Industry News

On August 15, 2022, Fitch Ratings released its report, Inflation Moderately Pressures US Public Pension Liabilities. The report indicates that the high inflation environment will likely only have moderate negative effects on state and local government public pension plan liabilities through automatic cost-of-living adjustment (COLA) mechanisms. However, Fitch states that higher inflation will pressure plans by weakening asset performance and increasing payroll costs. To help mitigate these challenges, some governments may consider market value smoothing and supplemental pension contributions from budget surpluses this year.

According to the report, “Beyond COLA provisions, inflation will affect defined benefit pensions through asset value fluctuations and wage pressures, ultimately exerting upward pressure on actuarial contributions. Most plans phase in market value changes over a multi-year smoothing period to moderate shifts in budgetary demands on governments.”

It adds, “On the asset side, high inflation, the US Federal Reserve’s policy response and the risk of recession are driving weaker financial markets, dragging down pension asset values and lowering funded ratios. Almost 75% of funds held by the 73 largest state public pension plans are allocated to equities or alternative assets.”

The report is available here.