Industry News

On February 4, 2025, S&P Global Ratings published its report, Three U.S. Public Pension Points to Watch in 2025. S&P Global indicated that moderating inflation may result in pension plans reducing their long-term inflation assumption. However, plan sponsors may be faced with choosing between higher expected costs due to a lower discount rate or additional market risk if they continue with the same discount rate.

The key issues include:

• Generally, U.S. public pension funded ratios are expected to improve when measured as of the fiscal year ended June 30, 2024, and continue to improve in fiscal 2025 due to positive market results in the first half of fiscal 2025.
• U.S. public pensions face growing risks since assets that are used to fund the plans are based on increasingly diverse allocations.
• Pension contributions are expected to increase as a result of inflation-driven salary growth that may be partially offset by less expensive new benefit tiers for new hires; however, this may no longer be a viable method that was previously used often.

According to the report, “Although recent asset returns have been positive overall, pension funds are taking on more risk to meet their return assumptions by increasing their allocations toward private equity, complex derivatives, and other investments. Public pension plans’ allocations toward private equity have nearly doubled in the past 10 years, a problematic trend since these investments often have opaque and variable disclosures and increasing fees, meaning that risk versus return might be hard to measure.”

The report concludes, “[D]ue to attraction and retention pressures states and local governments face, the ability of plans to add cheaper new benefit tiers could be limited, or no longer a viable option, with some plans even looking to undo recent cost-saving changes so they can increase benefits for recent hires. Such increases are not easily reversed, and plan affordability changes on a year-to-year basis, so although reverting to higher benefit plans could lead to better hiring outcomes, they could, in turn, result in higher costs.”

The report is available here.