HSI (2): Overfunding Danger

Horizon Actuarial Services, LLC (HAS) kicks off their letter to the Bailout Committee with:

Pension funding is a long term budgeting exercise. Over the life of a pension plan, the incoming total contributions and investment earnings must equal the total benefits paid out (plus expenses to operate the plan). It is, therefore, important to predict the long term investment earnings as accurately as possible so that contributions can be budgeted to satisfy this future benefit obligation. If the benefit obligation is discounted at a rate below the reasonably expected long term investment earnings, the contributions needed in the shorter term will be unnecessarily high….Multiemployer plans invest in fully diversified professionally managed investment portfolios that, over time, are expected to produce earnings well in excess of corporate bonds or Treasury instruments. Therefore, in the current economic environment, using discount rates based on these lower yields would significantly overstate the contributions required to fund future benefits.

Two points that the HAS actuaries are missing:

  1. Participants are ALREADY losing benefits due in large part to funding flaws; and
  2. Current funded ratios need to be a critical component in determining the interest rate for valuing liabilities (as explained here).

Based on 5500 data for HAS clients in 2009 and 2015, in spite of  a bull market and funding methods that were supposed to pay off the annual cost along with amortizing the unfunded liabilities, nothing much has changed for their plans:

One response to this post.

  1. Posted by skip3house on September 25, 2018 at 7:35 am

    “You play by all the rules … and then they pull the rug out from under you.” per a benefit loser. Too bad ‘pension’ is so complicated, this person had no idea it was underfunded, and just ‘rules’ are not enough

    Reply

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