NEW YORK (Reuters) – The funded ratio of U.S. state and local pensions is expected to increase in 2017 after a decline in 2016, aided by revived stock market performance, the Center for Retirement Research at Boston College said in a report on Tuesday.
Funded ratios are an important measure of the health of a pension plan as they describe the level of assets versus projected liabilities.
A study of 170 plans found that their funded ratio decreased to 72 percent in 2016 from 73 percent the previous year under traditional accounting standards, and to 68 percent from 73 percent under new standards, the report said.
The decline partly stemmed from low investment returns in 2016 due to poor stock market performance. Public plans reported a 0.6 percent return on average in 2016 compared to their assumption of a 7.6 percent rate of return, the report said.
In addition, benefits continued to exceed contributions, resulting in negative cash flows.
“In 2016, these negative cash flows, combined with the low returns, kept the market value of pension assets relatively flat,” the report said.
At the same time, liability growth rates exceeded asset growth, causing the funded ratios to fall, the report said.
The ratio outlook for 2017 is projected to increase by 3.2 percentage points from the previous year under new accounting standards, influenced by a revival in stock market performance, the report said.
In 2016 the U.S. benchmark S&P 500 stock index rose 9.5 percent and is up an additional 10.6 percent year to date.
Beyond 2017, the ratio will depend on future investment performance and adequate contributions, it said.
Reporting by Stephanie Kelly; Editing by Daniel Bases and Cynthia Osterman