The estimated funded ratio of U.S. state and municipal pension plans is expected to increase to 80.6 per cent in 2024 due to the outperformance of investment targets, according to a new report by Equable Institute.
The report, which analyzed trends in benefits, cash flows, contributions, funding and investments at 245 of the largest U.S. public sector pension funds, found the unfunded liabilities of the tracked pension plans are expected to slightly decline to US$1.34 trillion this year.
As at June 30, the investment returns for the pension plans covered in the report is, on average, 7.4 per cent, as most public pension plans are projected to overperform their assumed return target of 6.9 per cent. The report found that these investors are increasing allocations to private capital and have now reached 13.7 per cent exposure in 2023, worth approximately US$694 billion. Alternative assets make up more than a third (33.8 per cent) of the total pension fund assets.
Read: U.S. public pension funding shortfall unlikely to meaningfully improve in 2023: report
State and local governments paid a record amount into their public retirement systems in 2023, the report noted, on average 31.3 per cent of payroll or $180.7 billion. Despite the record contributions, the report said the fastest growing contributor to unfunded liabilities is pension debt.
The average current cost-of-living adjustment (2.02 per cent) policy isn’t enough to keep up with the national inflation rate of three per cent. Indeed, 31.3 per cent of the plans tracked don’t offer any inflation adjustment.
In a press release, Anthony Randazzo, executive director at Equable, said year-to-year changes in the funded status for U.S. public pensions have been more volatile since the coronavirus pandemic. The results from the first half of 2024 show some positive progress for the industry, he added.
“But this welcome annual improvement hasn’t been enough to break the country out of its pension debt paralysis, as public plans still have over $1.3 trillion in unfunded liabilities. Plus, a range of headwinds — including negative cash flow trends, growing interest on pension debt, and the looming threat of a financial market correction — could easily lead to a funded status reversal next year.”
Read: Estimated funded status of 100 largest U.S. DB pension plans increased to 79.9% in June: report