How Pensions Stayed Poor Despite 2013 Market Roar

US state and local pension funds could expect to be at least 80% funded in 2017 under new GASB standards, research has found.

(June 10, 2014) — The funded status of US state and local pension funds remained at 72% in 2013, unchanged from the previous year despite strong equity performance, according to a newly published report.

The Center for Retirement Research (CRR) at Boston College said actuarially smoothed values of plan assets—still including returns from the financial crisis—only increased 2% over the fiscal year 2013, contributing to the stagnant funding ratio.

Contributing to this overall inertia was the California Public Employees’ Retirement System’s changes in asset valuation methods, the report highlighted. The pension giant last year made changes that dropped its funded ratio to 69%, well below the 83% it posted in 2012. This helped prevent the average funded status from rising with market conditions.

CRR researchers studied a sample of 150 US public funds and their funding levels. Only about two-thirds of the sample submitted their funding levels by May 2013 and CRR has estimated some assets and liabilities for the 2013 aggregate figure on a plan-by-plan basis.

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The report found in 2013, the 150 funds recorded an aggregate liability of $4.1 trillion, assets of $2.9 trillion, and unfunded liability of $1.1 trillion, calculated with the average discount rate of 7.7%.

According to the report, the annual required contribution (ARC) has increased substantially in the last five years, from 12.5% in 2009 to 17.6% last year. The percentage of ARC paid by pension funds dropped as revenues started to recover since the crisis to 83% last year from 93% in 2008.

However, public funds can expect positive changes to their funded status starting this year, CRR said.

“2014 was always going to be a pivotal year because, under the old Governmental Accounting Standards Board (GASB) accounting standards, the disastrous stock market performance of 2009 rotates out of the smoothing calculations,” the report said. “Now 2014 will be pivotal because plan sponsors will report under GASB’s new accounting standards. 

CRR predicted that under the new GASB rules, plans should be over 75% funded in 2014 and “at least 80% funded” by 2017.

“Regardless of the measurement standard, a continued healthy stock market will improve the funding picture in 2014,” the report said. “What happens thereafter depends very much on the performance of the stock market and the extent to which plans adjust their discount rates.”

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