman attributed the increase to solid aggregate investment gains of 2.66% as estimated returns ranged from 1.33% to 4.39% for the plans, which have now mostly recovered the investment losses they suffered during the final quarter of 2018.

“Public pension funded ratios are basically back where they were a year ago,” Becky Sielman, author of the Milliman 100 Public Pension Funding Index, said in a statement. “But over the past 12 months annualized returns, at 6.0%, fell short of long-term expectations. It’s good to remember that investment horizons for these plans are measured in decades, so short-term fluctuations are something plan sponsors have to live with to reap long-term rewards.”

The overall annualized return for the 12 months ending June 30 is slightly under 6.0%, which falls short of most of the plans’ expected long-term earnings assumptions. The aggregate asset value rose to $3.789 trillion at the end of the second quarter from $3.697 trillion at the end of the first quarter. The plans gained investment market value of approximately $119 billion, which was offset by approximately $27 billion flowing out, as benefits paid out exceeded contributions coming in from employers and plan members.

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The aggregate deficit for the plans fell to $1.458 trillion at the end of June from $1.508 trillion at the end of March. And the total pension liability (TPL) for the plans continues to grow and was an estimated $5.247 trillion at the end of the second quarter, up from $5.205 trillion at the end of the prior period.

As the plans’ funded ratios moved higher, three plans moved above the 90% funded mark to bring the total to 17 plans that currently stand above the threshold, compared to 14 at the end of the first quarter. Meanwhile there are 28 plans that have funded ratios below 60%, and nine plans are below 40% funded.

The results of Milliman’s Public Pension Funding Index are based on the pension plan financial reporting information disclosed in the plan sponsors’ comprehensive annual financial reports.

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Senate Holds Hearing on Digital Currencies, Blockchain

Crypto proponents argue current banking system is inefficient and exclusionary.

 

A decade after Bitcoin and blockchain made their debut, the US Senate has finally gotten around to holding a hearing on potential regulatory frameworks for digital currencies.

The hearing, which was held by the Banking, Housing, and Urban Affairs Committee, included expert witnesses Mehrsa Baradaran, a law professor at the UC Irvine School of Law; Rebecca Nelson, a specialist in international trade and finance with the Congressional Research Service, and Jeremy Allaire, CEO of Circle Internet Financial Limited, who represented the Blockchain Association.

“The digital currency and blockchain ecosystem is diverse, and care must be taken in determining what gaps may be present in the existing framework and developing a more comprehensive approach,” US Sen. Mike Crapo, an Idaho Republican and chairman of the committee, said in his opening remarks. “With the appropriate balance of regulation, digital currencies, and their innovative underlying technology could provide meaningful benefits.”

One of the main topics discussed in the hearing was the June announcement by social media giant Facebook that it was delving into cryptocurrencies with the launch of Libra, which will be powered by blockchain technology.

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The new cryptocurrency will be supported by more than two dozen companies including Uber, Spotify, Mastercard, and Visa, and would be classified as a so-called “stablecoin” because its value would be backed by a basket of low-volatility assets, such as bank deposits and short-term government securities, from stable and reputable central banks.

However, as Nelson pointed out in her testimony, there has been a backlash against Facebook’s foray into crypto over questions about its lack of banking expertise, the size of its network, and concerns about its handling of user data. Nelson cited G-7 finance ministers and central bank governors who said Libra raises “serious regulatory and systemic concerns, as well as wider policy issues, which both need to be addressed before such projects can be implemented.”

The creation of digital currencies came in the aftermath of the 2008 financial crises when many expressed dismay at the banking sector, accusing it of creating inequalities, perpetuating fraud, and harming people with their greed-fueled risk-taking.

The cryptocurrency industry aims to offer a more efficient, confidential, and accessible payments system than what is offere by the bank-operated payments system, which they claim is slow, outdated, inefficient, and exclusionary.

“Our existing financial system is in desperate need of transformation,” said Allaire. “We currently have a global system with limited access and exorbitant fees that impose a tax on real economic activity; a system rife with money launderers and financial crime.”

Allaire said that with digital currencies payments and value exchange will be commoditized and become free services on the internet akin to the way that sharing content or data and communicating online are free.

“This will ultimately return hundreds of billions of dollars of value to the real economy,” he said, “as the fees that people and businesses pay to intermediaries to move value drops to zero. This will also lead to greater economic activity between people around the world.”

However, Baradaran argued that “while I share many of the cryptocurrency industry’s concerns with respect to failures of the banking industry, I do not believe cryptocurrency is the best solution to the problems of financial inclusion and equity in banking.”

Among the stated goals of the cryptocurrency industry is to establish a public payments system available to all, but Baradaran said this was unnecessary because such a public payments system already exists—the Federal Reserve.

“The problems of inequality and inefficiency that bitcoin and the cryptocurrency industry has set out to solve are not problems of technology, they are problems of policy,” Baradaran said. “Every American not only deserves the right to participate in the economy, but also to participate democratically in the monetary policy decision-making that affects their lives. We do not need to replace the Federal Reserve or fiat currency to achieve that. In fact, our Congress must do just the opposite and ensure that our public institutions are achieving their mission.”

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