Recent market declines as a result of the coronavirus pandemic could cause state pension funds to suffer increased losses of $500 billion, which would bring the overall state pension debt to $1.7 trillion and the aggregate funding gap to an all-time high, analysis from Pew Charitable Trusts said.
Greg Mennis, director of Pew Charitable Trusts' public sector retirement systems project, noted in his analysis that most public plans are on track to face fiscal year losses for the first time since 2009 due to equity markets recent decline.
"In the aggregate, they are currently short of annual return targets by 10% to 15%," Mr. Mennis wrote.
And although each state has their own set of individual issues and challenges, almost all state plans will have to face these four key issues:
- Making required contributions.
- Lowering assumed rates of return.
- Needing to stress test.
- Monitoring the effectiveness of cost sharing.
Making the expected annual contributions to their funds despite projected revenue declines will be the most pressing issue for sponsors of state plans, especially plans in states like Illinois and New Jersey that were already severely underfunded before the pandemic.
Not only will reducing required contributions will increase pension costs over the long term, they may also hinder funds in meeting their investment goals and policies in the short term.
Plans will also likely need to consider lowering the assumed rates of return on investments. But even before the coronavirus outbreak, projections were already resulting in downward revisions of return assumptions.
