Your Pension Plan Will Be More Expensive Than You Think
Returns on public sector pension plans reach a record low
As the sponsor or contributing member of a public sector pension plan, you’re aware that investment returns have been lagging the assumed rate of return over the last few years. This, along with increased longevity of your retirees, is increasing plan liabilities & required contributions.
It’s a minor blip – I’m using long term rates!
Many plan sponsors have argued for using discount rates of 7.75% to 8.25% on the basis that these are long-term rates and we shouldn’t worry about year-to-year returns. While that is correct, new data from Wilshire Trust Universe Comparison Service (“Wilshire”) shows that the annualized 20-year rate of return for public sector plans will hit a record low in 2016 at 7.47% (down from 12.3% in 2001). CALPERS & CALSTRS (the two largest funds in the US with a combined $484 billion in assets returned 7.03% & 7.1% respectively over the 20 year period). So, this isn’t a short-term blip, but a long-term trend toward lower asset returns.
What does this mean for my contributions?
As you’re aware, the long term cost of the plan is the actual benefits paid plus associated administrative & other expenses. These costs are offset by contributions and investment returns. Therefore, assuming you achieve lower investment returns, you will need to make higher contributions assuming benefits remain unchanged.
Do I need to adjust my discount rate?
As you’ve recently implemented GASB 67/68 for your pension accounting, you’re aware that the discount rate is based on the long-term rates of return by asset class. Assuming the trend continues, actuaries & auditors will face pressure to reflect this data and use lower discount rates for your pension valuations & disclosures. This will yield higher disclosed plan liabilities and actuarial determined contributions (“ADC”).
We encourage you to talk to your actuaries & auditors to be aware of these trends so that you can plan accordingly.
As always, if you have questions on this or need more, please contact your Odyssey consultant.