U.S. state and municipal pension funds are on track to miss investment targets and are unlikely to see meaningful improvements in their unfunded liabilities or funded ratios in 2023, according to a new report by the Equable Institute.
The report, which analyzed trends in benefits, cash flows, contributions, funding and investments at 225 of the largest U.S. public sector pension funds, found that, in the first half of 2023, plans returned, on average, 5.3 per cent, falling short of assumed return targets (6.9 per cent on average).
In 2022, unfunded liabilities grew to $1.57 trillion following significant losses due to negative investment returns. This year, unfunded liabilities are anticipated to remain effectively flat at $1.49 trillion, while the national aggregate funded ratio is projected to increase from 75.4 per cent to 77.4 per cent.
Read: Study finds U.S. public pension plans’ average funding ratio reached 77.8% in 2022
The report also found pension funds have more money in alternative investments — including private equity, real estate and hedge funds — than at any point in history, both in dollar terms ($1.63 trillion) and share of asset allocations (34 per cent).
The long-term outlook for pension funds in 2023 and beyond will likely be shaped by converging pressures of risk addiction, market uncertainty and increasing politicization of asset management activities, said Anthony Randazzo, executive director of the Equable Institute, in a press release.
“The increasing addiction to investment risk has meant exposing public employee retirement assets to the volatility of highly interconnected global markets. In just the past fiscal year, asset values were shaken by rapidly changing interest rates, a cryptocurrency crisis [and] a community bank crisis.
“Beyond volatility, the heavy expansion into alternative asset classes that don’t have robustly transparent market prices — like private equity and real estate — means that each retirement system needs to start accounting for the amount of valuation risk that their portfolio poses to the state and local government budgets in their jurisdiction.”
Read: U.S. bank failures have minimal impact on public pension plans: experts