NASRA Publishes Public Fund Survey Summary of Findings for FY 2022

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NASRA Publishes Public Fund Survey Summary of Findings for FY 2022

On November 28, 2023, the National Association of State Retirement Administrators (NASRA) released its Public Fund Survey Summary of Findings for FY 2022. The survey presents key data from 102 mostly statewide retirement systems with 130 public pension plans, covering 13.1 million active members, 10.6 million retirees and other annuitants, and holding $4.5 trillion in assets.

Overall, the retirement systems surveyed represent approximately 90% of state and local DB plan membership and assets as of Fiscal Year (FY) 2022. The Summary of Findings presents information regarding plan funding, membership, benefits, contribution rates, cash flows, and actuarial assumptions. 

Due to the COVID-19 pandemic, the analysis notes that there was an exceptional level of economic and investment market volatility which has continued since early 2020. The aggregate funding level was 76.1% in FY 2022, down from 76.9% in FY 2021. The predominant factor impacting lower funding levels in FY 2022 was the recognition of investment returns below assumptions in previous years, combined with investment returns in FY 2022 which fell short of actuarial assumptions and were sharply negative.

According to the report:  

  • The aggregate funding level for the surveyed plans was 76.1% in FY 2022, down slightly from the prior year. Between FY 2021 and FY 2022, the aggregate actuarial value of assets increased 3.1% from $4.35 trillion to $4.49 trillion. The combined actuarial value of liabilities increased 4.1% from $5.66 trillion to $5.90 trillion. Many state and local plans smooth investment gains and losses into the actuarial value of assets over time (typically five years and sometimes longer). 
  • Growth in pension liabilities remains at a median rate below 4.0% for the fifth consecutive year, as a result of various factors such as plan maturity, low salary growth and employment levels among states and local governments and the effects of many pension benefit reforms (mainly reductions) enacted in recent years.
  • The average allocation of plan assets to public equities has declined steadily since the major decrease in global capital markets in 2008-2009. In FY 2022, the allocation to fixed income securities declined to 20.6% and equities at about 42.2%. In recent years, allocations to real estate increased to 9.1% and allocations to alternative investments (such as private equity and hedge funds) has continued to grow reaching the threshold of 27.4%.
  • For most of the Public Fund Survey’s measurement period, the median investment return assumption used by public pension plans was 8.0%. However, in FY 2021 and FY 2022, the median actuarial assumption for investment return was 7.0%. Notably, since 2009, many plans have reduced their investment return assumptions.
  • Since the inception of the survey, employer contribution rates have increased significantly mainly due to larger unfunded pension liabilities and often include lower investment return assumptions. For some plans, higher employer contribution rates are the result of a disciplined approach to contribute all or more of their actuarially determined contributions.  

The survey data is available for each individual retirement system and plan in Appendices A and B. The data includes: plan membership, plan assets and liabilities, and actuarial funding levels.   

The summary is available here.

GRS Publishes Research Alert on Maximum Deferral and Threshold Limits for 2023 and 2024

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GRS Publishes Research Alert on Maximum Deferral and Threshold Limits for 2023 and 2024

On November 9, 2023, GRS released its Research Alert, Maximum Deferral and Threshold Limits for 2023 and 2024. This publication summarizes the Internal Revenue Service’s (IRS) new maximum deferral and threshold limits effective for limitation years beginning on or after January 1, 2024. 

The Internal Revenue Code (IRC) establishes a number of limits on retirement plan benefits and contributions. The limits are located in various sections of the Code and often apply in different ways to private and public sector plans. Generally, plans must comply with the limits to maintain their tax-qualified status. 

This GRS Research Alert is available here.

NASRA Updates Brief on State and Local Government Contributions to Statewide Pension Plans for Fiscal Year 2022

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NASRA Updates Brief on State and Local Government Contributions to Statewide Pension Plans for Fiscal Year 2022

On November 8, 2023, the National Association of State Retirement Administrators (NASRA) updated its issue brief, State and Local Government Contributions to Statewide Pension Plans: FY 22. The brief includes: 1) a brief history of public pension contributions; 2) recent public employer contribution experience; and 3) how governance structure may impact funding experience.   

According to the brief, “[On] a national basis, contributions made by employers – states and local governments – in 2022 accounted for 78 percent of all contributions received by public pension plans…. [Of] the $10+ trillion in public pension revenue received during the 30-year period since 1993, 37 percent, or more than $3.8 trillion, came from contributions paid by employers and employees.”  

On average, employer contributions to public pension plans continue to be a small percentage of state and local government spending. In recent years, employer contributions have been growing. Among the statewide pension plans included in the study, the aggregate public employer contributions increased from $137.8 billion in Fiscal Year (FY) 21 to $153.1 billion in FY 22, up 11.1%.  

The brief notes that ASOP No. 4 defines an actuarially determined contribution (ADC) as, “A potential payment to the plan as determined by the actuary using a contribution allocation procedure. It may or may not be the amount actually paid by the plan sponsor or other contributing entity.” 

According to NASRA, “the median percentage of ADC received in FY 22 was again 100 percent, and the dollar-weighted average reached 103.6 percent. This marks the highest percentage of ADC received since NASRA began monitoring this experience in FY 01, and the eighth consecutive year in which the aggregate ADC experience was higher than 90 percent.”  

Furthermore, NASRA cited that, “Following the recession of 2007-09 and the market decline of 2008-09, many public pension plans changed their funding policies and practices, resulting in increases in required contributions. Such changes include implementation of more aggressive funding policies; lower investment return assumptions; updated mortality assumptions; and reduced amortization periods.” 

For the individual plans included in the analysis, the brief also provides an appendix with the basis of employer contributions and contribution history for FY 13 to FY 22.    

The brief is available here. 

CRR Examines the National Retirement Risk Index with Varying Claiming Ages

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CRR Examines the National Retirement Risk Index with Varying Claiming Ages

On November 7, 2023, the Center for Retirement Research (CRR) at Boston College released its issue brief, The National Retirement Risk Index with Varying Claiming Ages. As discussed in the brief, the National Retirement Risk Index (NRRI) measures the percent of U.S. working households at risk of being unable to maintain their pre-retirement standard of living throughout retirement. This brief is intended to examine the relationship between Social Security claiming ages and the inclusion of earnings as well as the extent to which assuming more realistic claiming ages reduces the “excluded earnings” factor after the assumed retirement age of 65.

The NRRI compares the projected household replacement rates (i.e., projected household retirement income as a percentage of projected pre-retirement income) with the target replacement rates needed to maintain their living standard. The NRRI assumes all households claim Social Security and retire at 65 and does not include earnings after age 65. Generally, the NRRI confirms the earlier findings that 50% of households are unprepared for retirement and will not be able to maintain their pre-retirement standard of living. 

Other key findings include:

  • Overall, households ages 62-75 have substantial earnings.
  • About 50% of all earnings for those ages 62-75 are excluded from the NRRI and may distort the results.
  • Introducing more realistic claiming ages for low-, middle-, and high-income households would: 1) increase the earnings in the NRRI to two-thirds, with the remainder being allocated mainly to high earners where it has little impact; and 2) produce a more reasonable pattern of percentage “at risk” by income group. 

The brief concludes, “while the existing NRRI produces a good representation of risk for the whole population, an index that varies Social Security claiming ages includes the bulk of earnings by older workers and provides a better picture of outcomes by income group. So those parameters will be used to construct the NRRI going forward.”

The brief is available here.

American Academy of Actuaries Reports on Social Security Reform

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American Academy of Actuaries Reports on Social Security Reform

Recently, the American Academy of Actuaries released its issue brief, Reforming Social Security Sooner Rather Than Later. The brief indicates that the 2023 Social Security Trustees Report projects that the combined trust fund reserves (Old-Age Survivors Insurance Trust Fund and the Disability Insurance Trust Fund) are projected to become depleted in 2034. At that time, its income would only be able to pay 80% of the benefits scheduled for its 80 million beneficiaries.

According to the brief, “If Congress has not acted by 2034, we will be faced with an automatic 20% cut in benefits to people already receiving benefits, the need to immediately increase Social Security taxes by 25%, or some combination of benefit cuts and tax increases.”  It adds, “Earlier reform action would allow for tax increases and benefit reductions to be phased in gradually and provide individuals more time to plan and adjust to the changes.”

The issue brief is available here.

S&P Global Assesses Pension Funded Ratios of Largest U.S. Cities

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S&P Global Assesses Pension Funded Ratios of Largest U.S. Cities

Recently, S&P Global Ratings published its report, Pension Funded Ratios Fall for Most U.S. Big Cities on Weakened Investment Returns. In the report, S&P Global Ratings assesses the pension funded ratios of 20 of the largest cities in the U.S. Over the past five years, volatile market returns have resulted in temporary changes in the funded ratios of the largest plans in the selected cities. However, S&P Global indicated that overall plan contributions have remained stable during this time period.

The key findings include:

  • The median pension funded ratio for the 20 largest U.S. cities decreased from 78.5% in fiscal 2021 to 70.6% in fiscal 2022.
  • The decrease in funded ratios was mainly due to investment returns falling from the highs in 2021.
  • While some losses from the volatile markets in 2022 could recover slightly in fiscal 2023, S&P Global is predicting relatively slow growth over the next few years and that it is unlikely that funded ratios will return to near-2021 levels in the near term.
  • Most cities do not prioritize pre-funding their other postemployment benefits (OPEB) liabilities, which may lead to future cost pressure.

According to the report, “Our view that funded ratios will not return to 2021 levels is further supported by the fact that in fiscal 2022 fewer cities met our minimum funding progress (MFP) metric for at least one of their two largest pension plans than in the prior year.” It added, “Cities with the largest shortfalls in contributions compared to MFP have accumulated large unfunded liabilities, which shows the effect of deferring pension costs for short-term budgetary relief.”  

The report is available here.