How Sensitive is Public Pension Funding to Investment Returns?

Source: Alicia H. Munnell, Jean-Pierre Aubry, and Josh Hurwitz, Center for Retirement Research at Boston College, Issue in Brief, SLP#34, September 2013

The brief’s key findings are:
• To assess the sensitivity of pension funding to investment returns, the analysis projects funded ratios through 2042 for large public plans using:
• a stochastic model of year-to-year returns; and
• a median real return of 4.45 percent, the average used by plans in 2012.
• The baseline results show that the funded ratio for the 50th-percentile outcome does not reach 100 percent because:
• plans pay only 80 percent of annual required contributions (ARC); and
• amortization approaches produce inadequate contributions.
• Paying 100 percent of the ARC and using more robust funding approaches leads to near full funding by the end of the period.
• However, even under these more favorable scenarios, the variability of returns still poses risks of funding shortfalls.