NCPA - National Center for Policy Analysis

Pension Gaps Loom Larger

September 22, 2010

Many of America's largest pension funds are sticking to expectations of fat returns on their investments even after a decade of paltry gains.  This could leave U.S. retirement plans facing an even deeper funding hole and taxpayers on the hook for huge additional contributions, says the Wall Street Journal.

  • Return assumptions can affect the size of so-called funding gaps -- the amounts by which future liabilities to retirees exceed current pension assets.
  • That's because government plans use the return rates to calculate how much money they need to meet their future obligations to retirees.
  • When there are funding gaps, plans have to get more contributions from either employers or employees.
  • The concern is that the reluctance to plan for smaller gains will understate the scale of the potential time bomb facing America's government and corporate pension plans.

Some plans are beginning to trim their return forecasts, says the Journal.

  • Earlier this month, New York State Comptroller Thomas DiNapoli said he would reduce the expected rate of investment return for his state's pension system, the third-largest in the nation, to 7.5 percent from 8 percent.
  • The country's two biggest plans -- the California Public Employees Retirement System and the California State Teachers' Retirement System -- both are undergoing reviews of projected investment returns that could lead to reductions later this year.

Many plans have held onto an 8 percent return expectation through thick and thin.  Such return assumptions partly reflect the heady years of the 1990s bull market.  Public pension plans posted a median, annualized return of 9.3 percent over the past 25 years, but just 3.9 percent over the past 10 years, according to consulting firm Callan Associates.

Source: David Reilly, "Pension Gaps Loom Larger," Wall Street Journal, September 18, 2010.

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