WALL STREET has been in buoyant mood in recent years. The S&P 500 equity index has reached repeated record highs. One might think that would be great news for America’s public-sector pension plans, which hold more than half their assets in equities.
Only up to a point. The latest report* from the Centre for Retirement Research (CRR) at Boston College estimates that the funding ratio of pension plans—the proportion of liabilities covered by assets—has risen from 72% in 2013 to (drum roll) 74% last year. A fifth of all schemes have a funding ratio of less than 60%—a group that includes not just the usual suspects in Illinois and New Jersey but some in Alaska, Arizona, Connecticut and Kentucky.
To make matters worse, this calculation makes a very generous assumption. Most liabilities of a pension plan fall well into the future—a stream of payments to current and future beneficiaries who may live into their 90s. These payments must be discounted to work out the sum in contemporary dollars needed to cover them, but at what rate? Private-sector pension plans are required to use long-dated AA-rated corporate-bond...Continue reading
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