How many times have you heard, “when things return to normal” recently? Amidst the coronavirus pandemic, recession, and election cycle, this mantra is being repeated a lot, and public pension plan management is not exempt from this mentality.
When was the last time we saw the “normal” that public pension administrators allude to?
Just in the past 20 years, we’ve seen multiple major stock market downturns, significant recessions, continually decreasing long-term interest rates, roller-coaster public employment figures, uncertain government revenues, changing employment patterns, and tens of thousands of Americans reaching retirement age every single day. Is any of this “normal”?
Go back further to the 1990s, when there were ever-increasing equity market returns, before the bubble burst—Was that normal? How about the runaway inflation of the 1970s?
When public pension managers and policymakers discuss a return to normal for public pensions it is a reference to their hope for higher rates of returns on investments and their resistance to change. They are simply banking on—hoping— the markets to produce higher yields, as we have seen at various points in the past, to pull these public pension systems out of deep underfunding.
But experts are saying the future is expected to produce a lower-yield investment environment characterized by low dividend yields, ultra-low interest rates, subdued economic growth, subpar inflation, and increased market volatility/risk. Most financial advisors now predict muted, compared to the past 30 years, investment returns for institutional investors over the next 10–to-15 years.
Waiting for the public investment market to return to a mythical normal is a fool’s game. Even so, it is somewhat understandable why many public pension stakeholders get trapped in this thinking. Change is always hard, especially for governments.
Due to the COVID-19 pandemic and recession, we are seeing dramatic decreases in some state and local revenues. As a result, state and local governments have had to take another hard look at their strained budgets to begin prioritizing expenditures. Predictably, public pensions are not high on these priority lists because changes aren’t immediately felt by the public in ways that cuts to education or public services might be felt. But that doesn’t mean there aren’t major financial implications.
If a government chooses to hold off on making a single year’s pension contribution or slow down its payments on their unfunded pension liabilities it increases the long-term pension debt problem by multiples, while further negatively impacting the government’s credit rating.
How do public pension systems know what direction to go given the current economic uncertainty and budget constraints? What is desperately needed is bold, yet common-sense, leadership that can cut through the noise and focus on what is known and can be reasonably expected, rather than leadership that becomes paralyzed by the unknown and the uncertain.
Strong leadership will focus on the primary purposes of a retirement system: keeping promises made to employees about their long-term retirement benefits, meeting employer workplace needs for recruiting and retaining talent, and doing both in a sustainable and cost-effective way for taxpayers.
Some of the key “knowns” for public retirement systems include the ever-more mobile public employee workforce, changing revenue streams, historically low-interest rates, privatization of infrastructure, growing unfunded liabilities, and the impact these liabilities are having on state and local government operations.
Continuing to wait for the alleged return to something normal instead of addressing the ever-increasing financial instability of the current pension systems makes no sense. This is particularly true given that the current pension plan designs, which, by and large, no longer meet the primary purposes of a retirement system as articulated above.
Public retirement leaders and influencers—public retirement system heads, legislators, industry experts, public policy think tanks, and employee representatives—must get focused on realistic, meaningful solutions and reforms to underfunded public pension plans.
First and foremost, this should include keeping promises already made to employees. It should also focus on implementing plan designs that recognize the career mobility of the modern public workforce rather than penalizing employees for this emerging reality. New unfunded liabilities simply cannot be allowed to accrue, and existing ones must be paid off in a responsible manner. New plan designs must be flexible enough to weather inevitable future economic uncertainties, whatever they may be.
Public retirement plan sponsors and advisors can no longer wait for the return to some imaginary normal. The public pension environment before the COVID-19 pandemic and recession was already fraught with problems, as can be seen by the fact that many public pension plans had yet to recover from the Great Recession of 2008, despite the longest bull run in history following that downturn. It is clear public pension plans can not simply invest themselves out of the current crisis.
Gone are the days of high, risk-free, investment returns. Common sense and an understanding of reality are desperately needed by leaders today. Help is available and pension plan sponsors should look to organizations without a political agenda for support. The Pension Integrity Project is one such source. It is now time for reform efforts guided by data-driven insights that can lead to the targeted and lasting change that public pension plans need.
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