Rockefeller Institute: Pension funding at greater risk with longer repayment schedules

Slower repayment of unfunded pension liabilities raises the risk that a pension plan will become severely underfunded and future taxpayers will be stuck with higher contributions, said a report released Thursday by the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York.

Under one common repayment method, payments are calculated as a constant level percentage of payroll over a constantly extended 30-year “open” period with five-year asset smoothing. The report found that if “investment returns vary from year to year — as they generally do,” a typical 75% funded public pension plan using that method has a 17% chance of falling below 40% funded sometime in the next 30 years, even if investment return assumptions are met on average over the long term and full actuarially required contributions are received.

Under other repayment methods, the risk of underfunding varies. For a plan that uses a 30-year closed period, which requires liabilities to be completely paid off after 30 years, the pension fund's risk of falling below 40% funded sometime in the next 30 years drops to 10%, the report also found. Additionally, when the repayment period is shortened to 15 years or a fixed-dollar payment method is used (instead of paying a percentage of payroll) and there is no asset smoothing, the risk of dropping below 40% funded sometime in the next 30 years falls to 4% or less.

The full report and brief are available on the institute's website.