US Public Pension Funding Levels Plunge to 66% in Q1

Market turmoil has wiped out all funding gains made in 2019.

The funded level of the 100 largest US public defined benefit pension plans plunged to 66% during the first quarter from 74.9% at the end of last year, according to Milliman. It was the largest quarterly drop in the history of the firm’s public pension funding index (PPFI), and it eliminated the funding level improvements made during 2019.

Volatility from the COVID-19 pandemic resulted in net negative cash flow of approximately $24 billion and a $419 billion loss in the market value of assets for the pensions, which in aggregate saw huge investment losses of 10.81% during the first quarter. The estimated returns from individual plans ranged from a loss of 17.41% to a gain of 4.76%.

The results were a stark reversal from the fourth quarter of last year when the plans had quarterly and annual investment returns of 4.47% and 15.9%, respectively, and the funded ratio hit a three-year high.

“Coming off the heels of what was a stellar fourth quarter in 2019, the economic fallout from the COVID-19 pandemic has completely wiped out any public pension funding gains we saw last year,” Becky Sielman, author of the Milliman 100 Public Pension Funding Index, said in a statement. “While these pensions now have a long way to go to return to pre-pandemic funding levels, it’s important to remember that most public pension plans use some sort of asset smoothing mechanism to dampen the impact of market gyrations. This gives plan sponsors some breathing space to explore and plan for how this market downturn will impact contributions.”

The aggregate deficit of the 100 public plans swelled to $1.819 trillion at the end of March from $1.334 trillion at the end of December, and the plans are now at their lowest funding levels since the PPFI began in September 2016. Meanwhile, the asset value of the plans fell to a PPFI low of $3.536 trillion at the end of the first quarter from a PPFI high of $3.979 trillion at the end of the previous quarter.

Milliman said the total pension liability continues to grow and rose to an estimated $5.355 trillion at the end of the quarter from $5.313 trillion at the end of 2019.

During the quarter, 16 of the plans fell below the 90% funded mark, with just four plans remaining above that threshold, compared with 20 just three months earlier. Additionally, nine plans fell below 60% funded, bringing the total number of plans under this critical level to 35 from 26 at the end of the previous quarter.

According to Moody’s Investors Service, US public pension investment losses are approaching $1 trillion due to the stock market turmoil caused by the pandemic and are on pace to see investment losses of approximately 21% for the fiscal year ending June 30.

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