Volatile equity markets are being blamed for a decline in the funded status of the100 largest US public defined benefit pension plans during the first quarter of the year. The funded status dropped to 71.4% from 73.1% at the end of the previous quarter.
According to consulting and actuarial firm Milliman’s Public Pension Funding Index (PPFI), the 100 largest public defined benefit pension plans had a $93 billion loss in funding during the first quarter, as the aggregate investment returns for the plans were down 0.75%.
This is a reversal of fortune from the last quarter of 2017, when the funds took in investment income of approximately $126 billion. This aggregate investment return of 3.24% raised their funded status to 73.1% from 71.6% at the end of the third quarter of last year.
“After more than a year of running smoothly, the market stubbed its toe in Q1,” Becky Sielman, author of the Milliman 100 Public Pension Funding Index, said in a release. “As a result, much of last year’s robust pension funding gains were washed away in early 2018.”
During the quarter, the estimated returns ranged from a loss of 1.91% at the low end, to a loss of 0.03% at the high end, as the Milliman 100 PPFI deficit grew to $1.425 trillion from $1.332 trillion. According to Milliman, the losses resulted in six plans dropping below the 90% funded mark, with only 15 plans now above that watermark, down from 21 as of the fourth quarter of 2017. At the same time, 26 of the 100 plans now have funded ratios below the critical status threshold of 60%, with 10 plans that are less than 40% funded.
The aggregate asset value of the pension funds decreased to $3.560 trillion at the end of Q1 from $3.615 trillion at the end of Q4. The plans lost an investment market value of approximately $27 billion on top of approximately $28 billion of outflows, as benefits paid out exceeded contributions coming in from employers and plan members.
Meanwhile, the total pension liability increased to an estimated $4.985 trillion at the end of Q1 from $4.947 trillion at the end of Q4.
“Just as pension assets grow over time with investment income and shrink over time as benefits are paid, so too does the [total pension liability] grow over time with interest and shrink as benefits are paid,” said Milliman in a release. “The TPL also grows as active members accrue pension benefits.”