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.
EBRI says moving to less volatile investments would increase unfunded pension liability and require employers contribute more, but this may be necessary to address the economic reality and to avoid the need for additional taxpayer-financed contributions.
Meanwhile, evidence from actuarial and consulting firm Milliman shows defined benefit pension plans experienced their first gain in funded status in March since July 2008, according to the firm’s 100 Pension Funding Index, which consist of 100 of the nation’s largest DB plans.
March was the first month in which a gain in assets – $30 billion -improved pension funding status since May 2008. These gains were coupled with liability decreases of roughly $18 billion due to increases in discount rates, resulting in a $48 billion improvement in funded status for the month. These gains improved funded status to 77.7 percent.