An Update on Pension Obligation Bonds
This issue brief examines the rationale for issuing Pension Obligation Bonds (POBs) and how they have performed since the financial crisis.
- Alicia H. Munnell, Jean-Pierre Aubry, and Mark Carafelli
- Publication date:
- Filed under:
- Research Studies
- Key findings:
- Some state and local governments issue POBs to cover their required pension contributions.
- POBs offer budget relief and potential cost savings, but also carry significant risk.
- POBs had a negative average real return from 1992-2009, but show a small gain when the time period is extended to 2014.
- POBs could be a useful tool for fiscally sound governments or as part of a broader pension reform package for fiscally stressed governments.
- But results to date suggest that, instead, POBs tend to be issued by governments under financial pressure who have little control over the timing.
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The brief finds that governments are more likely to issue POBs if their debt levels are high, they are short of cash, and the pension plan represents a substantial obligation to government.
If the timing is good, governments will earn more on the proceeds than they have to pay in interest.