Public pensions are now less than 60% funded: Expert

Mike Moran, Senior Pension Strategist at Goldman Sachs Asset Management joins Yahoo Finance's Alexis Christoforous and Brian Sozzi to discuss what pension managers are doing right now to ensure they're able to fund plans going forward.

Video Transcript

ALEXIS CHRISTOFOROUS: The volatility in the markets has a lot of individual investors unsure about what to do next. So imagine what it means for those tasked with running the nation's big pension funds. Goldman Sachs estimates that pension assets declined 9% so far this year.

Joining us now on the phone is Mike Moran. He is Senior Pension Strategist at Goldman Sachs Asset Management. Mike, good to have you with us.

I want to ask you about this stimulus package that has been passed in the House. Perhaps dead on arrival in the Senate, but in it is something we haven't seen in prior stimulus packages during this pandemic, and that is assistance for pension funds. Tell us what that might look like.

MIKE MORAN: Sure. Good morning, Alexis, and thanks for having me on.

So even before the crisis, there had been some efforts in Washington among single-employer pension plans to extend some relief on funding that had been really put in place all the way back in 2012 and was starting to run out or will start to run out next year. So even before the pandemic hit and even before, as you point out, we saw asset prices decline during the first quarter, impairing funded levels for single-employer plans, there were efforts to kind of extend funding relief-- give pension plans over a longer period of time to make up their obligations. Given the decline that we've seen so far year to date, that has just accelerated in terms of plan sponsors looking for relief.

So there have been discussions about this already. It has worked its way into the latest stimulus bill on the House side. As you point out, let's see what will happen once it gets to the Senate. But it is something that many plan sponsors and employer groups have been looking for.

In addition, multi-employer plans, which are union-based plans, some of them have very low funded levels. There's also been calls for them, even before the crisis, to have some funding relief. That has been put in as well. But again, all yet to be seen as to whether it actually works its way into final law.

BRIAN SOZZI: And Mike, what's the outcome here? I mean, pensions have been under pressure for some time. Are we just looking at a scenario that states-- let's say that state pensions-- that states are going to have to raise taxes to help offset some of these shortfalls?

MIKE MORAN: Yeah, and it's interesting because I think when you talk about pensions, you really have to break out the corporate pensions, the private pension plans of the world, versus the public pensions. And public pensions actually saw even larger declines in the first quarter, about 14% based on our numbers, because they tend to have more exposure to equity beta, both through the public markets and the private markets.

I think a big issue for the public sector is not just what's going on with their asset portfolios but as you point out, Brian, what's going on with state and local finances. Because as we have a recession, as state revenues decline, their ability to fund their pensions becomes a lot more challenged.

So our work would indicate that coming into the year public pensions were, in aggregate, funded about 72%, 73%. That has now dropped to below 60%. And again, so it's not just what's going on with the assets in their portfolio today but what is their ability to fund these plans going forward?

When we look at previous recessions-- the period after September 11, the period after the global financial crisis, for several years many state and local governments undercontributed to their plans because they had budgetary stress. And I think that's going to be a key concern going forward, their ability to make contributions not just in 2020 but really over the next couple of years.

ALEXIS CHRISTOFOROUS: Mike, I don't want to call it a death knell for pension plans, but when we come out the other side of this pandemic, will the way pension plans perhaps are structured or run be very different based on what's been happening these past few months?

MIKE MORAN: So I think, again, we'll break it up between corporates and publics. On the corporate side, there has been a multi-decade trend to move away from defined-benefit pension plans to more defined-contribution plans, 401(k)s, putting more of the onus on the individual. I think that just continues given everything that's going on in this environment.

Brian, as you pointed out, many of these plans have been underfunded for a long period of time, in particular on the corporate side because of low interest rates. I think that just continues that trend.

On the public-sector side, these plans are still open. They're still accruing new benefits. Much more union membership where it's embedded as part of a collective bargaining agreement. I think what potentially changes there is how they think about asset allocation and liquidity going forward. Many of these plans have a 6 and 1/2%, 7% nominal return target. And I think many of them really questioning, how do I hit that target in an environment where 30-year Treasury bond yields are below 1 and 1/2%? It just becomes much more challenging, and I think they have to think about being more nimble, more tactical. Certainly many of them have moved to more alternatives over the past number of years. I think that just accelerates going forward.

ALEXIS CHRISTOFOROUS: All right, Mike Moran, senior pension strategist at Goldman Sachs Asset Management, thanks so much for joining us this morning.

MIKE MORAN: Thanks for having me on.