Industry News

On January 25, 2021, S&P Global Ratings released its report, Five U.S. State and Local Government Pension and OPEB Trends to Watch for in 2021 and Beyond. According to the report, U.S. public pension and other postemployment benefit (OPEB) plans face various challenges to help recover from the sudden-stop recession and to mitigate health and safety risks due to the pandemic. Some of the challenges facing these plans may be similar to those that occurred after the Great Recession. It is expected to have comparable recessionary policy responses to address these risks and the management of related costs to have near-term credit implications. S&P Global Ratings indicates that even slight changes to pension contributions can have a significant long-term effect on costs and funding levels.

The key findings include:

• Among some U.S. local governments experiencing severe budgetary stress, pension contribution deferrals are likely to increase;
• Declining payrolls and early retirements will likely contribute to shortfalls in required plan contributions and demographic changes may increase costs;
• While interest rates remain low, safer investment options may seem less attractive for pension funds trying to meet targeted investment returns;
• Governments facing budgetary stress may consider some pension reform initiatives (i.e., pension obligation bonds (POBs)) to be helpful for long-term system health; however, they may not solve near-term credit pressures; and
• Governments and asset managers are expected to be increasingly guided by environmental, social, and governance (ESG) factors in making investment decisions.

The report is available here.