Unfunded Pension Liabilities Might Be Bigger Than You Think

I’m not done with the latest 2008 Investment Report on pension returns across the state.

If you look through it, almost every communities’ 5 and 10 year returns (and for a few their lifetime returns) are below, way below, their expected rate of return on their pensions.

Why does this matter? Well, the expected rate of return on pension assets is a key determinant of the unfunded liability. A high rate of return lowers the unfunded liability.

Let’s pick a town at random and see what that means. How about…say…Swampscott?

The 2007 Annual Report of the Swampscott pension fund reveals an assumed rate of return of 8%. Yet, in the past 5 years, they have had returns of 3.04% and, in the past ten years, 3.96%. In their defense, lifetime returns are 9%.

Now, I don’t think it’s fair to draw broad conclusions right away (with the hopefully anomalous year of 2008 included), but it’s worth thinking about.

Swampscott is only 51.6% funded (as of 1/1/2008). That number is undoubtedly lower based on a loss of 23.19% in 2008. That number would go even further lower if you used a assumed rate of return closer to the 5 or 10 year average.