The Boston College Center for Retirement studies thinks it may have a new way to help sponsors of public pension funds understand how they’re performing.
In a blog post, Alicia Munnell, director at the center, explained how she and her colleagues use the Unfunded Actuarial Accrued Liability, the change in the UAAL from the prior year, and information on factors influencing the change — information that all public pensions are required to report — to get a clearer picture of fund performance.
They do so by taking the existing data and aggregating it over a longer period, so that clearer trends can be established on factors outside trustees’ control as well as where trustees have exercised questionable administration.
The goal would be to highlight the specific reasons why a fund has not been growing, wrote Munnell.
The center’s new approach looks at five factors influencing pension performance: investment returns; contribution rates; actuarial experience (are retirees living longer than projected); benefit increases; and changes in actuarial assumptions, which affect discount rates and ultimately determine contribution responsibilities.
Munnell uses the New Jersey’s Teacher Retirement System as an example.
In 2001, the system was running a surplus of $2.6 billion. The stock market was peaking, and contributions to the plan exceeded the average interest rate cost on liabilities by $183.5 million. But two recessions depleted its investment portfolio and the state’s contributions never kept up.
By 2012, its UAAL stood at a deficit of $20.3 billion.
“In every year since the turn of the century, the state (New Jersey) has failed to contribute enough to cover the normal cost and the interest on the unfunded liability — much less make a stab at paying off the unfunded liability,” wrote Munnell.
Other factors played a role in burying the plan in debt, like adjustments in actuarial assumptions accounting for shifts in early retirement, disability costs and mortality rates.
Analyzing the performance of any state system using the center’s suggested “prescriptive” could help more clearly tell a story that “is often obscured in the political debate” and would highlight the inadequacy of plan contributions, Munnell wrote.