Latest Corporate and Public Pension Articles

A consulting firm called Willis Towers Watson released a report that estimated that corporate funding status of their pensions only improved slightly in 2019: improving from 86% to 87%. This is even though they estimate that investment returns hit 19.8%.

Institutional Investor reported on the reason why there was such limited improvement in funding status even though returns were so significant:

Interest rates experienced the largest one-year drop in two decades last year, said Joseph Gamzon, senior director of retirement at Willis Towers Watson. According to Lewis, this is important because interest rates affect how liabilities are calculated. When they fall, liabilities increase, which affects a pension’s funded status.



I'm guessing this has something to do with net present value calculations. Interestingly, they seem to imply that the problem will grow worse due to funding relief that was provided by the IRS during the great recession.

In the years ahead, corporate pension plans will be facing more challenges when it comes to interest rates, Lewis said, because the funding relief offered by the IRS after the financial crisis will soon expire, which means the adjusted interest rates that corporate pension plans use to calculate their liabilities will fall.

I would hope that any S&P 500 corporation has long planned for this. If they haven't, they're really purposely shoving the knife into the backs of their shareholders.

Chief Investment Officer reports on something that is not new information regarding public pensions:

The think tank [Pew Charitable Trusts] said that more than half of the funds in its database lowered their assumed rates of return in 2017 to an average of 7.3%. That’s down from more than 7.5% in 2016 and 8% in 2007 just before the recession hit.

Pew argues that some public pensions are being clever:

. . . The California Public Employees Retirement System (CalPERS), for example, announced in 2016 that it would decrease its assumed rate of return incrementally from 7.5% in 2017 to 7% by 2021. Pew said that even such incremental changes can have “a significant impact” over time as a one percentage point drop in the discount rate would increase reported liabilities across US plans by more than $500 billion. 

If I understand this correctly, California is just slowly increasing their liabilities over time versus just taking one big hit even though they know what the true liabilities are. Perhaps it is an attempt to allow their cities to adjust to the new reality.

Independent Institute also takes a look at the Pew Charitable Trusts report:

As of 2017, only two states have small surpluses per household in their public-employee pension funds: Wisconsin and South Dakota. The other 48 states would need to tax each of their households anywhere from $666 (Tennessee) to $44,477 (New Jersey) to fill in the fiscal holes that their pension plans for government employees have put them.

Rounding out the top five worst states for their pension liabilities per household are Alaska ($28,681), Hawaii ($28,586), Illinois ($28,408), and Colorado ($26,216). 

What should be pointed out is that a lot of noise is made about Illinois and their pension problems. I on my blog tend to focus on California as this is where I live. Yet, New Jersey, Alaska and Hawaii are worse off then Illinois. Alaska and Hawaii are in the same ball park. New Jersey is really bad off. It is interesting that I read so much about Illinois, but so little about New Jersey.