Symposium on public pensions.

Author:Mohan, Nancy


Public pension funds continue to face challenges from economic factors and demographic changes. Governments that offer defined benefit plans to their employees promise fixed payments upon retirement and must fund the promised payments through contributions to a pension plan and growth of pension assets throughout the employee's working life. In general, yearly contributions to the investment fund are based on anticipated, often optimistic, investment returns. Although the stock market indices have recovered from the 2008 financial crisis, the low interest rate environment since the recession has limited fund performance. When actual returns deviate consistently from expected, pension plans become underfunded, that is the promised payouts or liabilities exceed the actuarial value of the fund's assets. Demographic trends, such as longevity, further strain a pension fund's sustainability as plan participants are living longer than that assumed for calculating payment contributions.

Consider state- and locally-administered defined benefit pension plans in the U.S., where the membership is close to 20 million individuals. From 2013 to 2014, total membership increased 0.6 percent; however, those receiving benefits increased by 3.2% (United States Census Bureau Annual Survey of Public Pensions: State and locally administered defined benefit data summary report: 2014. (1) Also in all 50 states, there were less than 2.5 active members per beneficiary--five states have less than one active member per beneficiary. According to data available through a 2015 report issued by the PEW Charitable Trusts, the average funding ratio for state administered plans is 72%; and, almost 2/3 of all plans are funded at less than 80%. Collectively, the liabilities are $3.4 trillion while assets equal $2.5 trillion. Just as troubling is the percentage of plans which contributed the recommended payment--slightly more than half of the total plans contributed the actuarial required contributions or ARC (data for 2013). (2) The United States may represent the problem faced by many developed economies as underfunding issues relate to other countries as well.

Canada's Auditor General announced (2014) that public service pension plans face a $152 billion liability. (3) During the last few years several provinces, such as Alberta and Prince Edward Island, have announced changes to their government worker pension plans due to underfunding. Some of...

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