The National Conference on Public Employee Retirement Systems (NCPERS) released a new report last month showing that public pensions stayed on solid financial footing despite the coronavirus-induced economic downturn.
For the report, 138 public retirement systems across the country shared how their plans performed in 2020. They included metrics like their overall sources of revenue, assumed rates of return, and funded statuses, which are critically important in determining a plan’s fiscal health.
(It’s also worth noting that 29% of the funds surveyed include members who are not eligible for Social Security, making defined-benefit pension one of these members’ only sources of income in retirement).
Below, we outline the study’s major findings and what they mean for public pensions.
1. Investment returns still make up a majority of public pension revenue.
Pension plans are primarily funded through three mechanisms – employer contributions, employee contributions, and investment returns. NCPERS has found that investment returns continue to provide the bulk of income for most plans.
In 2020, investment earnings provided 71% of the plans’ revenue, increasing two percentage points from 2019.
Public pension plans continue to make fiscal sense since most funds earn their money through investments, not through contributions from taxpayers.
2. Assumed rates of return increased in 2020.
An assumed rate of return (sometimes referred to as a discount rate) is a metric that plans use to calculate how much investments will earn in the future. This metric is necessary for plans to determine how much employers and employees need to contribute to a fund in order to meet its goals.
In 2020, due in part to the stock market’s recovery from the original decrease last March, the average assumed rate of return also increased, rising from 7.24% in 2019 to 7.26% in 2020.
While a single year of positive market news is good for plans, many invest over the course of, say, 30 years. Given this longer time frame and the fact that pensions are pooled collectively, plans have time to recover from any temporary blips in the market. This ensures they always have enough revenue to pay out benefits.
NCPERS has previously confirmed that pensions are dependable for the long-term. They have also found that pension debt has remained stable over the past 20 years, a time period which includes two other major recessions (the dot-com crash in 2001 and the Great Recession in 2008).
3. The average funded status of most plans rose in 2020.
A plan’s funded status reflects the “difference between the total amount of benefits owed to ALL current employees & retirees and the value of the financial assets the pension plan manages.” It’s important to note that if a plan has an unfunded liability, this means that “at a specific point in time, the pension plan does not have the full amount of money it will need to pay out ALL of the retirement benefits it will owe in the future to ALL of its current and former employees.”
While a plan will never need all of that money at one time, determining funded status can help plan sponsors decide what to set for the assumed rate of return and employer/employee contributions in a given year.
In 2020, the average funded levels of the plans surveyed experienced an increase to 75.1%, nearly three percentage points higher than in 2019.
Last year’s increase in the average rate of return appears to have helped increase the average funded status of most plans. This makes sense given that the rate of return measures the future performance of a plan’s financial assets (i.e., investments).
This latest research from NCPERS confirms that the vast majority of public pension plans have been able to withstand the volatility of the current economic crisis, making them a critical source of financial stability and security for public employees in retirement.