COVID-19 will bring total pension debt to $1.62 trillion this year

COVID-19 will bring total pension debt to $1.62 trillion this year
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There’s no denying that COVID-19 has impacted the global economy, and it’s weighed on public pension funds too. The Institute for Pension Fund Integrity published a report on COVID-19’s impact on public pensions.

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Q3 2020 hedge fund letters, conferences and more

Data from the Equitable Institute suggests that COVID-19 will bring total pension debt to $1.62 trillion this year. Those losses haven't hit budgets yet, but they will mean higher pension bills starting next year.

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Public pensions before the COVID-19 crash

The Institute for Pension Fund Integrity (IPFI) reports that before the pandemic, state pension liabilities totaled $1.24 trillion. More than half of that debt is from five states: California, Illinois, Pennsylvania, New Jersey and Texas.

The more-than 10-year bull market was helping close the unfunded liability gap for some public pensions. The Milliman Index reveals that the 100 biggest U.S. public pension funds saw their overall funding ratio rise from 67.2% at the end of 2018 to 74.9% in December 2019. That's the highest overall funding ratio since 2016, so progress was being made. Total liabilities were also down in 2018, falling from $1.35 trillion in 2016 and $1.28 trillion in 2017.

The IPFI notes that over the last several decades, pension funds have been shifting their portfolios away from relatively safe assets toward riskier ones. Fund managers were trying to raise estimates for future rates of return with the goal of reducing the need to make up for growing liabilities.

Unfortunately, these riskier assets have failed to pay off as much as stocks have over the last several years. Another problem is that these alternative assets are hit especially hard during economic downturns.

Assessing the impact of the COVID-19 market crash on public pensions

Moody's reported that public pension investment losses neared $1 trillion at the end of March following the COVID-19 market crash. That was a 21% loss for the fiscal year, and it was in addition to the $4.1 trillion shortfall in state and local pensions that was felt before the crash.

Even with gains during the second quarter, public pension funds are averaging year-to-date returns of only 2.84%, according to the Milliman 100 Public Pension Funding Index. That's much lower than what would be needed to meet funding goals.

The IPFI notes that very few states have fully funded pension plans, and those that do could weather the COVID-19 downturn with limited consequences. However, states that were already in serious trouble with unfunded liabilities before the pandemic, like Kentucky, New Jersey and Illinois, are now in even bigger trouble.

Moody's Investors Service expects public pension liabilities to climb from $1.35 trillion last year to $1.62 trillion this year. The IPFI also notes that many governments also have less capacity to defer cost increases or take other mitigating actions like they did after the 2008 financial crisis. The reason is because their non-asset cash flow relative to assets has dropped significantly or even become negative. According to the IPFI, this is "another indication of neglected reforms and kicking the can down the road."

State-level pension data on COVID-19

Data points on the impacts of COVID-19 at the state level are starting to appear. For example, California has especially seen an impact on its already strained public pension system. At the end of the first quarter, the California Public Employees' Retirement System (CalPERS), reported that its asset value declined about $35 billion, falling 10.5% since June 2019.

CalPERS fund managers had been assuming that their investments would grow 7% during the fiscal year. The IPFI stated that "mismanagement" from CalPERS leadership, including the resignation of Chief Investment Officer Ben Meng, "leaves the pension's future hanging in the balance with a lack of clear direction moving forward."

Illinois has also assumed a 7% annual return rate, but Moody's expects its public pension liability to increase from $230 billion last year to $261 billion this year, mostly because of COVID-19. The Kentucky Retirement Systems' returns finished the fiscal year at -7% after the COVID-19 market crash in March. The pension plan has $25.8 billion in unfunded pension liabilities.


According to the IPFI, the consequences of pension shortfalls include difficulties making required contributions, rethinking investment projections, liquidity problems, the possibility of long-term recession, and disproportionate impacts on pensions for women and minorities.

For more on the ramifications of pension shortfalls, check out our cornerstone piece on pensions here.

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