Pew: Hawaii’s State Pension Ready to Withstand Recession

Increased contributions and stress tests are key to Hawaii’s financial health.

Two years after initiating pension reforms that included increased contributions and regular stress testing, the funding projections for Hawaii’s state retirement system are on a “better trajectory,” according to a report from The Pew Charitable Trusts.

Pew said it independently examined Hawaii’s stress testing analysis and found the increased pension contributions required by the 2017 reforms should protect the system from insolvency.

“The latest stress test report shows that the increased contributions will go a long way toward sustaining the economics of the system,” said Pew. “The analysis found that, under current contribution policies and annual return assumptions of 7%, the pension plan should be fully funded in fiscal year 2044.”

In 2017, Hawaii reported having $15.7 billion in assets to cover $28.6 billion in liabilities for a funded level of 55%, down from 94% in 2000. In a move to address this shortfall, Hawaii enacted changes in 2017 that increased state contributions annually over a four-year period. For general employees, contributions will rise to 24% in 2021 from 17% of payroll in 2017, while rates will increase to 41% from 25% of payroll for police officers, firefighters, and corrections officers over the same period. Contributions are set to remain at these levels until the system is fully funded.

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That same year, state lawmakers also passed legislation to require annual stress test reporting to monitor the fiscal health of its pension system and help protect it from market volatility. California, Colorado, Connecticut, New Jersey, Virginia, and Washington have similar requirements in place, according to Pew.

Based on Pew’s analysis, the state’s retirement system will still be in relatively good shape even if it misses its 7% target. It said that if actual returns turn out to be only 5% each year, the state would have to increase contributions to stay on a path to fully fund the retirement system by 2047, which is its 30-year projection window. However, even with 5% investment returns, the system’s funded ratio would stay fairly level at around 56% if the state followed the currently prescribed funding policy, said Pew.

Pew said that had Hawaii not increased its contribution rates, the state’s funded ratio would decline significantly in a low-return scenario, and could have fallen below a sustainable level.

“The increased pension contributions required by the 2017 legislation were an important change to keep the system solvent,” said Pew.

The report also said that requiring stress tests as part of regular pension reporting can help assess contribution policies and provide an early warning if problems arise. It added that the tests “can help improve budgetary planning, allow better assessment of proposed pension changes, and avoid costly mistakes.”


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