Market Decline Could Affect Public Pensions for Several Years

October 22, 2009 (PLANSPONSOR.com) - The Public Fund Survey sponsored by the National Association of State Retirement Administrators and the National Council on Teacher Retirement indicates that the market decline in 2008 resulted in a median investment return for public pension funds of -25.3% for the year.

According to the report, the fall in asset values has caused aggregate funding levels to move downward from 86.7% in FY07 to 85.3% in FY 08.

However, the report notes that because public pension actuarial methods are designed to temper the effect of market volatility, public pensions will recognize the investment losses incurred in 2008 over several years. During this recognition period, funding levels are expected to decline, although losses may be partially offset with investment gains.

Future funding levels will also be influenced to the extent sponsoring state and local governments consider adjustments to benefit levels and financing arrangements, such as reduced benefits for future hires, reduced future accruals, and/or higher contributions for both employers and employees.

According to the report, the extent of cost increases will vary by plan and will depend on several factors, especially the plan's funding condition prior to the market decline; the adequacy of contributions to the plan by employers and employees; and the plan's demographic composition. The cost to amortize unfunded liabilities also will be affected by the plan's actuarial methods, assumptions, and past and future investment returns.

The timing of required cost increases also will vary by plan and will be affected mostly by the date of the plan's actuarial valuation, the report said. Roughly three-fourths of the systems in the Public Fund Survey have a fiscal year-end date of June 30; most of the remaining systems have a fiscal year- end of 12/31.

Because the steepest portion of the market decline occurred in October and November 2008, public pension plans with an actuarial valuation date prior to that period have not yet begun to incorporate those investment losses.

In addition, the report said, for many plans, the actuarial valuation date lags the system's fiscal year-end date. In these cases, the process of recognizing investment losses will be delayed further, typically by one year. The performance of investment markets in the meantime could either offset or exacerbate the effect of the market decline of the last year.