Unfunded Pension Liabilities Might Be Bigger Than You Think

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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.