The Center for Retirement Research at Boston College examined the status of public pension plans following the outbreak of the coronavirus pandemic, and the extreme market volatility that followed. Specifically, the study examined:
- the shortfall in investment returns from actuarial assumptions
- public plan liquidity and concerns raised during the financial market turmoil
- public plan vulnerability to sharp financial market downturns
The findings of the study revealed:
- Although public plans earned an average return of 8.9% in 2019 (exceeding the average actuarially assumed return of 7.2%), the same plans are expected to earn only about 1.8% in 2020, falling far short of actuarial assumptions.
- Since 2008, public plans have found it difficult to pay out benefits from contributions, requiring a liquidation of investment assets at a rate of 1% per year. Following the events of this year, all public plans are experiencing severe negative cash flows. As a result, plans may be forced to liquidate assets at an even more rapid pace, and possibly at depressed prices. Portfolio liquidation problems may also be compounded by the trend of increasing allocations to private and alternative assets.
- While the events of 2020 could have formed a perfect storm, the study found that many plans went into this year holding about 8% of their portfolio in Treasury securities as a liquid hedge against economic stress. In addition, plans have increasingly turned to derivative usage to improve liquidity. Therefore, the study concluded that “while public pension plans face many long-term fiscal challenges, most are able to weather sharp (financial market) downturns relatively unscathed”.
On a separate note, a U.S. Census Bureau survey showed public state and local defined-benefit plans were, on average, 73.6% funded, based on an assumed discount rate of 6.6%. Reported liabilities were $4.7 trillion; reported assets were $3.5 trillion.
An Update on Multi-employer Plans: The Treasury department gave final approval to the Western States Office and Professional Employees Pension Fund to allow a benefit cut to participants and retirees as of October 1, 2020. While the voting members did not approve this concession as part of a proposed rescue plan, the benefit reduction still went into effect. A greater number of ballots were not returned; hence, a majority of eligible voters did not reject the proposal. Without this benefit cut the plan was projected to be insolvent by 2036, which is a direct result of the fact that retirees outnumber active workers 11 to 1.
*Source: Center for Retirement Research at Boston College, September 2020, U.S. Census Bureau.