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Pensions Funds

Stagnant growth in pension contributions to intensify state plans’ pension burdens – Fitch

Stagnant growth in pension contributions is likely to intensify the burdens of state pension plans, said a new report from Fitch Ratings.

In the report, "Slower Growth in Pension Contributions," Fitch notes the pace of growth in actuarial contributions to state and local government defined benefit plans has slowed in recent years after rapid increases following the Great Recession.

For state plans reporting their fiscal year 2017 data, the median actuarially determined contribution rose 3.5%. Actual contributions, meanwhile, rose faster, increasing 3.7%. Recent increases are well below the post-recessionary peaks, when the median ADC rose 8.6%, in fiscal 2011, and actual contributions rose 8%, in fiscal 2014.

The burden of the pension plans on states is substantially higher compared to a decade ago.

As of fiscal 2017, ADCs for major plans were 74% higher than fiscal 2007 levels and actual contributions were 81% higher; median annual increases were 5.7% for ADCs and 6.1% for actual contributions over that period.

About 67% of major pension funds received contributions from participating governments that equaled or exceeded their ADCs in fiscal 2017. Recent levels are above the 46% post-recessionary low point for this figure (in fiscal 2011) and the previous peak at 61% (reached in fiscal 2008).

"Though there has been a material improvement in the funded status of pensions, ADCs must rise further to cover asset performance that over time is unlikely to match investment return assumptions," said Fitch Senior Director Douglas Offerman in a news release. "Slower ADC growth is taking place against a backdrop of longer-term unfavorable factors that will continue to push the carrying costs of pension liabilities higher over time."

Despite actions being taken to improve contributions, the willingness of states and local governments to make full contributions is generally cyclical, which Fitch sees as a negative over time.

"The damage done by weak contribution practices is higher today compared to decades past because pension systems are more mature, with less favorable demographic and cash flow profiles," Mr. Offerman added.