Contributions Are Stepping in the Right Direction, but Missing the Mark

Despite recent sponsor attempts to catch up, unfunded liabilities are getting out of hand, actuaries study finds.

US plan sponsor contributions have been steadily going up, but it’s still not enough to revive underfunded pension funds, a new study shows.

Contributions more than doubled between 2005 and 2017, from $42.4 billion to $88.1 billion, and, on average, they exceeded targets and benchmarks. This is helping cut the unfunded liabilities of pensions as a percentage of payroll, which burgeoned since the financial crisis in 2008. Once the markets collapsed, the funds needed more money as their funding ratios fell with it. This, of course, raised the needed contribution dollars, but according to the study by the Society of Actuaries, the amounts needed weren’t being paid.

Between 2008 and 2013, contributions shrank compared to pre-crash years, and aggregate liabilities grew among the 133 plans that the group examined. By 2017, these obligations had grown 76% from 2005 (from $2.1 trillion to $3.6 trillion). Underfunded burdens increased an absurd 245%, from $290 billion in 2005 to $1 trillion in 2017.

“One thing that is interesting about public plans is that for most states, there’s little or no regulation that says what goes into the plans,” Lisa Schilling, one of the society’s retirement research actuaries who worked on the paper, told CIO. “The legislative bodies that make the budgets allocate whatever they allocate and, for some of those plans, it’s a mere fraction of what those states need.”

What plans invested in since the crisis varies and the contributions made also differ from state to state, but the number is alarming. One of the main drivers has been insufficient contributions. In 2003, when the Society of Actuaries first began researching the subject, 55% of plans weren’t getting what they needed, partly due to the dotcom crash in 2000. This went as high as 84% in 2011 before it shrank to 63% in 2016.

Schilling said it’s likely that this trend dates back further than ’03, but there isn’t enough data to pinpoint when it really started. As for where the money went, it’s impossible to say exactly, but contributions are addressed in state fiscal budgets, and can be absorbed into other budgetary projects.

A silver lining in the research is that payments have been steadily increasing since 2013, going above the aggregate benchmark for reducing liabilities, but they still fell short of both target and benchmark.

In other words, liabilities are growing faster than sponsors can catch up.

Some ways that public plans are trying to increase their funded status is by cutting back on benefits for members and new hires, but that doesn’t solve the contribution problem.

“In the totality of the systems in place, clearly something hasn’t been working well,” Schilling said. She added that in order for things to change, there might have to be something done at the federal level, which won’t come easy.

“I guess the choices are either the federal government steps in and start regulating that, [which] I imagine the states would fight tooth and nail…or the other option is each state has put in legislation to ‘fix’ their problem,” she said.

Should it one day come to the latter, every unique fix would occur on a state-by-state case.

“There’s no silver bullet,” said Schilling. “It’s a sticky wicket and it’s not fun to fix it.”

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