An Update on Pension Obligation Bonds


Summary:

This issue brief examines the rationale for issuing Pension Obligation Bonds (POBs) and how they have performed since the financial crisis. (7/14)

Author(s):
Alicia H. Munnell, Jean-Pierre Aubry, and Mark Carafelli
Publication date:
7/13
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.
Download publication:
An_Update_on_Pension_Obligation_Bonds

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.