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Pension Funds

U.S. public plans see 2nd consecutive year with above-target returns — Moody’s

Adjusted net pension liabilities for U.S. public pension funds fell 5% in fiscal year 2018, Moody's Investors Service estimates, following a second straight fiscal year in which the funds' returns exceeded their return targets.

Still, a report from Moody's found that state and local government credit risks from pension funds remain high because unfunded liabilities are near historic peaks and pension costs are continuing to rise to cover past losses.

The fiscal 2018 drop comes after adjusted net pension liabilities fell by more than 6% in 2017. Moody's attributes the falling liabilities to positive equity returns, which average above 7%, combined with rising interest rates.

Moody's expects most U.S. public pension systems will report annual returns of around 9% for the fiscal year ended June 30. Despite strong investment returns, adjusted net pension liabilities would have increased by 2% if market interest rates had remained unchanged.

Looking ahead, Moody's predicts 2019 government contributions in aggregate will dip below the tread-water indicator, the level of contributions required to prevent reported pension liabilities from growing if plan assumptions are met. If investment returns meet plan return targets in 2019, Moody's projects contributions could exceed the tread-water indicator by fiscal year 2020.

Despite strong market performance over the past two years, U.S. public pension funds still face the threat of significant equity market losses. Moody's projects a 10% investment loss in fiscal year 2019 could push adjusted net pension liabilities up roughly 22% in fiscal year 2020.