“Best condition this century.” Or, “improved” but “fragile.” Both characterizations of the state of pensions in 2023. Which applies depends on which pension system one is talking about.

Better, But…

State and local pension plans saw improvement in 2023, but there is still plenty of room for more, according to Anthony Randazzo and Jonathan Moody in Equable’s research brief “The State of Pensions 2023,” which looks at how public pensions fared in the year that was.

Randazzo and Moody write that the average funded ratio for public pension plans in the United States stood at 78.1% in 2023. That’s a “modest improvement” since the year before, they say, but it also means that funded status remains “fragile,” which they say describes the state of pension plans ever since the Great Recession.

Funded ratios. The average actual funded ratio for state pension plans in 2023 was higher than that of 2022, says Equable.

Five states had funded ratios of 100% or more in 2023, they report: South Dakota (100%), Wisconsin (100.2%), Washington (103.5%), Tennessee (105%) and Utah (107%). And the District of Columbia outstripped them all at 107.2%.

Forty-one states had funded ratios under 90%; 27 states had ratios under 80%; and 12 states had ratios under 70%. Five states had ratios under 60%: South Carolina (59.9%), Connecticut (57.8%), New Jersey (53.5%), Illinois (50.9%), and Kentucky (50%).

Returns. The report says that most state pension funds’ investments had a “moderately positive” to “solid” investment performance. The average 2023 estimated rate of return stood at 7.5% on New Year’s Eve, up from 5.6% on Halloween.

Plan costs. Randazzo and Moody say that almost every state covered its pension plan costs, and that several made supplemental contributions to their plan as well.

Unfunded liabilities. The Equable report says that the total unfunded liability grew in 2023, but by a smaller amount than it did in 2002. It shifted by around $1.4 trillion in 2023.

Trends. Randazzo and Moody suggest that government employers will face “a likely future of persistent unfunded liabilities” if they do not increase the amount they regularly contribute to their pension funds. They argue that “status quo policies are not going to solve” the problems occasioned by unfunded liabilities, which, they say, “will likely result in uncontrolled and unknown cost increases” if they are not addressed.

Another Strong Year

Private-sector pension plans were the obverse of their state counterparts in 2023, according to a variety of reports. October Three characterized it as “another strong year” that took those plans to their “best condition this century.” Willis Towers Watson says that its end-of-year index level improved by 6.1% since the start of 2023.

Funded ratios. Milliman says that the funded status shown in its 100 Pension Funding Index—which measures the performance of the 100 largest corporate pension plans—modestly improved in 2023. October Three, which tracks two hypothetical plans—one that is traditionally invested, and one conservatively—reports that the funded ratio of the former improved by 7% in 2023, while that of the latter grew by 2%. Aon says that the funded status of the plans run by the S&P 500 improved by 2.8 percentage points.

Returns. Milliman says that the 100 largest corporate pension plans had annual investment returns of almost 10%. October Three’s traditional plan showed returns of 14% in 2023, they report, and the conservative had a return of 8%. Willis Towers Watson reports “higher-than-expected” investment returns in 2023.

Assets. Aon reports that the assets of the pension plans offered by the S&P 500 grew by 4 percentage points, and Milliman says that the assets of plans run by the 100 largest corporate pension plans grew by $19 billion.

Unfunded liabilities. Pension liabilities rose by 5%-7% in 2023 by October Three’s reckoning; by 2 percentage points, according to Aon; and $15 billion for the 100 largest corporate pension plans, according to Milliman. Willis Towers Watson, too, reports that liabilities grew in 2023.

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