Public pensions in 'fragile' state in 2023: What's the outlook for all pensions in 2024?

State retirement systems remain fragile as of the end of the third quarter with investment performance of state and local pension funds falling short of targets. This is a concerning trend as each year investment returns underperform expectations, a vicious cycle perpetuates wherein contributions are being fully consumed by benefit payments, pension funds rely on investment returns to make up the balance and pre-fund benefits for active members are not being fully funded, according to Equable Institute.

State and local pension funds have been impacted by a bear market in 2022 followed by a community bank crash before markets rebounded this past summer. The average funded ratio for U.S. state and local pension funds is expected to improve from 75% to 78.8% this year and unfunded liabilities will decline slightly from $1.59 trillion last year to $1.39 trillion this year, according to Equable Institute’s State of Pensions mid-year update.

The average investment return for 2023 is 5.6%, according to the report. This represents an improvement from a negative 5.9% return last year but is still below the 6.9% average assumed rate of return for U.S. pension plans. In addition, the average 10-year return is now 7.3%, the lowest it has been since 2018.