Fiscal year 2021 was a great year for public pensions. According to funding data from Pew Charitable Trusts, a decade of increasing pension contributions was bolstered by the reopening rally of 2021. As a result, public pensions in all 50 states saw their funding ratios top 80%, the highest level since before the Great Recession. By the end of fiscal 2021, public pensions had made the greatest progress in a century toward closing the gap between plan funding and liabilities.

While this data is positive, it may also be indicative of a high watermark in pension funding and stability. Pew’s forward-looking projections suggest that pensions are more likely to struggle to meet their 7% return targets. Why? Equity market volatility, rising inflation and low fixed-income yields all play a role, but so does fund governance. Increased contributions and a prolonged stock market rally have provided public pensions with significant cover in recent years. But choppy markets will make it harder for pensions to paper over structural issues that haven’t been fixed, even if the top-line numbers look better on paper.

Fumbling the Bag

U.S. public pension funds are a varied cohort in size and scope, which can make them difficult to compare. However, the underlying structural issues are fairly consistent. Public pension funds are tasked with the fiduciary responsibility of managing retirement benefits for millions of Americans. Internally, they’re also tasked with managing the political realities of shifting legislative priorities, politicized boards and public perception from pensioners themselves. This tends to result in public pension systems that look like other government organizations: Pension staff is under-compensated relative to private sector peers and organizations run very lean teams and often lack needed expertise. As a result, U.S. pensions tend to face significant governance challenges relative to their peers worldwide.

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