Industry News

Recently, Fitch Ratings released its report, U.S. Public Pension Market Bubble Exposure Remains High. The report indicates that, in recent years, favorable market valuations have helped to support funding progress for U.S. state and local defined benefit pension plans. Fitch Ratings cautions that higher asset allocations to alternative investments and steady demographic weakening may expose plans to increased losses.

According to the report, “Many plans’ demographic trends continue to weaken, which could exacerbate the effects of a market shock on pension contributions. The median ratio of active employees to retirees in state plans dropped to 1.2x in fiscal 2024 from 1.7x in fiscal 2010, putting more pressure on plans to generate asset growth. Increasingly lopsided demographics play out in plan cash flows, with benefit outflows rising faster than contribution inflows. After a downturn, participating governments would be subject to bigger contribution increases to restore market losses.”

It adds, “A major pension asset drawdown would depress portfolio values, raise unfunded liabilities, and lead to higher employer contributions. This would take place just as governments would likely be grappling with economic and budgetary fallout from a downturn. Fitch believes most governments have sufficient flexibility to increase pension contributions, aided by built‑in lags such as asset smoothing that phase in losses over time. However, those with weaker liability metrics and higher carrying costs relative to total spending (e.g., exceeding 20%) could be most vulnerable due to budgetary pressure from increased pension contribution demands.”

The report is available here.