Public Pension Gap Widening Between Top and Bottom Funds

The best third is 90% funded, and the worst third is at 55% and falling, a new study says.

At 72%, the average 2017 funded status of public pension plans has barely changed in the past few years. And while it remains steady, trends are suggesting a larger gap brewing between the top and bottom thirds.

Splitting 180 plans from best-, worst-, and middle-funded levels from 2001 to 2017, the Center for State and Local Government Excellence (SLGE) and the Boston College Center for Retirement Research noticed the top plans average about 90% funded, while the bottom sit at about 55%—and continue to slip in the wake of the 2008-09 financial crisis.

Mid-level pensions averaged at 73% funded.

To change these measures, the collaborative paper, titled “Stability in Overall Pension Plan Funding Masks a Growing Divide,” said the declining tier will likely “require intervention beyond traditional reforms to change the trajectory of their funded status.”

Due to smoothing rates, which averages three strong years and two weak ones, assets grew by 5.2%, to $3.64 trillion from $3.46 trillion, between 2016 and 2017.  Actuarial liabilities grew by 4.9%,  to $5.07 trillion from $4.83 trillion. The liability values are based on a plan’s annual discount rate.

While the costs of plans were about the same across the board, one of the top factors in the increased liabilities of these lower-tier plans was the lack of contributions paid. While the higher and middle bracket saw 95% and 80% of their required contributions, the bottom rung only obtained 74% of what they were promised.

Market corrections and underperformance also contributed to the pensions’ problems, with greater losses coming from the 55%-funded and below plans.

The top plans are fine for now as long as they don’t make any radical changes to their strategies, but the lower and middle are in varying degrees of trouble. The big concern is, of course, a market downturn within the next year.

In this scenario, the report says plans will either return exactly their assumed rates annually, or lose 15% of their assets. Should the best of those two scenarios occur, the average status could hit 76% by 2022. In the worst-case scenario, it’ll fall to 71%, even if plans generate strong returns from 2020 to 2022.

“Public pensions plans often are ‘clumped together’ when the funding status is described in policy discussions and covered by the news media,” Joshua M. Franzel, president and CEO of SLGE. “Generalizations often are made about all public plans as if they were monolithic, but they are not. The data indicate that state and local plans are not in the same fiscal position, do not face the same challenges, and do not have the same funding histories.”

Tags: , , ,