Pension industry dynamics
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The record-breaking rise in the U.S. stock market has promoted the strongest annual investment return of the national pension plan in more than three decades and eased the funding pressure on the entire U.S. public retirement system.
According to data from the Pew Charitable Trusts, a Washington-based think tank, in the year ended June 30, the national pension plan achieved an average return on investment of 25%. Assets increased by more than US$0.5 trillion to reach US$3.87 trillion.
Greg Mennis, director of Pew, stated that the “once in a lifetime” return has increased the total funding position of the U.S. National Pension Plan—assets as a share of liabilities—to 84%. This has been since 2007. The highest level since the end of the year. The 2008 financial crisis.
It is expected that by the end of June, the gap between the assets held by state pension plans and their liabilities will be reduced to 740 billion U.S. dollars, which is the first time since 2014 that the gap has fallen below the 1 trillion U.S. dollar mark.
However, Anthony Randazzo, executive director of the New York-based non-profit think tank Equable Institute, said that the funding position of the US National Pension Plan is “still far below” the level they should be aiming for.
Randazzo said: “Compared to recent history, it is great to get up to 80% of the funds, but there are still a lot of clouds ahead.” “No one thinks that the national pension plan will continue to get such high returns, which means there are A warning. The states cannot get rid of this chaos through investment.”
Thomas Aaron, senior credit officer at the rating agency Moody’s, said: “The returns of the national pension fund are outstanding. Some people have seen the best annual performance ever, but we still see a fairly common risk.”
Moody’s uses a discount rate of less than 3%-based on high-quality corporate bond yields-to assess the liabilities of the national pension fund, which shows that the funding gap still exceeds $4 trillion.
National pension funds use their own average expected annual return indicator as the discount rate, averaging about 7%, which significantly reduces the value of future liabilities.
“Most state pension funds still allocate large amounts of stocks and bonds to meet their 7% average return requirement,” Aaron said. “The high-return-seeking nature of public pension investment brings huge volatility risks, and will not repeat the mistakes of the 2007/08 financial crisis, thus erasing a large part of the returns already achieved.”
Pew collected data from 230 national pension plans, which accounted for about four-fifths of the assets of the public retirement system. Only some data is available in 2020, and Pew uses these data for his predictions on the state’s retirement system. These estimates are reviewed by officials implementing the plan.
Over the past ten years, an average annual increase of 8% in contributions has also helped to improve the funding situation of the national pension system. However, most states plan to pay more benefits than they receive.
To measure the risk of running out of funds in the national pension fund, Pew measures operating cash flow as a percentage of assets. Public pension plans in Colorado, Ohio, Oregon, New Jersey, and Rhode Island already paid 5% of their assets in 2017. Pew views this threshold as a warning sign about the future financial sustainability of the plan.
But increased donations and other policy changes mean that all 50 states paid less than 5% of assets in the most recent year.
The coronavirus pandemic highlights “Volatility and uncertainty“Faced with the retirement plans of the states in the United States, Mennis said, adding that stress testing and arrangements must be introduced to share losses between workers and retirees to ensure that future pension promises can be fulfilled.