Robust Financial Markets and Full Employer Contributions Impacting Improved Funded Status
The latest Public Plans Database (PPD) analysis from MissionSquare Research Institute indicates that the funded status of state and local pension plans nationwide has improved to 75.4% in 2021, up from 72.2% in 2020. The funded status has trended upward during a period of strong investment returns since 2020, and as more state and local governments are disciplined about making the required pension plan contributions.
“This analysis provides important data to assess the health of state and local pension plans,” said Gerald Young, Senior Research Analyst with MissionSquare Research Institute and author of the research brief. “Robust financial markets certainly are playing a role in higher funded ratios. We also see that regardless of a pension plan’s historical funded status, plan contributions are at or near the actuarially required levels. Failure to make required pension contributions on time and in full can lead to long-term funding shortfalls.”
Higher funding levels for state and local pensions help to ensure the long-term sustainability of the plans, which ultimately can benefit public sector employers and workers. Pensions serve as an important tool for employers to attract and retain state and local workers, which is especially important in a highly competitive job market. Additionally, pensions provide state and local government retirees with a stable income that lasts through retirement.
Additional research findings are as follows:
- Most state and local plans are contributing nearly all or more than the full actuarially determined employer contribution (ADEC). In the 2021 data available, plans have averaged contributions between 97% and 106% of the ADEC. By contrast, in 2010, plans in the top quintile by funded ratio contributed 99% of the ADEC, while those in the bottom quintile contributed only 78%.
- The mix of pension fund investments has changed significantly for public plans since 2005. The portion of total portfolios invested in real estate, hedge funds, commodities, and alternative investments has grown from 9% in 2001 to 29% in 2020.
- The ratio of active workers to plan beneficiaries continues to decline across all public plan sizes. Factors contributing to this trend may include the ongoing retirement of members of the baby boom generation and the departure of other employees amid the Great Resignation.
Established in 2007, the PPD is a comprehensive data set of public sector retirement plans developed and maintained through the collaborative efforts of MissionSquare Research Institute, the Center for Retirement Research at Boston College (CRR), the Government Finance Officers Association (GFOA), and the National Association of State Retirement Administrators (NASRA). It contains detailed information on the 210 largest state and local defined benefit (DB) pension plans in the U.S., representing 95% of all state and local pension assets and participants. The PPD was expanded in 2020 to include data from public sector defined contribution (DC) retirement plans, and it now houses data for 103 defined contribution (DC) plans across 44 states. It will continue to be expanded each quarter with state-wide and large local government plans. PPD data on DB and DC retirement plans provides governments and plan administrators an expanded, holistic view of public sector retirement benefits, as they focus on public employee financial security.
The analysis is based upon data in the PPD from 2001 to 2021. As of December 2021, roughly 25% of PPD plans have 2021 data available, with additional data uploaded quarterly.
MissionSquare Research Institute promotes excellence in state and local government and other public service organizations to attract and retain talented employees. The organization identifies leading practices and conducts research on retirement plans, health and wellness benefits, workforce demographics and skill set needs, labor force development, and topics facing the not-for-profit industry and education sector. MissionSquare Research Institute brings together leaders and respected researchers. More information and access to research and publications are available here.