An Update on Pension Obligation Bonds
Pension obligation bonds (POBs) are a general obligation of the government. They can alleviate pressure on the government’s cash position and may offer cost savings. In the previous version of this study, however, 2009 data showed that most issuers had lost money by issuing a POB and that those least able to absorb risk were the most likely to do so.
This 2014 issue brief examines the extent to which this picture has changed since the financial crisis, as well as the rationale for issuing POBs and the factors affecting the probability that a government will issue one. Key findings include:
- 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.