Markets rebound boosts US state pension plans

The record breaking rally for US equities last year has helped America’s largest state pension plans to recover from the wounding punch delivered by the coronavirus pandemic which had threatened to damage parts of the US retirement system.

The aggregate funded ratio for US state pension plans reached 78.6 per cent at the end of December, a jump of 16 percentage points from the 30-year low of 62.6 per cent registered in March 2020, according to estimates by Wilshire Consulting, the investment advice and research provider.

The funded ratio illustrates the gap between the assets held by a pension plan and its expected liabilities, providing an estimate of the future retirement benefits schemes will have to pay.

Liquidity unleashed by the Federal Reserve in response to the pandemic combined with a series of emergency relief spending programmes helped the S&P 500 to rebound 63 per cent by the end of December from its low point last March. Strong recoveries for US bonds, international equities and alternative investments in the second half of 2020 also boosted the financial position of US state pension plans.

“A third consecutive quarterly increase in the value of assets held by state pension plans more than fully reversed the decline in the funding ratio registered in the first quarter of 2020,” said Ned McGuire, a managing director at Wilshire.

A more detailed picture has emerged of the strains caused by coronavirus on US public pension plans which tend to release their annual financial updates long after their official year end, making any assessment backward looking. State pension plans also have a range of year ends for their annual reports which complicates data aggregation.

The latest reported data from 134 state pension funds with combined assets of $3.2tn showed that the aggregate funded ratio stood at 70 per cent at the end of June 2020, down from 72.7 per cent in June 2019.

“The decline ended a streak of three consecutive years of increases in the aggregate funded ratio,” said McGuire.

Liabilities for the 134 state pension funds have increased by $459bn, or 11 per cent, over the past five years to a record $4.6tn while assets have risen just $178bn, or 5.8 per cent, over the same period to an all-time high of $3.2tn.

The plans together paid out $252bn in benefits to retirees in the 12 months ending June 30 but only took in just under $162bn in contributions from employers and scheme members.

More US public pension plans have gone “cash negative” as they pay out more in benefits than they gather in contributions, leaving them more dependent on investment returns to meet pension promises.

The pandemic appears to have had a bigger impact on pension plans with weaker funding positions which are more likely to already be cash negative.

A quarter of the 134 public pension plans had sunk into the “distressed” category with a funding ratio of 60 per cent or less at the end of June 2020, up from a fifth over the previous 12 months, according to Wilshire.

Tyler Bond, research manager at the National Institute on Retirement Security, a Washington-based think-tank, said the decline in the funded position of US public pension plans due to coronavirus was not as dramatic as the deterioration caused by the 2007/08 global financial crisis.

“Public pension plans have made design changes over the past decade and adopted more conservative assumptions about future growth that have helped them to become more resilient. The rally in the US stock market means we are likely to see an improvement in the funded status of more public pension plans once data for the current fiscal year ending in June 30 are reported,” said Mr Bond.