Pension Crisis Is Much Worse Than It SeemsRupert Hargreaves
The scale of the pensions crisis facing the US is enormous but it's difficult to quantify just how impossible the task of pension trustees has now become.
Milliman tries to solve this issue with its annual Public Pension Funding Study. It just released its 2017 edition and it makes for grim reading.
- Public Pension Finances In Dire Conditions, Will Get Worse ...
- Pension Burdens Rise As Liabilities Double In Just A Few Years
- Pension Funds Underperform While Placing Blame On Hedge Funds
The key takeaway from the report is that although equities have rallied by 15% since the last report was released, the largest 100 public pensions were roughly just as underfunded on June 30, 2017 as they were on June 30, 2016. This is a hugely worrying statistic. As it turns out, funds have profited from the rise in equity prices, but liabilities have expanded at a much faster rate.
According to the study, (which is based on figures reported for fiscal year ends 2016) total plan assets for the 100 funds considered, as of the last fiscal year ends stood at $3.19 trillion, down from $3.24 trillion as of the prior fiscal year ends. However, based on the equity performance since the fiscal year ends 2016, “we estimate that aggregate plan assets have jumped to $3.44 trillion as of June 30, 2017. We estimate that the plans experienced a median annualized return on assets of 11.49% in the period between their fiscal year ends and June 30, 2017.”
Despite this asset return performance, Milliman estimates that the total pension liability has increased to $4.87 trillion as of June 30, 2017, up from $4.72 trillion last year and $4.43 trillion for 2015. The aggregate underfunding as of the last fiscal year ends stood at $1.53 trillion.
So, on the face of it, pension funds in aggregate are nowhere near funded enough, and the picture only gets worse if you dig into the data.
Underfunded Pensions: Crisis Is Much Worse Than It Seems
According to Milliman’s report, 32 plans have funded ratios of less than 60% and only 9% of the 100 funds considered have funded ratios higher than 90%. Meanwhile, it’s almost certain that funds’ true funding status is worse than official figures suggest as they are using a high discount rate to make their present values appear lower than they actually are. Milliman notes, the median expected return of the 100 largest public pension funds in the US is somewhere around 5.9% based on the asset allocations of those funds. However, 83 of the top 100 funds used discount rates in excess of 7%. According to the report, overstating a fund's discount rate by just 1% artificially reduces it's benefit liability by up to 15%.
Underfunded Pensions: Canada's Growing Problem. Updated -- Oct 17, 2017
The US isn’t the only nation that is facing underfunded pensions problems.
Canada (among other nations) is also facing a looming pensions crisis, although the nation is better prepared than many others.
Canada's pension problem
According to a report published by credit ratings agency Moody’s, Between 2006-16, the average active-to-retired ratio of the largest six Canadian pension plan fell to
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