The funding gap

It’s no secret pension systems have been facing hefty funding gaps for many years, with more and more pension funds moving to defined contribution plans from defined benefit plans to help deal with deficits. But there is a modicum of good news to help minimize the bad.

The bad news:

Pension benefits at U.S. state-run retirement systems were underfunded by $968 billion in 2013, an increase of $54 billion from 2012, according to a new report from The Pew Charitable Trusts. The report looks at data from 238 public-sector retirement plans across the country for the most recent year full data was available, 2013.

The good news:

Examining 2013 means recent strong investment returns are not fully reflected in the report. Furthermore, because historic data from state retirement plans tends to track investment gains and losses over time, losses from 2008’s global financial crisis are still included, making the amount of unfunded liabilities appear even larger. Even better, preliminary 2014 data suggests unfunded liabilities have been reduced in the majority of states, and a number of states have benefited from reforms implemented since the global financial crisis.

The bottom line:

While pension reform and investment gains have put a needed dent in overall unfunded liability, state pension debt is likely to remain above $900 billion — and above $1 trillion when local pension system debt is added to the mix. Improved investment returns alone will not reduce the funding gap enough in the long run. Instead, funding policies are needed that will allow these retirement systems to keep abreast of pension debt and pay it down.

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Jennifer-Molloy91x119Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.

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