Public-pension funding surged in 2021 thanks to buoyant financial markets, taking funding levels to the highest in over a decade.
As of June 30, 2021, the aggregate funded ratio of the 100 largest U.S. public pension plans is estimated at 85%, according to the 2021 Public Pension Funding Study from Milliman, an actuarial company, marking what the group calls “a stunning improvement” from 70% in 2020.
It’s also the highest level of funding in the eight-year history of Milliman’s report. According to another data source, Public Plans Data at the Center for Retirement Research , which covers a larger universe of pension plans, the last time funding was so high was 2007.
The “funded ratio” of a public pension plan refers to the assets it has, divided by its obligations to all current workers, current retirees and any applicable beneficiaries.
Pension assets increase when employees contribute more through their paychecks, when employers make contributions, and when financial market returns (S&P:SPX) are favorable. Milliman estimates the median plan gained 27% in 2021. The S&P 500, for example, is up 22% in the year to date and up 35% over the past year.
Assets decrease when governments skip making payments in order to divert money to other budget needs. or when the number of contributing employees drops, as was the case in the 2020 downturn when governments laid off 1.5 million workers .
Milliman’s report also notes another concern about the long-term status of public pension funding. “The number of active members [people still in the workforce and contributing to the plan] has been essentially flat for the past eight years, while the number of retired and inactive members has increased each year.”
If financial markets underperform, pension assets often take a big hit — and unfavorable markets often go hand in hand with unfavorable economic conditions. That’s why many public finance experts stress that constant discipline in funding a public pension may be more important than hitting a particular funding threshold.