Severe Underfunding of U.S. State Pension Plans (2018)
MIPC 2018 Case
The severe underfunding of U.S. state pension plan
This year’s edition of the McGill International Portfolio Challenge centers on the case of a severely underfunded state defined-benefit pension plan—VanPERS—which delivers pension benefits to public-sector employees in a fictional U.S. state, Vandalia. The funded status and other metrics of the plan are deliberately chosen to reflect the current situation of state pension funds in the U.S., where a potential pension crisis arguably looms.
The underfunding of state pension plans like VanPERS is incredibly complex and difficult to solve because it involves a uniquely large and diverse group of stakeholders with conflicting interests. In the case of VanPERS, stakeholders include: unions, which represent the interests of Vandalia’s public servants; municipalities, which run tight budgets and contribute capital to the fund on behalf of their public employees; the government of Vandalia, which adheres primarily to its political agenda that is oftentimes at odds with other stakeholder interests; and finally, active and retired members of VanPERS, who want to secure the safety of their pensions.
How U.S. regulation compounds the complexity
Going concern, the U.S. regulation that mandates pension funds to discount their liabilities at the expected rate of return on their assets, significantly increases the difficulty for pension funds. In effect, going concern creates an intricate system that links the financial decisions of the fund to the financial distress of member cities. As a consequence of this relationship, the going concern regulation (a) incentivizes pension funds to be heavily invested in riskier assets (e.g. equities), as doing so allows them to report lower liabilities and improved funding ratios; and (b) it discourages the implementation of worthwhile de-risking initiatives, since such initiatives would force them to report higher liabilities and weaker funding ratios.
Soliciting a fresh perspective from teams around the globe
Participating teams of this year’s MIPC will assume the role of external consultants hired by VanPERS’ Board of Directors. Their task is to come up with a creative and feasible solution that addresses VanPERS’ severe underfunding. Teams must contend with the diverging interests of the wide number of stakeholders, settle on a solution where some stakeholders are bound to be disappointed, and rank these disappointments appropriately.
Finding a way out of this pension problem and charting out a realistic plan for restoration undoubtedly requires out-of-the-box thinking and inventive problem-solving. MIPC is opening up this challenge to University students from around the globe with different viewpoints and experiences—many of whom might have never encountered this issue before. As a result, the participating teams of MIPC will bring along a wide variety of fresh perspectives to the table, and it is our sincerest hope that their contributions and creativity will help us find a way out of this potential pension crisis.
Introducing MIPC's Keynote Speaker
Dr. Heather Munroe-Blum
O.C., O.Q., Ph.D., F.R.S.C
Chairperson, Board and Investment Committee
Canada Pension Plan Investment Board (CPPIB)
Served for over a decade as Principal and Vice Chancellor (President) of McGill University. Former Vice-President (Research and International Relations) of the University of Toronto. Current Director of the Royal Bank of Canada, CGI Group, and the Gairdner Foundation (Vice-Chair). Currently a member of the Board of Stanford University’s Center for Advanced Study in the Behavioral Sciences (CASBS) and the Trilateral Commission. Among others, served on the boards of Four Seasons Hotels, Alcan, Yellow Media Inc., and Hydro One (Ontario), and as a member of the President’s Council of the New York Academy of Sciences, the Conference Board of Canada and the CD Howe Institute. Recipient of numerous domestic and international honorary degrees and awards of distinction. Officer of the Order of Canada, Officer of the Order of Quebec, and a Specially Elected Fellow of the Royal Society of Canada.
Building on a distinguished career of clinical, academic and scientific achievements, qualifications include more than 25 years of senior administrative leadership concentrated in higher education, public policy, and, research and development; has extensive board experience as a director on executive, human resources and compensation, governance, investment, finance and risk committees in the corporate and not-for-profit sectors.
MIPC Panel Discussion
The Future of Pensions
Dr. Marlene Puffer
Ph.D., CFA, ICD.D
CN Investment Division
Dr. Carl Robert
Ph.D., CFA, FRM
Asset Allocation at Intact Investment Management Inc.