Thursday, August 9, 2012

The state of state pension funds.

Many state pension plans are in trouble, but while 34 states are less than 80% funded, North Carolina is apparently well funded.  I'd argue that NC could do a lot better by reducing the fees paid to managers from about $300 million per year.

It's also worth noting that being 100% funded doesn't mean that the fund will meet liabilities, it just means that the present value of liabilities equals the present value of the investments.  The key here is that the same discount rate is used (incorrectly) to find both present values.  All funds should use a lower discount rate to value the liabilities, which will result in the liabilities having a higher value.

Therefore just because a fund says that it is 100% funded, it doesn't mean that it really is.

HT: Newmark's Door.