Pension Plan Funding Sputters in 2016

Report finds growth of liabilities is outpacing asset growth.

With the growth of liabilities outpacing that of investments last year, the aggregate funded status of state and local pension plans declined in fiscal year 2016, according to a new report from Boston College’s Center for Retirement Research.

According to the report, the ratio of assets to liabilities fell based on both the old and new standards used by the Governmental Accounting Standards Board. The report measured plan funding using both the new and old standards because, although the new standard has been in effect since 2014, most plans also still report under the traditional rules.

In 2016, the ratio of assets to liabilities for the 170 plans in the Public Plans Database decreased from 73% in 2015 to 72% in 2016, as measured by the traditional GASB standard; and from 73% to 68%, as measured by the new standard. The Public Plans Database was established in 2007 by the Center for Retirement Research, and the Center for State and Local Government Excellence (SLGE). The database covers both defined benefit and defined contribution plans.

“Even though 2017 has been a very good year in terms of market returns,” said the report, “plan funded ratios are projected to grow only modestly by 2021 even if plans achieve their assumed returns, (currently 7.6% on average).”

The report said that in 2016, liabilities valued under the old and new standards grew by 5.6% and 6.3% respectively, which exceeded asset growth, causing the funded ratios to drop. It also said the value of liabilities depends on the rate used to discount promised benefits. 

The traditional discount rate averaged 7.6% across public plans in 2016, while the blended discount rate used for the new GASB standard averaged 7.3%. As a result, the liabilities measured under the new GASB standard were about $160 billion (or 3.3%) greater than those measured under the traditional method.

“The stock market in 2016 continued the poor performance of 2015, decreasing the funded status of state and local pension plans,” said the report. “The revival of markets in 2017 has helped pension plan assets recover. But looking forward, the funded status of plans will depend heavily on both future investment performance and adequate contributions.”

The report said that, assuming plans achieve their expected returns, they are projected to be 72.9% funded under the old GASB standard in 2021, compared to 71.8% today, and 70.6% funded under the new GASB standard, compared to 67.9% today.

“To achieve more meaningful progress in funded levels going forward, plans need to re-evaluate the way their required contributions are calculated,” said the report. “Plans need to set and pay a more sufficient actuarially determined employer contribution, in addition to achieving their assumed returns.”

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