Modernizing Public Pension Myths

Governing magazine recently published an article analyzing several commonly-held public pension practices, including topics of debate for Maryland’s public pension system.

One topic is the assumed rate of return.  The recent State Retirement & Pension System Funding Study 2012 included estimates of lowering the assumed rate of return from 7.75% to 7.55% by 2016 (five basis points over a four year period). Governing suggests a reduction closer to 7% stating,

For funding policy, it seems to me that the most realistic path for the assumed rate of investment returns is a nationwide average closer to 7 percent until the global economy clears its debt hangover in this “New Normal” market environment. Even that adjustment in discount rates would have profound implications for how we value pension liabilities and the annual costs to be borne by employers and employees.

Another subject that Governing addresses is the level of funding that should be considered healthy for a public pension fund.  In the 2011 Comprehensive Annual Financial Report of the Maryland State Retirement & Pension System, the State sets out markers for reaching 80% and 100% funding for the System. As a result of comprehensive legislative reform of the pension system in 2011, the introductory message describes,

the General Assembly’s actuary projects that the system will reach approximately 80% funding by fiscal year 2023—three years faster than pre-reform projections—and full funding in fiscal year 2031.

Governing would push these goals even further.  Seeking to debunk the idea that a 70% or 80% funding level is OK, Governing sets forth that

. . .a fully funded pension plan must today have market-value assets of 125 percent of current accrued actuarial liabilities near the peak of an average business cycle — in order to offset the near-certain loss of stock market values in the following recession.

In Maryland, administrative and policy decisions like the investment rate of return and funding goals are the province of the Board of Trustees of the Maryland State Retirement & Pension System.  In the wake of recent legislation shifting direct costs for teacher pensions to county governments, MACo has adopted an initiative for the 2013 session to secure county membership on the Board of Trustees, to provide insight and guidance on the full range of administrative and oversight matters before the Board.

For more information on the subject of Maryland’s State Retirement & Pension System investing, see our related post, Maryland State Pension System: Investment Strategy and Management

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