Moody’s: Pension Funding Likely to Get Worse Before It Gets Better

Pension funds will have trouble closing their funding gaps in the remainder of 2016 fiscal year due to lackluster returns, according to a Moody’s report.

The report, which analyzed 56 US public pension funds, projects a 5 percent return as the best-case scenario for the rest of the fiscal year.

More from Financial Times:

Moody’s, the rating agency, said lacklustre returns in 2015 and 2016 will put severe pressure on the health of US public pension plans and force states and cities to act in order to plug their pension funding gaps.

Tom Aaron, an analyst at Moody’s, said the funding deficit — the difference between the assets a pension fund has and what it has to pay out to current and future pensioners — will grow substantially this year….

In the most optimistic scenario, where average returns totalled 5 per cent, the collective funding gap [for the 56 plans in its study] would still widen by more than $200bn.

Moody’s estimates the scale of the unfunded liabilities is greater than officially reported because of the generous discount rate public pension plans use to value retirement benefits. The rating agency said the schemes collectively have a deficit of $1.7tn, which could rise to $2.2tn this year if the pension plans suffered negative returns.

[…]

Olivia Mitchell, a professor at the Wharton School at the University of Pennsylvania, said public pension plans face “grave difficulties”.

“I do believe that US cities and towns will continue to suffer, and there will be additional bankruptcies following the examples of Detroit and the cities of Vallejo, Stockton and San Bernardino,” she said.

If you’re a Moody’s subscriber, you can view the report here.

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