US state pension system hit hard by coronavirus pandemic

The financial strength of the US state pension system has deteriorated to its weakest position in at least three decades as a result of the market turmoil unleashed by the coronavirus pandemic.

The aggregate funded ratio for US state pension plans dropped 12.2 percentage points during the first quarter to 62.6 per cent, according to Wilshire Consulting, the investment advice and research provider.

The large drop was due mainly to sharp falls across financial markets during March, leading to an estimated average 15.7 per cent decline in the value of assets held by 130 of the largest state pension plans.

“State pension plans funded ratio is now at its lowest level in the 30 years that Wilshire has been analysing this data,” said Ned McGuire, a managing director at the consultant.

The strains on pension plans are set to intensify due to the huge rise in US unemployment, which will cut state tax revenues and raise spending on benefits. More than 30m Americans have applied for unemployment benefits over the past six weeks since lockdown measures were introduced.

A BlackRock analysis of 70 US public pension plans found that the average funded status had weakened by a fifth to 52.1 per cent in March from 71.7 per cent at the end of December. First-quarter asset falls ranged from 20 to 40 per cent while declines in funded status varied between 9 percentage points and 32 percentage points.

“The dispersion of losses among public pensions has been wide, depending on the size of their allocations to growth assets,” said Calvin Yu, head of BlackRock’s client insight unit.

A comprehensive assessment of the damage done could take years to emerge due to the fragmentation of the $4.3tn US public sector retirement systems that includes 299 state-run plans and 5,977 locally administered schemes, which have evolved independently since the 19th century.

Democratic politicians are pressing US president Donald Trump to agree a fifth pandemic emergency relief package that would include more help for state and local governments, including public pension plans. Republicans are divided but Senate majority leader Mitch McConnell has expressed strong opposition to so-called “blue state bailouts.”

“There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations,” said Mr McConnell last month.

Jean-Pierre Aubry, a pensions expert at the Center for Retirement Research at Boston College, said that the long-term structural problems facing the US public system would now be greater as many plans had failed to strengthen their funding position in spite of the US stock market’s huge bull run since the 2007-08 financial crisis.

“Public pension plans can remain poorly funded for some time. They are not going to fail tomorrow and there is still time to turn the ship around. Even under a pessimistic scenario, the 20 worst-funded plans will not run out of money to pay pensions over the next five years,” said Mr Aubry.

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