Funding for public pension plans is quickly eroding due to investment losses, but it’s unlikely that underfunded sponsors will be motivated to make the shift toward relatively safer, lower-return investments in the short term, according to the Employee Benefit Research Institute (EBRI).
Under current circumstances, says EBRI, conservative investing could mitigate the risk to taxpayers making up for the shortfall. That’s something more sponsors need to take into consideration, even if it means higher employer contributions.
Underfunded public pension plan sponsors face some “perverse” incentives to maintain aggressive or risky investments, says EBRI – two of which include higher-projected investment income from risky asset allocations and plan sponsors that want to use a higher discount rate have an incentive to maintain high-return, high-risk asset allocation strategies (a high expected rate of return can be used to lower stated plan liabilities).
As the current economic recession drags on, administrators and trustees of these plans will need to seriously consider their long-term funding status and investment strategies – especially whether there is too much risk in pension portfolios, the EBRI analysis says.