Funding gaps for large public pension plans in the United States have widened over the last 10 years despite long-term investment returns meeting plan expectations, says Moody’s Investors Service.
Unfunded liabilities for these systems as calculated by Moody’s tripled to an estimated US$1.99 trillion.
In addition to assets falling further behind liabilities, the plans are also facing riskier asset allocations and the burden of an older population, leading to more risk for the states and local governments that fund them.
In the study US State and Local Government Pensions Lose Ground Despite Meeting Return Targets, Moody’s reports on the performance of the 25 largest public DB pension systems by assets under unified management for 2004 through 2013.
During this period, compound average investment returns averaged 7.45%, broadly meeting current return targets. The simultaneous sharp growth in the funding gap underscores the difficulty of recovering from double-digit asset declines experienced in 2008/09, as well as the broad inadequacy of sponsor contributions.
“Part of the problem for the level of overall funding is that it is inherently difficult to recover an overall asset position after the double-digit losses seen during the recession,” says Al Medioli, a Moody’s vice-president, senior credit officer. “Annual return may be strong, but incremental gain is small relative to pre-downturn levels because the investment base is so much smaller.”
Looking forward, the downsize risk to funding has heightened because of the increased asset allocation to equities and alternatives, and the large scale of assets necessary to fund the liabilities for demographically aging pensions.
Moody’s notes the strong investment returns combined with benefit reforms and moderating wages have begun to ease the rate of unfunded liability growth in 2014. However, a very large funding gap persists.
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