Pension funding is up over the last year despite pandemic-driven budgetary challenges

It’s been an exceedingly difficult few years for local governments—especially monetarily, given the pandemic’s unprecedented fiscal challenges—but even so, for the second year in a row, the funded ratio of public pensions continues to rise. Over 2021, the latest Public Plans Database analysis from the MissionSquare Research Group shows a 3 percent uptick in the percentage of funded plans. 

“The funded status of state and local pension plans nationwide has improved to 75.4 percent in 2021, up from 72.2 percent in 2020,” the report says, citing “a period of strong investment returns since 2020, and as more state and local governments are disciplined about making the required pension plan contributions.” 

Data shows the funded ratio for public pension funds declined from 101.8 percent in 2001 to 71.7 percent in 2016, before bouncing upward to its present ration. Notably, employee contributions declined somewhat from 2010 to 2020, while employer contributions increased from 4.4 to 10.6 percent.  

The funded ratio has trended upward since 2020, and as more state and local governments are disciplined about making the required pension plan contributions. A pension plan’s funded ratio is its assets as a percentage of liabilities, according to the Federal Reserve. 

There are a few reasons for the percentage increase. 

“Robust financial markets certainly are playing a role in higher funded ratios,” said Gerald Young, senior research analyst with MissionSquare Research Institute and author of the analytical brief. “We also see that regardless of a pension plan’s historical funded status, plan contributions are at or near the actuarially required levels. Failure to make required pension contributions on time and in full can lead to long-term funding shortfalls.” 

Over 2021, plan contributions for local and state pensions averaged between 97 and 106 percent, according to the brief. In comparison, plans ranged from 99 to 78 percent in 2010. At least part of the reason why pensions are being better funded in the last decade can be contributed to investment strategies. The portion of portfolios invested in real estate, hedge funds, commodities and alternative investments grew from 9 percent in 2001 to 29 percent in 2020. 

There’s also been a shift in who is contributing to the funds. Since 2012, an average of 6 percent of employers that participate in MissionSquare Research Institute’s workforce survey cited increases in employer contributions. Conversely, about 13 percent of employers cited increases in employee contributions over that same time period. 

The analysis notes a potential hurdle that public organizations could face in the future. Hiring slowdowns, starting with the Great Recession and most recently accelerated by the Great Resignation, have reduced the number of active employees and increased the number of retired beneficiaries drawing from the fund. 

Regardless, the ratio uptick is good news for public employers because pensions are an important element of recruiting. Higher funding levels “help ensure the long-term sustainability of the plans,” the report says, serving “as an important tool for employers to attract and retain state and local workers, which is especially important in a highly competitive job market. Additionally, pensions provide state and local government retirees with a stable income that lasts through retirement.”