Congrats to Keith Phaneuf, 8-Time 80 Percent Funding Hall of Shame Member!
by meep
This one steams me so much, I wasn’t going to wait for a quarterly round-up.
Congrats to Record-Breaking Keith Phaneuf!
Nappier: CT pension investments earned big returns
…..
Connecticut has a history of saving poorly for its public-sector pensions, a problem that dates back to 1939.The state has enough assets to cover 35 percent of the long-term obligations in its pension fund for state employees. And earlier this year it struck a deal to shift $14 billion to $21 billion in pension contributions until after 2032.
The teachers’ pension holds enough assets to cover 56 percent of long-term liabilities.
Analysts typically cite a funded ratio of 80 percent as healthy.
ARGH.
Here are Phaneuf’s 7 previous entries:
- 7: Let’s Make 80% Fundedness Great Again
- 5 & 6: The 80 Percent Funding End-of-Year [2016] Extravaganza!!!!!!
- 4: Midyear [2016]80% Funding Myth Update
- 3 & #2: 80 Percent Funding Myth September/October [2015] Roundup
- 1: June and July 2015 80 Percent Funding Hall of Shame (and Heroes!)
So 8 entries in 2 years.
That’s quite impressive.
BACKGROUND READING AND NEW BRIEF
For those new to my 80% Pension Funding Hall of Shame, who don’t know what I’m raving about… hdo you know the “You only use 10% of your brain crap?” That sort of thing?
This is similar.
In particular, the American Academy of Actuaries has addressed the 80% Funding Myth in a few briefs:
April 2014: The 80% Pension Funding Myth
July 2012: The 80% Pension Funding Standard Myth
To quote from the first:
The health of defined-benefit pension plans is a key issue to the tens of millions of Americans who are receiving or expecting to collect pension benefits. Some have said that the level of funding – specifically an 80% funded level – should be used as a general benchmark to determine whether pension plans are financially healthy. In reality, however, no single level of funding distinguishes a healthy plan from an unhealthy plan. In fact, plans should have as their objective accumulating assets equal to 100% of relevant pension obligations.
There are two parts of the myth: that 80% (or anything other than 100%) is a proper benchmark to compare against; that the funded ratio represents the plan’s health.
Many times, I focus on the first part, but the second part is also true.
Recently, the Academy released a new pension brief on the uses of these ratios in measuring pension plans.
Assessing Pension Plan Health: More Than One Right Number Tells the Whole Story:
Consider the following hypothetical case of unsettling news reports that indicate that a retirement plan of a major local employer is underfunded by $50 million. Retirees are concerned that their pension benefits might not be paid. Other stakeholders in the company, such as investors, customers, and taxpayers, are also worried. But what does the $50 million shortfall really mean? The employer’s leadership reported in an interview last week that the plan was in solid financial shape and consistent with its financial plan. So what is the truth? What is the right measure of the shortfall?
The answer is that there is more than one right number. The issues facing some retirement programs can be emotionally charged and involve allegations of misdeeds. But despite seemingly contradictory information, it may be that none of the parties involved lack financial literacy or are intentionally misleading with their statements. In fact, they may be viewing the same situation from different perspectives.
Various actuarial “numbers” exist, each of which conveys different useful information and can lead to different conclusions regarding the financial health of a pension plan. This issue brief explains how a pension plan can, for instance, be both 70 percent and 100 percent funded at the same time, and that knowledge of both of those funded percentages (and perhaps others) may allow plan sponsors and other stakeholders to make better decisions than if they only considered a single measurement based on a single set of assumptions. This brief discusses some of these various measures on a conceptual level and provides examples of ways stakeholders may commonly use them.
You can read the brief (that was just the intro), if you’d like to understand these different ratios.
It’s not just a matter of balance sheet ratios, but also a matter of income statement or cash flow items. That’s why I’ve started carving public pensions up on multiple dimensions.
A public plan, like Illinois GARS, can have a super-low funded ratio and not be in any serious trouble. Similarly, a plan can have a 90% or above funded ratio (which many of the Detroit pension plans have), and be in serious trouble when the sponsor declares bankruptcy.
An 80% funded ratio after a market crash isn’t necessarily bad. An 80% funded ratio after years of a bull market is definitely bad.
As nice as it would be to blame actuaries for over-complicating these issues (obviously, I have an interest in boosting actuarial expertise, being an actuary myself), these are complicated. A promise is being made in pensions that takes decades to accrue and decades to pay out. There are many aspects that feed into how much is actually put in and paid out over those decades — asset performance and timing of cash flows, employment patterns (hiring, tenure, retirement), mortality and disability patterns. Some of these have deviated from what was expected in surprising ways — for example, the mortality improvement seen in prior generations is not being seem in the same manner among Boomers (possibly due to drug use – specifically, opioids.).
Certain public pension practices have made pension promises shakier, and I’m sorry to say that actuaries have gone along with some of them (remember: sponsors set the valuation assumptions, not the actuaries… yes, this makes little sense, but you’ll see more and more disclaimers in actuarial reports for public plans in recent years.)
Here are my own prior explainers about why I find the 80% fundedness myth an important crusade on my part:
- Why It’s a Good Idea to Fully Fund Public Pensions
- Words Have Meaning: Neither Kale Nor 80 Percent Funded Public Pensions are ‘Healthy’
- New Public Pension Series: The 80 Percent Pension Funding Hall of Shame
- Public Pension Watch: The Fragility of “Can’t Fail” Thinking
At one point, because there was a lull in my news alert on the 80% funding myth, I thought this insidious mind virus may have been killed off. But no.
As long as people like Keith Phaneuf never have to correct parrotting idiocy, it will live on.
