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.