Unfunded annuities exceeded return targets in 2021, report says

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The defined benefit plans, which provide retirement income for five million state and local employees who don’t pay Social Security, are better off now than they were before the pandemic, despite dire predictions that the economic fallout from Covid-19 would decimate them, the Center for Retirement Research at Boston College.

The concern in March 2020 was that a prolonged pandemic recession, with poor investment returns and defaults in government revenues, would undermine the ability of these plans to meet their obligations to employees who may have no other source of income for retirement, explained a recent CRR briefing authored by Jean-Pierre Aubry and Kevin Wandrei, Deputy and Deputy Directors of State and Local Research respectively.

“But it didn’t come to that,” Wandrei said in an interview. “The impact of the pandemic on these public pensions has not been negative at all.”

Instead, Aubry and Wandrei found that the two key factors contributing to the financial health of public plans — investment returns from pension fund assets and contributions from government funders — both survived surprisingly well.

“After the stock market’s initial sharp drop in spring 2020, the market roared back,” they wrote. “As a result … [these plans] exceeded their return targets by over 20 percentage points on average. In fact, many plans cited 2021 as one of the best years for investment returns on record.”

Similarly, tax revenues rebounded from a fall in income taxes in the second quarter of 2020 as stimulus checks, unemployment benefits and the Payroll Protection Program poured into communities, the letter said.

And then there was the billions of dollars in federal aid: “Although the aid came with restrictions that allegedly prohibited its use to top up pensions, money is fungible,” Aubry and Wandrei wrote. “And anecdotal evidence suggests that states have contributed more to pensions than they otherwise would have.”

The result was that this category of defined benefit plans, which have experienced negative cash flows averaging about 2% of assets per year in recent years, saw the average funded ratio (which represents current assets versus the calculated present value of future benefits) a year Improve by almost 2% in 2021.

State and local defined benefit plans that exclude employees from Social Security (known as “unfunded” plans) exist in 19 states and include general public employees, teachers and public safety workers, the brief said. These plans are required to pay out benefits that are at least equivalent to Social Security.

The largest of these plans is the Texas Teachers Retirement System, which has more than 1.4 million members. The smallest plans include the Atlanta Fire, the Fairfax County Police and the Pittsburgh Police, each with fewer than 3,000 members, the paper said. Of the 2 million members of the California Public Employees Retirement System, about 65% are uninsured.

While there was no immediate impact of the pandemic on unfunded defined benefit plans, they still face the challenges they faced before the pandemic, including 2% negative cash flow and reliance on meeting aggressive investment targets historically were missed by about 1%. annually since 2001.

“What are the chances that these plans will literally run out of money in the next 10 years? That won’t happen,” said Wandrei. “But [long term], the coverage rates are not amazing. They’re hovering around 70%.”

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