How Sensitive Is Public Pension Funding to Investment Returns?
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.