Ultimately, tax payers would be on the hook to make up for low returns.
Markets have been volatile at the start of 2016, and that could be bad news for municipal pension funds in Pennsylvania.
As it was, about half of the municipalities that maintain pension funds have distressed plans, with a total liability of $7.7 billion.
Pension fund managers make assumptions about what kinds of returns they’ll bring in from investments, anywhere between five and nine percent. If the actual rate of return isn’t high enough, the money to make up the difference has to come from the municipality, or the pensions can become underfunded. The forecasts are generally for two-year periods.
Belynda Slaugenhaupt, Senior Vice President with Hefren Tillotson, a Pittsburgh-based financial services firm, said many pension plans saw a three to four percent drop in 2015. And though 2016 has started off poorly, she said “there is still time to recover. Municipalities won’t feel that impact immediately.”
In other words, if 2016 ultimately finishes strong, the gains could help smooth out the losses from 2015 and meet actuarial assumptions.
If that doesn’t happen municipal officials may have to contribute more to keep the plans at acceptable funding levels. Ultimately it’s taxpayers, and not the retirees, who will be affected if markets don’t stabilize.
Meanwhile, Slaugenhaupt said her firm, which manages about $50 million in municipal pension assets, is thinking longterm. “What we do is look at what we own and we look at the rationale for as to why is it that those funds were put into those accounts in the first place. And if that has not changed and if we still believe in the quality of the underlying investments there’s no reason to make a change in strategy,” she said.
Investment strategies for pension assets are becoming more aggressive and therefore risky, relying less on bonds (bonds are more stable investments, but their returns tend to be lower). That brings in bigger returns when the market soars but the funds also suffer greater losses during downturns.