The U.S. Postal Service participates in three retirement plans: the Civil Service Retirement System (CSRS), the Federal Employee Retirement System (FERS), and the Postal Service Retiree Health Benefits Fund (PSRHBF). The first two are pension plans, and the third is set up to prefund and provide retiree health benefits. These plans are restricted to government trust funds invested solely in U.S. Treasury securities. They are often regarded as riskless in the sense that there is virtually no possibility of loss of principal.

However, the trade-off for this safety is a low rate of return that has a high probability of not generating adequate investment income to meet all the future obligations of the funds. Currently, the total funding level for all three funds is at 82 percent, and all three funds are underfunded to varying degrees. The CSRS and the FERS are over 90 percent funded (91 and 97, respectively), but the PSRHBF is only 50 percent funded.

This funding shortfall can be addressed in a number of ways — by lowering the liabilities, increasing the assets, or some combination of both. In fact, there are efforts currently in place to address this underfunding. On the liabilities side, there are postal reform bills that would lower the PSRHBF liability by requiring all postal retirees to enroll in Medicare Parts A and B. In addition, the Office of Personnel Management (OPM) is pursuing a change in rules that would allow it to use postal-specific assumptions in its liability estimates. If successful, this will lower the liability in all three funds. On the assets side, a bill in the House proposes to allow a portion of the PSRHBF to be invested more aggressively in index funds.

This paper focuses solely on exploring ways to improve the asset returns on all three funds. The OIG retained Segal Consulting (Segal), experts in actuarial science and pension plan management, to explore options to improve the funding situation on the assets side. Segal identified six alternative investment strategies — three traditional portfolios comprising publicly traded stocks and bonds and three alternative portfolios which include traditional investments as well as non-traditional asset classes such as high yield bonds, private real estate, and other investments. For both, they offer a low-risk, medium-risk, and high-risk option. In general, the higher the risk, the higher the potential return.

All of Segal’s proposed portfolios outperform the current strategy. While the current strategy would result in a deficit, the CSRS and the FERS would be fully funded under all of the proposed alternatives. In addition, although the two conservative portfolios would not fully fund the PSRHBF, the deficit under these two portfolios would be less than it would be under the current investment strategy.

A sound investment strategy alone is not enough. Segal recommends a three-tier governance structure, each having a separate but related purpose. The first tier deals with overall fund investment strategy. The second tier focuses on implementation issues. The third tier deals with the day-to-day management of the investments.

This paper is a proof of concept analysis. We do not advocate a specific investment plan as it is impossible to determine which alternative portfolio would be the best since this is a subjective judgment based on a fund management’s appetite for risk.

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Comments (4)

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  • anon

    It is the little tidbits in your audits, blogs and white papers which make for interesting reading. For instance, in this report there is a great one.....I wish you would really dig in and explain the background of just one sentence. The sentence is the last line of the second paragraph on page 6. In writing about the mandatory prefunding you wrote; "These payments, which totalled $55.8 billion, were not actuarially based....." So please explain, in detail, what they were based on. I have my presumptions, please tell us the facts behind this deal.

    Sep 26, 2017
  • anon

    Sent to Senators Reading an article put out by USPOIG can be read on web site Comments Today all money has to be put in government trust funds causing a short fall of 50 % in PSRHBG retirement health plan Segal Consulting proposed 6 portfolios Something needs to be done would change it a little put 3 to 5 years of proposed outflows into government trust funds or liquid fixed rate to miss market drops and invest the rest with different active money managers or active fund managers Active because they can miss some drops in markets and results outperform passive funds would suggest more than one manager because even the best when handling very large amounts of money can have problems Would also have yearly balance reports going out to participants as public company's do keeps everybody accountable

    Sep 23, 2017
  • anon

    According to 2016 data, the two postal pension plans are 93% funded with combined assets of $286 billion. For example, FedEx is 84% funded while UPS is about 76%, Interesting to note that UPS suffered a 14% drop from the 2013 level. I’m not sure how much the risk-factor may have played in the UPS ratio drop. Looking at asset allocation - in 2016 FedEx’s pension fund asset allocation was: 29% corporate fixed-income securities, 22% government fixed income securities, 15% international securities, 14% domestic large-cap equities, 12% global equities, 4% domestic midcap equities, 2% mortgage-backed securities, 1% alternative investments and 1% cash. Compare that to USPS 100% in low-yield U.S. Treasury securities. Critics of the postal system often claim that USPS has an unfair advantage. 10 years after the prefunding mandate and Congress still fails to pass meaningful postal legislation. So the only things USPS can do without Congress is to negotiate with OPM and Treasury to invest in Treasury Inflation Protected Securities? Good starting point – but still not a well-diversified portfolio in today’s financial marketplace.

    Sep 22, 2017
  • anon

    In the past the mail used to be delivered for the third party (lost &stolen) ; so i could not receive any ; i wonder in case a important document sent to me if it will be delivered to me ;so i wish a confirmation of this because i do not want that thing will repeat again ...thank you

    Sep 22, 2017

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