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The record rise in US equities has been the highest return on investment for state-owned pension plans for over 30 years, reducing the funding burden of the entire US public pension plan.
According to Pew Charity Trust, a Washington-based think tank, the state-owned pension plan will generate an average of 25% return on investment over the year to June 30, bringing the total assets of the U.S. public pension system to over $ 0.5 trillion. It pushed up $ 3.87 trillion.
Greg Mennis, director of Pew, said the “once-in-generation” return raised the total funded position of the US state pension scheme (assets as part of its liabilities) to 84%, the highest level since the end of 2007. Said that it reached. 08 Financial crisis.
The gap between assets held by US state pension schemes and their liabilities is projected to close to $ 740 billion at the end of June, which fell below $ 1 trillion for the first time since 2014.
Still, Anthony Randazzo, executive secretary of the Equable Institute, a New York-based nonprofit think tank, said the U.S. state’s pension system funded position is “far below what they should be aiming for.” “.
“It’s great to raise up to 80% of the money compared to recent history, but there are a lot of clouds ahead,” says Randazzo. “No one thinks that the state-owned pension system will consistently earn such high returns. This means there is a warning here. The state cannot invest to get out of this turmoil. . “
Thomas Aaron, Senior Credit Officer at Moody’s Rating Agency, said:
Moody’s evaluates state pension fund debt using a discount rate of less than 3% based on high-quality corporate bond yields, suggesting that the funding gap is still over $ 4 trillion. I am.
The state pension fund uses its own measure of expected annual earnings with an average discount rate of about 7%, significantly reducing the value of future debt.
“Most state-owned pension funds still make large allocations to equities and bonds to meet the 7% average return requirement,” Aaron said. “The high return nature of public pension investments carries significant volatility risk and does not require repeating the 2007/08 financial crisis to wipe out most of the returns achieved.”
Pew collected data from 230 state-owned pension schemes, which account for about four-fifths of the assets of public pension schemes. The 2020 data is only partial and Pew used it to predict the state’s retirement plan. These estimates were reviewed by officials working in the plan.
An average annual increase in contributions of 8% over the last decade has also helped improve the funded position of the state-owned pension system. However, most state plans pay more benefits than they receive.
To measure the risk of a state-owned pension fund running out of funds, Pew measures operating cash flow as a percentage of assets. By 2017, the Colorado, Ohio, Oregon, New Jersey, and Rhode Island public pension schemes paid 5% of their assets. Pew sees this threshold as a warning sign of the institution’s future financial sustainability.
However, due to increased contributions and other policy changes, all 50 states have paid less than 5% of their assets over the last year.
The coronavirus pandemic is “Volatility and uncertaintyMenis said he is facing a severance pay system in the U.S. state and will introduce stress testing and a loss-sharing arrangement between workers and retirees to ensure future pension promises are fulfilled. He added that it is essential.
US stock market rally bolsters state pension plans Source link US stock market rally bolsters state pension plans
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