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Its July again, which means Equable is publishing our latest annual report: State of Pensions 2023. If you’re a pension geek, this is a 100 page trove of fascinating data. If you’re a normal human, here are three reasons why you might care about the status of government retirement plans anyway:  

1. Pension funds have around $500 billion invested in private equity funds… unless private equity valuations are just paper profits. We’ve tracked the recent history of growth in how much money pension funds are investing in “alternative” investments, as well as how much money has been put on the line in recent political fights related to “ESG,” climate change, and fossil fuel companies.
   
   
2. You might have read recently about elementary students still struggling with learning loss even after $190 billion in Covid relief funds were distributed to states. There are lots of reasons, but part of the problem is that not all of that money is making it to the classroom. Schools will spend $600 billion on pension debt costs during the same period of time they can spend Covid relief funds. We have some thoughts on where these costs might be heading in the future.
   
   
3. You might have also heard states and cities have struggled to retain talent amid a competitive labor market and inflation growing faster than government salaries. We’ve found that the annual required cost for state and local pension plans is now over 30% of payroll — a massive amount, compared to the common 3% of salary 401k match in the private sector. This leaves less money available to pay higher salaries, and has led states to cut the benefits offered to new workers.

I hope you find something interesting in this report, and if so I’d love to hear from you. Or, if this stuff is really just best served as a sleeping aid, I’d also like to hear from you about anything else you’re finding interesting in life at the moment.

- Anthony Randazzo, Executive Director

State and municipal retirement systems are on track to miss their investment targets and are unlikely to see meaningful improvements in their unfunded liabilities or funded ratio in 2023.

Equable estimates that the aggregate funded ratio for U.S. state and local pension funds will rise marginally to77.4% in 2023 and unfunded liabilities will remain effectively flat at $1.49 trillionyear over year, driven by underperforming investments.

This marks a return to the stagnant funding levels seen in the decade following the Great Recession.

Pension Trends to Watch in 2023 and Beyond

Traditional assets like stocks and other public equities that are valued based on their market price. Most alternative investments are valued based on “fair price” valuations from asset managers that are not tied to real-time market performance. This means that it is difficult to effectively evaluate if these “fair prices” are accurate. If they aren’t, pension funds are likely over-estimating the total value of their assets and, in turn, are setting contribution rates too low to achieve their funding goals.

Looking deeper, more states passed anti-ESG laws than pro-ESG laws. However, there are significantly more pension fund assets that are being influenced by pro-ESG sentiments than anti-ESG views. Over $2.4 trillion in assets are under management in pro-ESG states compared to $708 billion in anti-ESG states.

MARKET UNCERTAINTY & VOLATILITY

Given the current economic landscape and uncertain interest rate environment in the coming months and years, mixed market signals and significant volatility are likely to be a significant influence on the funding and investment decisions of public pension funds.

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