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Equable Institute Analysis Estimates U.S. Statewide Pension Funding Shortfall to Shrink by $400 Billion in 2021

Equable Institute Analysis Estimates U.S. Statewide Pension Funding Shortfall to Shrink by $400 Billion in 2021

Report warns investment assumptions are still too high for the U.S.'s fragile pension plans

PR Newswire

NEW YORK, Sept. 23, 2021 /PRNewswire/ -- Statewide public retirement systems are poised to deliver in 2021 the highest investment returns seen this century, according to the annual State of Pensions report from Equable Institute. The analysis finds that these record-breaking investment returns (20.7% on average), will cause unfunded liabilities to decrease to $1.08 Trillion in 2021, from $1.48 Trillion in 2020, bringing the funded ratio to 80.9% - a level last seen in 2008 amid the early days of the financial crisis and Great Recession.

The state of U.S. pension plans is still fragile, despite record returns in 2021.

State of Pensions 2021 analyzes trends in public pension funding, investments, contributions, cash flows and benefits for 159 of the largest statewide retirement systems in all 50 states (e.g., retirement plans with at least $1 billion in accrued liabilities).

While Equable finds a considerable improvement in the funding levels of public retirement systems year over year, executive Director Anthony Randazzo warns that the state of pensions in America is still fragile.

"The recent historic investment returns for state pension plans has provided significant assets to reduce funding shortfalls. But even with best-this-century returns, the collective funded status for state pension plans is still only at a fragile 81% — and that is based on a 7% average assumed rate of return, which is too high given current market forecasts. We should view these returns as a warning that state pension funds cannot invest their way back to health. State leaders and pension board trustees must ensure they are treating the problem of unfunded liabilities seriously while using realistic assumptions about the future so that they are not trying to mask with accounting tricks just how deep their funding shortfall really is."

Equable Institute's assessment of public retirement trends reveals a complex picture beneath the year's rosy returns:

  • Even with the strongest investment return year of the 21st century, public pension plans are still well below their 94.4% funded status prior to the Great Recession.
  • While investment assumptions have been steadily falling and are currently at an all-time low, they are likely still too optimistic If assumed returns had kept pace with declining interest rates since 2001, the average assumption in 2020 would have been around 4.33%. Today, the average assumed rate of return is 7.03%.
  • Within the states, funded ratios and unfunded liability levels continue to vary considerably from state to state. The vast majority have Fragile or Distressed funded status.
  • Asset allocations continue to shift toward riskier and less transparent alternatives, including hedge funds, private equity, and real estate. The share allocated to hedge fund managers and private equity strategies has grown to 13.1% from 8.6% in 2008.
  • Negative trends from the past decade persist in historically high contribution rates for both members and governments.
  • Over the past two decades, the number of public retirement plans available to new hires has grown, particularly as states add options and design more specific benefits for narrower segments of the workforce.
  • States have made meaningful changes to their funding policies. 30 state retirement systems lowered their investment assumptions and, in the aggregate, states made 98.3% of required contributions to their retirement plans in 2020, the highest level since 2001.

For a deeper look into The State of Pensions 2021, visit http://www.equable.org/StateofPensions2021 to access additional downloads and interactive data visualizations. Additional media tools including figures, fact sheets and raw data can be found here.

About Equable Institute

Equable is a bipartisan non-profit that works with public retirement system stakeholders to solve complex pension funding challenges with data-driven solutions. We exist to support public sector workers in understanding how their retirement systems can be improved, and to help state and local governments find ways to both fix threats to municipal finance stability and ensure the retirement security of all public servants.

Equable.org | Twitter: @EquableInst | Facebook: @EquableInstitute | Instagram: @EquableInst

Cision View original content to download multimedia:https://www.prnewswire.com/news-releases/equable-institute-analysis-estimates-us-statewide-pension-funding-shortfall-to-shrink-by-400-billion-in-2021-301383298.html

SOURCE Equable Institute



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