Public pension funded ratios improved despite lackluster returns
3 min read
Bloomberg News
Record-high contributions by state and local governments helped reduce unfunded pension liabilities even as returns fell, according to the Equable Institute, a non-profit that works with public retirement system stakeholders to solve pension funding challenges.
The average fiscal year 2025 return for state and local pension plans will be 5.41% based on data available June 30, compared to 9.7% last year, according to Equable’s
That’s below the 6.78% average assumed return rate, but pension funds boosted contributions to 31.65%, which Equable predicts will increase the average funded ratio to 81.4% in 2025 from last year’s 78.3%, Anthony Randazzo, Equable’s executive director and chief financial officer, said during an online presentation.
The
“In just two years, our investment returns have helped CalPERS increase the funded status to nearly 80% and rebound from the economic effects of the pandemic,” Chief Executive Officer Marcie Frost said in a statement. “Although there is more work to be done, I am proud to say that CalPERS is delivering for its members and employers.”
But Randazzo said despite CalPERS reported strength, and improvements in the average funded status across all of the funds Equable tracks, pension funds are still fragile, and “it’s possible that economic conditions could flip the script in a negative way.”
It’s a much different outlook from last year when the pension funds, on average,
Equable predicts unfunded liabilities will decrease to $1.35 trillion in 2025 from the $1.51 trillion posted in 2024, but Randazzo notes that is roughly the same as 2009, when they hit $1.37 trillion, Randazzo said.
The 25 largest pension funds have experienced a lot of volatility over the past six months, said Jonathan Moody, Equable’s vice president of research. Private equity peaked in February, but then dropped in April, when President Trump announced his so-called “
This year’s economic peaks and valleys have been a blip for some plans, who are long-term investors and are not worried about it, but others are starting to sweat, Moody said.
“It’s unclear how the political turmoil will translate into other asset classes,” he said. “Since 2022, we have been at record levels. We are nearing levels of volatility we saw during the 2008 financial crisis. There is concern as to what these investments will do.”
Employer contributions to public pensions have risen from 9.41% of payroll in 2001 to 31.65%, which means for every dollar paid in salary, governments are paying 32 cents into retirement funds, Randazzo said.
“Contribution rates are set several years in advance,” Moody said.
“It’s how the plans roll with the gains and losses, so they don’t see a jump from one year to the next, and the plans are still trying to pay down the liabilities from the 2008 financial crisis,” he said.
“We do expect them to be above 30% for the next five years,” Moody said.
Pension funds are of interest to the muni market, because bond holders are sometimes second in line behind pension fund members for payment if a municipality goes bankrupt. Underfunded pension funds can also negatively impact municipal credit ratings.
Equable is also tracking some trendlines it finds concerning.
“Public pensions asset allocations have shifted away from transparent public equities and relatively safe fixed income investments into
