COVID-19 fallout prompts rethink of stress test advice – Pew

Given the economic uncertainty brought about by the COVID-19 pandemic, Pew Charitable Trusts is recommending new guidelines for the way public pension plans conduct stress tests.

The updates include resetting baseline and downside scenarios to reflect the current economic environment and the unique risks to an economy already in a downturn, revising investment return assumptions to roughly 6% annually from 7%, and updating the methodology to project long-term state revenues to reflect the latest in-state forecasts, indicating a reduction in resources available to make annual pension contributions.

Although plans managed to avoid significant investment losses during the fiscal year ended June 30, and newly released government data show signs of the national economy improving, public pension systems still face funding challenges brought on by COVID-19.

Citing projections from the Congressional Budget Office, Pew noted that lower earnings on investments could reduce pension fund returns by about $10 billion to $20 billion annually. Additionally, an estimated 6% to 11% decline in state revenues has limited some states' ability to make their required annual contributions to their plans.

The updates to Pew's stress testing framework are intended to help policymakers manage better evaluate pension funding strategies and budget priorities during the pandemic.

Although the latest federal data show that a recovery is underway, real GDP does not approach its pre-pandemic trajectory until 2025. And that's only if the projections are met. That doesn't consider the possibility of an economic slowdown or another recession.

Pew's research also showed that this reduction of investment return assumptions could apply over the next 20 years.

"With revenues depressed, meeting scheduled pension payments will require a greater share of state resources, particularly over the next few years," Pew research said.