Wednesday, June 8, 2011

Public Pension Problem Shrinking?

Lisa Lambert of Reuters reports, Public pension problem could be shrinking:

As the issue of underfunded public pensions in the United States takes center stage at city council meetings, state budget drafting sessions, congressional hearings and public protests, a report released on Wednesday says the problem may be getting better.

"Public pension funds are experiencing a robust recovery from the historic market downturn of 2008-2009 -- reporting strong investment returns, growing assets and funding levels on track to meet obligations," said the National Conference of Public Employee Retirement Systems.

The group, the largest trade association for public sector pensions, surveyed state and local systems representing 7.6 million people and assets exceeding $900 billion.

It found that over the last year, funds have achieved an annual investment return of 13.5 percent, nearly double the 7.7 percent rate most assume.

On average, said NCPERS, pension systems are 76.1 percent funded, meaning they can cover more than three-quarters of liabilities. Typically, pensions are considered fully funded when they surpass 80 percent.

"In addition, funds have responded to changes in the economic, political and social landscape by adopting substantial organizational and operational changes to ensure their long-term sustainability," NCPERS said.

Pensions are backed by contributions from employees and employers and by earnings from investments, which NCPERS found make up 66 percent of fund revenue. Employer contributions, essentially the taxpayer bill, comprise about 24 percent of revenues, it said.

Typically, when investment returns are low, governments increase contributions. But amid some of the worst budget crises in recent memory, state and local governments cut deposits just as the stock market plunged.

With most states beginning a new fiscal year in less than a month, investors in the $2.9 trillion municipal bond market are worried that they cannot fund pension promises.

The study found the annual investment return for pension funds when averaged over three years, which would include the time of the financial crisis, was 1 percent.

NCPERS found that over the last two years most public pensions have lowered their assumed rates of return, lengthened the period of time to amortize their liabilities, increased employee contributions and raised the retirement age.

The findings are in sync with a recent National Conference of State Legislatures report that 33 states changed their public pension plans from January 2010 through May 2011, with 23 requiring future employees to make higher contributions.

On Wednesday, the Philadelphia City Council took up reforming its Deferred Retirement Option Plan. It allows workers to set a retirement date four years in the future and then deposits pension payments into an interest-bearing account leading up to that date. Retirees are paid a lump-sum amount and a reduced monthly pension when they retire.

Saying the system costs Philadelphia hundreds of millions of dollars, Mayor Michael Nutter has proposed scrapping the plan, known as DROP.

You can read the NCPERS report by clicking here. The strong showing in the stock market over the last two years fueled asset returns but public pension funds are by no means out of the woods. These are choppy, volatile markets that can turn on a dime. If global stock markets start retracing, then pension funding will get worse before it gets better. And pension deals remain elusive in NJ and NY, which means the politics of pensions are heating up, adding more pressure on public pension funds.


Bernard Dussault, former Chief Actuary of Canada, sent me a short message on the claim in the above article that "typically, pensions are considered fully funded when they surpass 80 percent." According to Bernard, this is "nonsense as a plan is fully funded only when the funding ratio is at least 100%." Like I stated, public pensions are not out of the woods, not by a long shot.

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