Retirees Outnumber Active Employees In Public Pension Plans

For the first time, the number of retired and inactive members in the nation’s 100 largest public pension plans is greater than the number of active employees, according to a new report.

In 2015, there were 12.6 million retired/inactive members (former employees) covered by the plans versus 12.5 million active employees, according to a public pension study from Milliman. Public plans cover workers in various public services such as state and local government, public education, police and more.

The 12.6 million versus 12.5 million may seem like a small differential. However, on the retiree side, it reflects a big jump from four years earlier, Becky Sielman told InsuranceNewsNet. She is a principal and consulting actuary at Milliman and the lead author of the report.

In 2012, Sielman said, the retired/inactive number was just 10.5 million as compared to 12.3 million active employees. And, over the past four years, the number of retirees/inactives has been inching up while the number of active employees stayed “virtually unchanged.”

Milestone

This is a “significant milestone,” Sielman said. “It demonstrates the combined impact of the aging workforce and increased longevity.”

The oldest baby boomers are approaching age 70, so many already have retired. In addition, some older boomers who had previously put off retiring in the wake of the last recession have now decided the economy is more stable and so they too have decided to retire, she said.

Meanwhile, today’s longevity trends mean that “more people (in the member population) are retiring but not dying, at least at the moment,” she said.

The combined effect of the two trends is to the increase the total number of retired/inactive members in the public pension plans.

“What is striking to me is that the number of active employees in the plans has stayed about the same over the last four years,” Sielman said. “I had thought that this number would have increased starting a couple of years after the end of the recession, but it did not.”

Her take is that active workers in public pension plans are essentially replacing those who retire on a one-for-one basis. Some plans may be located in areas where public sector employment has been growing, she allowed, but others are in areas where it has been shrinking. The net effect has been no major increase.

Will liability be an issue?

The Milliman study found that the accrued liability for retired and inactive members overshadows the accrued liability for employees by more than 40 percent in aggregate.

That does not mean the plans are at risk, Sielman said. “The accrued liability takes into account that active members will retire one day, and when that day comes, it shouldn’t change the overall liability appreciably.”

In fact, the report noted that the plans “currently have assets sufficient to cover 100 percent of the sponsor-reported accrued liability for retirees and inactive members.”

However, it’s possible that plan liability could increase if the employer were to offer an incentive or “sweetener” to older workers to retire early, and if the workers take the option, Sielman said.

Looking ahead, the Milliman actuary predicted that, because increased longevity trends are expected to continue, the increase in retiree/inactive members also will continue.

This is not an alarming sign, she said. “Paying benefits to members in retirement is what these plans are for.”

The challenge in 2015

Although insurance and financial advisors do not deal with public pension plans very often, many advisors do have clients who are in these plans. Most advisors have clients who are affected by the aging and longevity trends these plans are facing. For such advisors, the big picture view may prove useful.

According to Sielman, public pension plans had a decent year in 2014, with funding status improving by more than 4 percent. However, based on early 2015 returns, “the road ahead could be challenging for the 66 percent of these plans that are less than 80 percent funded,” she said.

To that point, the study reported that 2015 has been flat from an equity standpoint. Also, many public plan sponsors have reduced their return assumptions going forward, making it a “steeper hill to climb” in order to reach full funding, the researchers noted.

On average, retired/inactive members have a sponsor-reported accrued liability of $191,000 per person, and active members, $134,000 per person.

The reported aggregate liability for these retired/inactive members, whether receiving benefits or waiting, was $2.41 trillion in 2014. By comparison, the aggregate for active members was $1.67 trillion for the same year.

In the aggregate, the plans have only 39 percent of assets sufficient to cover the sponsor-reported accrued liability for active members, the study also found.

InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].

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Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].