The Role of Economic, Fiscal, and Financial Shocks in the Evolution of Public Sector Pension Funding
June 28th, 2014
from the Boston Fed
New research from the Federal Reserve Bank of Boston challenges the common perception that state and local governments deliberately decreased public pension fund contributions as a backdoor means to run operating deficits from 2001 to 2010, and finds that public pension sponsors actually increased contributions during that time.
Unfunded pension liabilities grew significantly during the first part of this century — the average public pension plan was fully funded in 2001, but the ratio of funding to pension liabilities declined steadily thereafter. This chronic underfunding of public pensions was largely as a consequence of investment portfolio returns that fell short of expectations, according to the report.
“Public pension plans are very vulnerable to financial shocks because they tend to include a relatively high share of risky assets,” said one of the report’s authors, Boston Fed vice president and economist Robert Triest. “Plan sponsors assumed that they would achieve a higher rate of return on their investments than was realized.”
Although plan sponsors increased their contributions in response to the growth of unfunded liabilities, they did not do so by enough to fully counteract the effect of the subpar portfolio returns.