With stocks hitting new all-time highs this week, it might be tempting to think pension plans would be celebrating. They're not, for at least a few reasons:
- It's taken too long to get here. Stocks may be at all-time highs, but they are mere percentage points above where they were a year ago. Pension plans assume their investments will return 8 percent year after year. If stocks return less than that mark, pension plans will see their long-term liabilities increase.
- Although the S&P 500 has roughly tripled since its March 2009 low, pension plans still haven't recovered. According to the most recent data from the Center for Retirement Research (CRR) at Boston College, state and local government pension plans have a funded ratio of just 74 percent. That's a tick higher than last year, but it's a far cry from where they were 10 or 20 years ago, and it's still far short of what funds will need to pay future benefit promises.
- Worse, even if pension plans continue to get an 8 percent return every year from now until 2020, the CRR projects funding levels would only rise to 78 percent. That's the best case scenario.
- Attaining an 8 percent investment return going forward is going to be harder and harder. About 25 percent of pension plan assets are invested in bonds, but bond yields are hitting all-time lows and many are actually in negative territory (meaning the bond holder has to pay for the privilege of holding the bond, not the other way around). That puts even more pressure on investments in stocks and private equity and will, in turn, push pension plans into riskier and more volatile assets.
- Who knows what the future will hold, but a wide variety of indicators suggests we may be living in an "everything bubble," where pretty much all assets are expensive based on historical standards. If that does come to pass, pension plans will once again need to cut benefits, raise contributions, or some combination of the two.
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