Public pension-plan funding topped a key benchmark for the first time in tracking history during the second quarter, buoyed by surging financial markets, according to a report released in July.
The funded ratio — a metric that describes the amount of assets on hand to pay all expected liabilities for the coming 30 years — rose to 82.6% at the end of June for the 100 largest plans in the country, according to the Public Pension Funding Index from actuarial group Milliman. That’s the highest since Milliman began tracking in 2016, and suggests that the largest public pensions, in aggregate, are in better shape than in the past.
An 80% funded ratio is often loosely considered a satisfactory level for pensions sponsored by state and local governments and other municipal entities, even as most employers formally aim for full funding — that is, enough money on hand to cover all existing workers and retirees for the next 30 years.
It’s worth noting that more recent scholarship suggests that full funding for public pensions isn’t necessary, and that they would do fine with a pay-as-you-go approach, as Social Security does. Still, there are plenty of larger pension plans that remain dangerously underfunded.
Milliman estimates aggregate returns for the plans tracked to be 4.26% for the quarter, while the overall annualized return for the year ending June 30 was 19.95%. As the group points out, that kind of return “significantly exceeds the expected long-term earnings assumptions” for plans it covers.
The S&P 500 SPX, +0.24% is up over 17% in the year to date and up more than 36% in the past year. The S&P 500 on Friday rose 2% to finish at its 40th record close of 2021.
As previously reported, many public pension plan administrators have been reducing their assumptions for returns, believing that lower, more conservative assumptions are safer. Among state pensions, the median assumed return in 2021 is 7.20%, down about 1 percentage point since 2000.
Market returns account for roughly two-thirds of a pension’s asset growth (or decline), so when they fall short, governments, school districts and other plan sponsors must kick in more money.
As Milliman’s release notes, “In the coming months, plan sponsors will start seeing the results of actuarial valuations that will reveal the extent to which the [COVID-19] pandemic has impacted plan liabilities, including higher death rates and the impact of furloughs on benefit accruals, pay levels and contributions from active members.”
That’s already evident, according to an earlier report from the Center for Retirement Research at Boston College, which found that layoffs during the COVID recession meant fewer workers paying into the system.
Read: Public pensions don’t have to be fully funded to be sustainable, paper finds
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