Data show public pension plans lowering interest rate assumptions

The discussion about attainable assumptions has become reality. 

The median interest rate used by 29 of the nation’s 100 largest public pension plans dropped from 8% in 2012 to 7.75% in 2013, according to the latest study by Milliman Inc.

The global consulting and actuarial firm, today released its second annual Public Pension Funding Study, which consists of the nation’s 100 largest public defined benefit pension plans. It complements Milliman’s corporate Pension Funding Study, which is now in its 13^th year.

The latest findings are significant since a reduction in interest rates increases accrued liabilities and decreases funded ratios. The average funded ratio across the 100 plans is down slightly from the 2012 study, which reflects both the lowered interest rate assumptions and market movements. Because this study is based on published reports that largely reflect 2012 valuation dates, much of 2013’s strong market performance is not reflected in this study’s results.

“This year’s study reflects a consensus move toward more conservative assumptions,” said Becky Sielman, author of the study. “This is evident in the average reduction in interest rate assumptions since last year’s study. As was the case last year, our independent analysis of these pension plans indicates that most are realistically approaching their funding calculations, with the Milliman analysis only 2.6% larger than the cumulative accrued liability reported by the plans. While that still leaves a sizeable funding hole — these plans are 70.6% funded — at least it offers a realistic view of the road ahead.”

The study provides insight into other aspects of these 100 plans, including investment allocations, liability and asset performance, and asset volatility ratios. Taken as a whole, the study allows for the ongoing, independent measurement of aggregate public pension funded status.

To view the complete study, go to www.milliman.com/PPFS.

Source: Employee Benefit News