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Pension liabilities surpass $4 trillion and are set to rise

By Gary St. Fleur. Originally published at ValueWalk.

A recent report from Moody’s states that “US public pensions funds’ adjusted net pension liabilities (ANPLs) surpassed $4 trillion nationwide in 2016”. The report also indicated that this increase in Unfunded pension liabilities was a result of “poor investments” and “declining discount rates”. Three different investment return scenarios are offered in the report- base, upside and downside- to project pension liability debt levels in 2020. According to the report, the downside scenario places public pension debt at dangerous new levels with a expected 59% increase in total liabilities.

Unfunded pension liabilities
41330 / Pixabay

In order to stave off this possible forecast, pension would have stabilized their funds through sound investment allocation. Unfortunately, even in the upside best case scenario, pension liabilities will not decline. Furthermore, the sample of 56 pension plans used in the study provides a dismal picture for the future. According to the sample, investments in the pension plans  achieved 1% returns on average within the last year. Their investment targets were an assumed 7.5%. This portends a dire situation if pension investments continue to perform poorly.

The report outlines good reason for concern; unfunded liabilities can expose state and local government to balance sheet challenges that can affect credit ratings. In fact, such pressure is “at or near all time high for many” pension systems. Exacerbating the situation is the tendency for pension systems to place fund allocations to volatile investments in search of greater returns. This only increases the risk of loss, placing greater strain on state and local balance sheets.

To place this into perspective, the reports finds “that a mere 5% investment loss would increase unfunded pension liabilities by an amount equal to 25% of payroll…”  The report illustrates by explaining “…[the] sample in aggregate, covered payroll was roughly $414 billion, as of 2016 reporting. Thus, a $103 billion asset loss would amount to 25% of payroll. With pension assets amounting to $1.98 trillion in total for the plans we sampled, a loss of $103 billion translates to a 5% investment loss.”

As noted recently, it looks like the pension system is dying out, but what will happen to existing workers is the million (or trillion) dollar question.

The post Pension liabilities surpass $4 trillion and are set to rise appeared first on ValueWalk.

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