National Data

Funding commitment – the degree to which the plan sponsor regularly and fully makes required contributions to the plan – is a critical factor in assessing the current and future health of a pension plan and an indicator as to whether or not the costs of funding the pension plan creates fiscal stress for the pension plan sponsor.

The employer’s required contribution each year is generally equal to the amount needed to finance benefits earned in the current year, plus an amount to amortize unfunded benefits earned in past years, net of contributions made by employees. In practice, there are various methods used by plans for calculating costs of benefits earned in the current year and amortizing the cost of unfunded benefits.  Additionally, plans vary in their assumptions for key parameters underlying the calculation of the required contribution such as the assumed long-term investment return, the assumed growth of salaries for individual employees as well as the overall plan payroll, and the assumed mortality. Because these methods and assumptions can differ from one plan another, caution should be taken when comparing the required contribution between plans.

While funded ratios among pension plans vary substantially, in the aggregate, public pension funding levels rose steadily during the 1990s, due largely to strong returns in global equity markets. Since then, sharp market downturns in 2000-02 and 2008-09 negatively affected asset values and increased unfunded pension liabilities and required contributions. A combination of the market downturns, insufficient contributions (for some plans), and increased benefit levels (also for some plans) resulted in a decline in aggregate funding level between 2001 and 2012, and has since remained relatively stable.

Below is a summary of aggregate funding levels from 2001 through 2018:

Pension benefits for public employees are pre-funded.  In other words, employers and employees make contributions to the pension during an employee’s working life, which are invested and then distributed over the participant’s years in retirement.

Public pension funds are invested in broadly diversified portfolios for the purpose of generating investment earnings with an acceptable level of risk.  Public pensions develop target asset allocations considering a broad range of factors, including the fund’s risk tolerance, projected stream of benefits payments, expected contributions, and the efficient frontier, which optimizes levels of risk and return. The long-term nature of public pension fund investment goals permits investors to focus on long-term results, within the context of the level of risk the fund incurs.