Federal Reserve Reports Public Pension Assets Increased to a Record $4.06 Trillion as of the Second Quarter of 2017

​On September 21, 2017, the Board of Governors of the Federal Reserve released its Financial Accounts of the United States statistical report for the second quarter of 2017.  On page 99, the report shows that state and local government employee retirement fund assets totaled a record $4.06 trillion on June 30, 2017, up from $3.74 trillion on June 30, 2016, an increase of $323 billion (or 8.6% based on the unrounded asset values). Moreover, state and local retirement funds’ holdings of corporate equities totaled $2.44 trillion (39.2% of total assets) on June 30, 2017, up from $2.40 trillion (39.0% of total assets) on June 30, 2016.

The Federal Reserve’s report is available here.

U.S. Census Bureau Reports Asset Growth for the Largest State and Local Government Retirement Systems Continues in the Second Quarter of 2017

On September 28, 2017, the U.S. Census Bureau reported that total holdings and investment for the 100 largest state and local government retirement systems increased from approximately $3.51 trillion at the end of the first quarter of 2017 to $3.58 trillion at the end of the second quarter of 2017. Compared to the second quarter of 2016, assets increased 8.5% from $3.30 trillion. This asset growth trend continues that began in the third quarter of 2015.

In the second quarter of 2017:

  • Cash and short-term investments were $127.6 billion, down from $131.4 billion in the first quarter of 2017, but the year-to-year increase was 17.1% from $108.9 billion;
  • Employee contributions were $12.6 billion, up 12.8% from $11.2 billion in the first quarter of 2017; and
  • The ratio of government contributions to employee contributions was 2.5 to 1 with government contributions comprising 71% of the total contributions.

During the second quarter, holdings and investments in corporate stocks increased 2.8% to $1,299 billion, corporate bonds increased 1.2% to $418 billion, international securities increased 4.7% to $728 billion, and federal government securities increased 4.5% to $299 billion.

The results are from the U.S. Census Bureau’s Quarterly Survey of Public Pensions which surveys the revenues, expenditures, and composition of assets for the 100 largest U.S. public employee retirement systems.  These systems comprise 88% of the total cash and security holdings reported for public plans in the 2012 Census of Governments.

The report also provides a table showing the quarterly percentage changes in investment holdings by major investment category from the first quarter of 1968 to the second quarter of 2017.  However, in the first quarter of 2012, the survey was revised to implement changes in asset classification.  As a result, comparisons of asset amounts before and after the first quarter of 2012 should be made with caution.

The summary is available here.

GFOA Approves Best Practice for Investment Policies for DB Plans

On October 5, 2017, the Executive Board of the Government Finance Officers Association (GFOA) approved a new Best Practice (BP) titled, Investment Polices for Defined Benefit Plans. The GFOA regularly develops BPs to serve as guidance on selected topics for state and local governments.  It also develops advisories to caution against certain practices.

In the BP, the GFOA recommends that defined benefit (DB) plans establish and adhere to a formal investment policy to regulate and monitor the system’s investment program. The formal investment policy should be: 1) viewed as a long-term governing document; 2) adopted by the governing board(s); 3) reviewed at least annually; and 4) updated as appropriate.

Generally, in addition to the elements outlined in the BP on Investment Policy, the GFOA also recommends that an investment policy for DB plans includes:

  • Statement of goal, purpose, or mission;
  • Statement on managing risks of individual investments;
  • Liquidity of investments;
  • Guidelines for other investment-related service providers;
  • Investment management guidelines;
  • Cost management;
  • Performance measurement (benchmarking) and reporting; and
  • Corporate governance.

In addition, the BP recommends that an investment policy for DB plans includes the following, if applicable:

  • For foreign assets, it recommends identifying the parameters for establishing foreign currency positions and management; and
  • For transaction or brokering trades, it recommends outlining the guidelines to avoid conflicts of interest or revenue and expense sharing arrangements between the plan and service providers.

The BP is available here.

Society of Actuaries Releases Mortality Improvement Scale MP-2017

On October 20, 2017, the Retirement Plans Experience Committee (RPEC) of the Society of Actuaries (SOA) issued its Mortality Improvement Scale MP-2017 Report.  The report provides the new MP-2017 Mortality Improvement Scale, which is an annual updated mortality improvement scale for pension plans. MP-2017 reflects a 1.2% increase in age-adjusted U.S. population mortality rates between 2014 and 2015. Since 2005, this is the first year-over-year mortality rate increase. The new scale suggests that life expectancies decreased slightly, which may result in slightly lower pension plan obligations. According to the SOA’s report, their preliminary estimates indicate that updating to the MP-2017 scale may reduce a pension plan’s obligations by about 0.7% to 1.0%, when calculated using a 4.0% discount rate.

The MP-2017 scale incorporates the most recent publicly available mortality data from the Social Security Administration (SSA) through 2013. In addition, it includes 2014 and preliminary 2015 data developed by the SOA and acquired from the SSA, Centers for Disease Control and Prevention (CDC), Centers for Medicare and Medicaid Services (CMS) and the U.S. Census Bureau.

As reported by the CDC, the slight decline in life expectancy is due to an increase in mortality from eight of the 10 leading causes of death in the U.S. Under the new scale, the life expectancy for a 65-year-old male pension plan participant decreased from 85.8 years under MP-2016 to 85.6 years under MP-2017, while the life expectancy for a 65-year-old female pension plan participant decreased from 87.8 years to 87.6 years.

David Kausch, Chief Actuary for GRS, serves as a member and former chairperson of the RPEC.

MP-2017 is available here.

Actuarial Standards Board Announces Adoption of ASOP on Pension Risk

On October 26, 2017, the Actuarial Standards Board (ASB) of the American Academy of Actuaries announced that the ASB recently adopted Actuarial Standard of Practice (ASOP) No. 51, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions. The new standard will be effective for any actuarial work product with a measurement date on or after November 1, 2018.

According to the ASB, “ASOP No. 51 provides guidance to actuaries when performing certain actuarial services with respect to measuring obligations under a defined benefit pension plan and calculating actuarially determined contributions for such plans, with regard to the assessment and disclosure of the risk that actual future measurements may differ significantly from expected future measurements.”

David Kausch, Chief Actuary for GRS, serves as a member of the ASB Pension Committee.

ASOP No. 51 is accessible here.

CRR Reports on the Impact of Out-of-Pocket Medical Spending on Retirement Income

In October 2017, the Center for Retirement Research (CRR) at Boston College released its working paper, How Much Does Out-of-Pocket Medical Spending Eat Away at Retirement Income? As discussed in the report, Medicare’s high out-of-pocket (OOP) costs greatly reduce the adequacy of retirement income from Social Security benefits and other sources.

The research project uses the 2002-2014 Health and Retirement Study to calculate the share of Social Security benefits or total income available for non-medical spending, known as post-OOP benefit ratios. The project also examines how the post-OOP benefit ratios differ based on age, gender, health status, income, and supplemental insurance coverage.

Some of the key findings include:

  • In 2014, the average medical OOP spending (excluding long-term care) was $4,274 per year with about $2,965 spent on premiums.
  • The average retiree only had 66% of Social Security benefits remaining after OOP spending and 82% of total income.
  • About 18% of retirees had less than 50% of their Social Security benefits remaining after OOP spending and 6% of retirees dropped below 50% of total retirement income remaining.
  • Post-OOP benefit ratios increased simultaneously with the enactment of Medicare Part D for retirees without prescription drug coverage before 2006 and also slightly increased after the “donut hole” began closing in 2010.

The report indicates that many retirees are financially challenged since many have limited income with less than two-thirds of their Social Security benefits being available for non-medical consumption. Medicare costs are expected to increase which will reduce the portion of Social Security benefits available for non-medical spending. In future decades, medical costs are projected to increase faster than Social Security benefits which will exert more pressure on retirees’ budgets.

The report is available here.