MassPRIM Tackles the Liability ‘Everyone’s Ignoring’

Healthcare benefits pose an enormous—and largely ignored—liability for public pensions, according to the head of Massachusetts’ employee fund Steven Grossman, and he’s decided to deal with it.

(August 27, 2012) – Kicking the can down the road, turning a blind eye—the pension world’s most well-worn clichés are usually aimed at shortsighted government officials and executives, not institutional investors themselves. 

But those are just the phrases Massachusetts Treasurer and employee pension Chairman Steven Grossman used to describe the industry’s prevailing attitude toward Other Post-Employment Benefits (OPEB) liabilities, which include the healthcare and life insurance premiums promised to retirees. These amount to $16 billion in unfunded liabilities for the Massachusetts Pension Reserves Investment Management Board (MassPRIM), while the 81%-funded plan’s outstanding pension payouts total $20 billion. 

“I see it as a bigger issue than unfunded pension liabilities, presently,” Grossman told aiCIO recently. “You can’t kick OPEB liabilities down the road indefinitely.” And he has taken decisive action to ensure MassPRIM doesn’t. 

From this year onwards, Massachusetts will set aside in an OPEB-specific fund a chunk of the roughly $300 million annual payment it receives from the Tobacco Master Settlement Agreement. This first year, that chunk is $25 million. Next year, it’s $50 million. By 2022, and the years thereafter, $250 million of the state’s tobacco settlement money will go into a fund for retirees’ healthcare expenses. 

“We’re making a dramatic, decisive move to deal with this enormous issue,” Grossman said. “Ratings agencies have been very interested in whether we could get this plan through the legislative process, and, of course, we did. Dealing with our OPEB liabilities is one of the reasons S&P has upgraded its ratings on some of Massachusetts’ bonds. Investors like to see you keep your promises.” 

Few other public pension funds have taken on their OPEB responsibilities so systemically. (It’s a testament to how little talked-about these liabilities are that searching ‘OPEB’ on turns up zero results.) A 2010 Pew Center report noted, “on average, states have put aside 7.1% of the assets needed to adequately fund retiree healthcare liabilities. Twenty states have not set aside any funds.” Furthermore, even for the sharpest actuary, estimating the size of the liability with any accuracy is notoriously difficult. 

But, of course, even a shaky estimate and firm plan are better than nothing. Or, in Massachusetts’ case, better than the $400 million it had set aside for its $16 billion in OPEB liabilities.

“I don’t want to lecture anybody, but it’s a serious matter for any state,” said Grossman. “You have to find a way to fund obligations.”