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Member, Beacon International Group, Ltd.
Recent market volatility could result in higher unfunded U.S. public pension liabilities in fiscal year 2016 and erase funding improvements seen in fiscal years 2013 and 2014, said a new report from Moody's Investors Service Inc.
Stock market trends since mid-2015 and recent performance reports suggest investment returns will fall below assumed targets in fiscal 2016, according to the report. For many plans, the annual target is 7.5%.
Given these indications, “we project unfunded pension liabilities on a reported basis will grow by at least 10% in fiscal 2016 (to $655 billion total) under even our most optimistic return (5%) scenario,” said Thomas Aaron, an analyst and co-author of the report, in a news release. Under a pessimistic scenario with returns of -10%, unfunded liabilities could grow 59% to $952 billion, Moody's predicts.
In fiscal year 2015, the surveyed plans saw their reported unfunded liabilities increase by roughly 17% to $597 billion total, driven by lower than expected investment returns. Average investment returns were 3.2% in 2015, compared to 11.7% and 16.6% in fiscal years 2013 and 2014, respectively.
The report also found that government pension contributions exceeded the cost of benefit accruals and interest on existing unfunded liabilities for only 45% of the plans surveyed in fiscal year 2015. Moody's predicts that figure could be similar or slightly smaller in 2016, which could further increase plan liabilities.
The report analyzed 56 state and local government pension funds with more than $2 trillion in assets combined in fiscal year 2015. Most plans' fiscal years ended June 30.
While higher unfunded pension liabilities are expected in 2016, the report notes, “the magnitude of pension risk and the ability to absorb rising liabilities among individual governments will continue to vary.”
Meaghan Kilroy writes for Pensions & Investments, a sister publication of Business Insurance.